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, 1998
-------------------------------------------------
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ----------- to ------------------
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address and Telephone Number Identification No.
1-6047 GPU, Inc. 13-5516989
(a Pennsylvania corporation)
300 Madison Avenue
Morristown, New Jersey 07962-1911
Telephone (973) 455-8200
1-3141 Jersey Central Power & Light Company 21-0485010
(a New Jersey corporation)
2800 Pottsville Pike
Reading, Pennsylvania 19640-0001
Telephone (610) 929-3601
1-446 Metropolitan Edison Company 23-0870160
(a Pennsylvania corporation)
2800 Pottsville Pike
Reading, Pennsylvania 19640-0001
Telephone (610) 929-3601
1-3522 Pennsylvania Electric Company 25-0718085
(a Pennsylvania corporation)
2800 Pottsville Pike
Reading, Pennsylvania 19640-0001
Telephone (610) 929-3601
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 October 30, 1998, was as follows:
Shares
Registrant Title Outstanding
- ---------------------------------- ---------------------------- -----------
GPU, Inc. Common Stock, $2.50 par value 127,963,926
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
<PAGE>
GPU, Inc. and Subsidiary Companies
Quarterly Report on Form 10-Q
September 30, 1998
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 51
PART II - Other Information 79
Signatures 80
---------------------------------
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 1997
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; generating plant performance; fuel prices and availability; and
uncertainties involved with foreign operations including political risks and
foreign currency fluctuations.
2
<PAGE>
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
In Thousands
---------------------------
September 30, December 31,
1998 1997
------------ -------------
(Unaudited)
ASSETS
Utility Plant:
In service, at original cost $10,832,810 $11,150,677
Less, accumulated depreciation 4,341,080 4,050,165
---------- ---------
Net utility plant in service 6,491,730 7,100,512
Construction work in progress 175,499 250,050
Other, net 148,298 159,009
---------- ---------
Net utility plant 6,815,527 7,509,571
---------- ---------
Other Property and Investments:
GPUI Group equity investments (Note 4) 648,304 596,679
Goodwill, net 523,756 581,364
Nuclear decommissioning trusts,
at market (Note 1) 635,689 579,673
Nuclear fuel disposal trust, at market 115,423 108,652
Other, net 216,033 252,335
---------- ---------
Total other property and investments 2,139,205 2,118,703
---------- ---------
Current Assets:
Cash and temporary cash investments 248,276 85,099
Special deposits 47,247 27,093
Accounts receivable:
Customers, net 335,921 290,247
Other 113,992 104,441
Unbilled revenues 130,387 147,162
Materials and supplies, at average cost
or less:
Construction and maintenance 158,767 187,799
Fuel 34,949 40,424
Investments held for sale 22,098 106,317
Deferred income taxes 74,164 83,962
Prepayments 116,216 55,613
Other - 1,023
---------- ---------
Total current assets 1,282,017 1,129,180
---------- ---------
Deferred Debits and Other Assets:
Competitive transition charge (Notes 1 & 2) 989,815 -
Other regulatory assets, net (Note 1) 2,900,585 1,547,478
Deferred income taxes 1,979,072 383,169
Other 191,176 134,833
Total deferred debits and other assets 6,060,648 2,065,480
---------- ---------
Total Assets $16,297,397 $12,822,934
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
In Thousands
------------------------
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock $ 331,958 $314,458
Capital surplus 1,010,373 755,040
Retained earnings 2,278,770 2,140,712
Accumulated other
comprehensive income/
(loss)(Note 6) (43,743) (29,296)
-------- --------
Total 3,577,358 3,180,914
Less, reacquired common stock, at cost 78,349 80,984
---------- ----------
Total common stockholders' equity 3,499,009 3,099,930
Cumulative preferred stock:
With mandatory redemption 86,500 91,500
Without mandatory redemption 66,478 66,478
Subsidiary-obligated mandatorily
redeemable preferred securities 330,000 330,000
Long-term debt 4,214,057 4,325,972
--------- ---------
Total capitalization 8,196,044 7,913,880
--------- ---------
Current Liabilities:
Securities due within one year 264,610 631,934
Notes payable 298,393 353,214
Obligations under capital leases 129,440 138,919
Accounts payable 415,321 413,791
Taxes accrued 104,078 48,304
Interest accrued 71,343 83,947
Deferred energy credits 7,771 25,645
Other 285,721 325,681
--------- ---------
Total current liabilities 1,576,677 2,021,435
--------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 2,964,223 1,566,131
Unamortized investment tax credits 115,960 123,162
Three Mile Island Unit 2 future costs 464,304 448,808
Nonutility generation contract loss liability 1,810,350 -
Other 1,169,839 749,518
--------- ---------
Total deferred credits and other
liabilities 6,524,676 2,887,619
--------- ---------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $16,297,397 $12,822,934
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
<TABLE>
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
---------------------------------
(Unaudited)
<CAPTION>
In Thousands
(Except Per Share Data)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- --------------------
1998 1997 1998 1997
---- ---- ---- -----
<S> <C> <C> <C> <C>
Operating Revenues $1,168,779 $1,117,140 $3,226,975 $3,110,935
--------- --------- --------- --------
Operating Expenses:
Fuel 119,692 98,704 316,745 288,730
Power purchased and interchanged 338,275 282,694 857,490 771,513
Deferral of energy costs, net (7,585) 4,900 (18,915) 11,629
Other operation and maintenance 308,836 268,027 810,064 721,867
Depreciation and amortization 127,592 125,002 389,608 355,258
Taxes, other than income taxes 56,019 95,186 170,777 271,589
--------- --------- --------- ---------
Total operating expenses 942,829 874,513 2,525,769 2,420,586
--------- --------- --------- ----------
Operating Income Before Income Taxes 225,950 242,627 701,206 690,349
Income taxes 48,320 65,341 164,929 183,996
--------- --------- --------- ---------
Operating Income 177,630 177,286 536,277 506,353
--------- --------- --------- --------
Other Income and Deductions:
Allowance for other funds used during
construction 188 274 737 935
Equity in undistributed earnings/(losses)
of affiliates, net (Note 4) 12,038 (138,309) 42,882 (85,995)
Other income/(expense), net 3,465 (4,759) 44,377 1,472
Income taxes (8,035) 58,477 (26,755) 46,980
--------- --------- --------- ---------
Total other income and deductions 7,656 (84,317) 61,241 (36,608)
--------- --------- --------- ---------
Income Before Interest Charges
and Preferred Dividends 185,286 92,969 597,518 469,745
--------- --------- --------- --------
Interest Charges and Preferred Dividends:
Long-term debt 78,309 57,374 240,243 171,009
Subsidiary-obligated mandatorily
redeemable preferred securities 7,222 7,222 21,666 21,666
Other interest 8,933 9,261 26,776 27,900
Allowance for borrowed funds used
during construction (1,201) (1,104) (3,548) (3,547)
Preferred stock dividends of subsidiaries 2,624 2,890 8,516 9,491
--------- --------- --------- ---------
Total interest charges and
preferred dividends 95,887 75,643 293,653 226,519
--------- --------- --------- ---------
Minority interest net income 708 422 1,457 1,035
--------- --------- --------- --------
Income Before Extraordinary Item 88,691 16,904 302,408 242,191
Extraordinary item (net of income taxes
of $178,790 and $16,300)(Notes 1 & 2) 249,355 - (25,755) -
--------- --------- --------- ---------
Net Income $ 338,046 $ 16,904 $ 276,653 $ 242,191
========= ========= ========= ==========
Basic - Earnings Per Avg. Common Share
Before Extraordinary Item $ 0.69 $ 0.58 $ 2.38 $ 2.01
Extraordinary Item 1.96 - (0.20) -
--------- --------- --------- ---------
Basic - Earnings Per Avg. Common Share $ 2.65 $ 0.58 $ 2.18 $ 2.01
========= ========= ========= ==========
Avg. Common Shares Outstanding 127,940 120,762 126,796 120,694
========= ========= ========= =========
Diluted - Earnings Per Avg. Common Share
Before Extraordinary Item $ 0.69 $ 0.58 $ 2.38 $ 2.00
Extraordinary Item 1.96 - (0.20) -
--------- --------- --------- ---------
Diluted - Earnings Per Avg. Common Share $ 2.65 $ 0.58 $ 2.18 $ 2.00
========= ========= ========= =========
Avg. Common Shares Outstanding 128,068 121,068 127,019 120,979
========= ========= ========= =========
Cash Dividends Paid Per Share $ .515 $ .500 $ 1.53 $ 1.485
========= ========= ========= =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
5
</TABLE>
<PAGE>
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
In Thousands
-------------------------
Nine Months
Ended September 30,
------------- ----------
1998 1997
Operating Activities:
Net income $ 276,653 $ 242,191
Extraordinary item (net of income tax
benefit of $16,300) (Note 2) 25,755 -
-------- --------
Income before extraordinary item 302,408 242,191
Adjustments to reconcile income to cash provided:
Depreciation and amortization 414,688 370,769
Amortization of property under capital leases 40,323 36,867
PaPUC restructuring rate orders (Notes 1 & 2) 68,500 -
Gain on sale of investments (43,600) -
Equity in undistributed (earnings)/losses
of affiliates, net of distributions received (30,025) 123,023
Nuclear outage maintenance costs, net 12,461 8,685
Deferred income taxes and investment tax
credits, net (123,004) (68,815)
Deferred energy and capacity costs, net (17,835) 11,629
Accretion income (7,380) (8,070)
Allowance for other funds used
during construction (737) (935)
Changes in working capital:
Receivables (2,986) (51,480)
Materials and supplies 5,480 1,995
Special deposits and prepayments (57,113) (15,808)
Payables and accrued liabilities 17,479 1,373
Nonutility generation contract buyout costs (21,667) (49,050)
Other, net 15,808 (25,136)
-------- --------
Net cash provided by operating activities 572,800 577,238
-------- --------
Investing Activities:
Capital expenditures:
GPU Energy companies (213,154) (235,941)
GPUI Group (49,428) (97,565)
Proceeds from sale of investments 163,768 -
Contributions to decommissioning trusts (38,057) (30,764)
Other, net 14,256 12,104
-------- --------
Net cash used for investing activities (122,615) (352,166)
-------- --------
Financing Activities:
Issuance of long-term debt 226,355 130,471
Increase/(Decrease) in notes payable, net (54,821) 60,227
Retirement of long-term debt (474,889) (166,601)
Capital lease principal payments (38,695) (38,884)
Issuance of common stock 269,448 -
Redemption of preferred stock of subsidiaries (15,000) (20,000)
Dividends paid on common stock (192,149) (179,188)
Net cash required by financing activities (279,751) (213,975)
-------- --------
Effect of exchange rate changes on cash (7,257) (178)
-------- --------
Net increase in cash and temporary
cash investments from above activities 163,177 10,919
Cash and temporary cash investments, beginning of year 85,099 31,604
-------- --------
Cash and temporary cash investments, end of period $ 248,276 $ 42,523
======== ========
Supplemental Disclosure:
Interest and preferred dividends paid $ 295,338 $ 240,524
======== ========
Income taxes paid $ 254,411 $ 187,503
======== ========
New capital lease obligations incurred $ 30,587 $ 39,306
======== ========
Common stock dividends declared but not paid $ - $ -
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Balance Sheets
In Thousands
-------------------------
September 30, December 31,
1998 1997
--------- ---------
(Unaudited)
ASSETS
Utility Plant:
In service, at original cost $4,692,874 $4,671,568
Less, accumulated depreciation 2,149,280 2,007,427
Net utility plant in service 2,543,594 2,664,141
Construction work in progress 75,163 124,887
Other, net 101,183 92,654
--------- ---------
Net utility plant 2,719,940 2,881,682
--------- ---------
Other Property and Investments:
Nuclear decommissioning trusts,
at market (Note 1) 375,967 343,434
Nuclear fuel disposal trust, at market 115,423 108,652
Other, net 8,930 8,951
--------- ---------
Total other property and investments 500,320 461,037
--------- ---------
Current Assets:
Cash and temporary cash investments 9,846 2,994
Special deposits 6,177 6,778
Accounts receivable:
Customers, net 190,987 153,753
Other 29,641 18,225
Unbilled revenues 54,615 59,687
Materials and supplies, at average cost or less:
Construction and maintenance 81,463 90,037
Fuel 12,687 14,260
Deferred income taxes 20,001 27,536
Prepayments 66,327 14,468
--------- ---------
Total current assets 471,744 387,738
--------- ---------
Deferred Debits and Other Assets:
Other regulatory assets, net (Note 1) 792,969 736,476
Deferred income taxes 181,374 154,708
Other 22,444 19,909
--------- ---------
Total deferred debits and other assets 996,787 911,093
--------- ---------
Total Assets $4,688,791 $4,641,550
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
7
<PAGE>
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Balance Sheets
In Thousands
----------------------------
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock $ 153,713 $153,713
Capital surplus 510,769 510,769
Retained earnings 942,714 875,639
--------- ---------
Total common stockholder's equity 1,607,196 1,540,121
Cumulative preferred stock:
With mandatory redemption 86,500 91,500
Without mandatory redemption 37,741 37,741
Company-obligated mandatorily
redeemable preferred securities 125,000 125,000
Long-term debt 1,173,472 1,173,304
--------- ---------
Total capitalization 3,029,909 2,967,666
--------- ---------
Current Liabilities:
Securities due within one year 2,512 12,511
Notes payable 72,493 115,254
Obligations under capital leases 87,929 79,419
Accounts payable:
Affiliates 33,293 27,167
Other 122,415 113,822
Taxes accrued 24,886 3,966
Deferred energy credits 7,771 25,645
Interest accrued 29,693 26,021
Other 105,993 76,529
--------- ---------
Total current liabilities 486,985 480,334
--------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 637,256 644,562
Unamortized investment tax credits 50,775 54,675
Nuclear fuel disposal fee 139,684 134,326
Three Mile Island Unit 2 future costs 116,101 112,227
Other 228,081 247,760
--------- ---------
Total deferred credits and
other liabilities 1,171,897 1,193,550
--------- ---------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $4,688,791 $4,641,550
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
8
<PAGE>
<TABLE>
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Statements of Income
---------------------------------
(Unaudited)
<CAPTION>
In Thousands
---------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- -----
<S> <C> <C> <C> <C>
Operating Revenues $ 647,625 $ 602,900 $1,598,853 $1,591,569
-------- -------- ---------- ---------
Operating Expenses:
Fuel 29,709 27,633 72,453 73,703
Power purchased and interchanged:
Affiliates 31,320 7,513 46,388 14,719
Others 193,237 172,432 501,942 451,538
Deferral of energy and capacity costs, net (7,585) 4,900 (18,915) 11,629
Other operation and maintenance 140,632 115,531 354,392 331,808
Depreciation and amortization 55,435 68,940 187,114 190,178
Taxes, other than income taxes 27,796 64,050 75,330 176,878
------- -------- -------- ---------
Total operating expenses 470,544 460,999 1,218,704 1,250,453
-------- -------- -------- ---------
Operating Income Before Income Taxes 177,081 141,901 380,149 341,116
Income taxes 59,748 39,374 119,099 85,466
-------- -------- -------- ---------
Operating Income 117,333 102,527 261,050 255,650
-------- -------- -------- ---------
Other Income and Deductions:
Allowance for other funds used during
construction 184 65 652 332
Other income, net 2,314 1,975 7,232 2,122
Income taxes (1,095) 1,583 (3,437) (1,244)
-------- -------- -------- ---------
Total other income and deductions 1,403 3,623 4,447 1,210
-------- -------- -------- ---------
Income Before Interest Charges and
Dividends on Preferred Securities 118,736 106,150 265,497 256,860
-------- -------- --------- ---------
Interest Charges:
Long-term debt 21,814 22,434 65,455 67,779
Company-obligated mandatorily
redeemable preferred securities 2,675 2,675 8,025 8,025
Other interest 3,058 4,022 8,645 11,680
Allowance for borrowed funds used
during construction (418) (287) (1,336) (1,491)
-------- --------- -------- ---------
Total interest charges 27,129 28,844 80,789 85,993
-------- -------- -------- ---------
Net Income 91,607 77,306 184,708 170,867
Preferred stock dividends 2,330 2,597 7,633 8,638
-------- -------- -------- --------
Earnings Available for Common Stock $ 89,277 $ 74,709 $ 177,075 $ 162,229
======== ======== ========== ==========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
9
</TABLE>
<PAGE>
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
In Thousands
-----------------------
Nine Months
Ended September 30,
-----------------------
1998 1997
---- ----
Operating Activities:
Net income $ 184,708 $170,867
Adjustments to reconcile income to cash provided:
Depreciation and amortization 206,758 201,149
Amortization of property under capital leases 22,010 21,195
Nuclear outage maintenance costs, net 5,393 10,925
Deferred income taxes and investment tax
credits, net (37,052) (29,818)
Deferred energy and capacity costs, net (17,835) 11,629
Accretion income (7,380) (8,070)
Allowance for other funds used
during construction (652) (332)
Changes in working capital:
Receivables (43,577) (10,528)
Materials and supplies 2,580 4,521
Special deposits and prepayments (51,259) (32,116)
Payables and accrued liabilities 62,009 (14,584)
Nonutility generation contract buyout costs (15,000) (30,500)
Other, net 32,507 4,367
-------- ---------
Net cash provided by operating activities 343,210 298,705
-------- ---------
Investing Activities:
Capital expenditures (111,704) (116,026)
Contributions to decommissioning trusts (20,775) (13,502)
Other, net (6,214) (7,603)
--------- ---------
Net cash used for investing activities (138,693) (137,131)
--------- ---------
Financing Activities:
Increase/(Decrease) in notes payable, net (42,761) 75,000
Retirement of long-term debt - (80,075)
Capital lease principal payments (21,965) (20,289)
Redemption of preferred stock (15,000) (20,000)
Dividends paid on common stock (110,000) (95,000)
Dividends paid on preferred stock (7,939) (9,062)
--------- ---------
Net cash required by financing activities (197,665) (149,426)
--------- ---------
Net increase in cash and temporary
cash investments from above activities 6,852 12,148
Cash and temporary cash investments, beginning of year 2,994 1,321
-------- ---------
Cash and temporary cash investments, end of period $ 9,846 $ 13,469
======== =========
Supplemental Disclosure:
Interest and preferred dividends paid $ 83,893 $ 93,035
======== =========
Income taxes paid $ 139,334 $ 91,518
======== =========
New capital lease obligations incurred $ 30,515 $ 10,431
======== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
10
<PAGE>
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
In Thousands
--------------------------
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
ASSETS
Utility Plant:
In service, at original cost $2,211,270 $2,411,810
Less, accumulated depreciation 983,516 919,771
--------- ---------
Net utility plant in service 1,227,754 1,492,039
Construction work in progress 45,013 45,435
Other, net 27,725 39,056
--------- ---------
Net utility plant 1,300,492 1,576,530
--------- ---------
Other Property and Investments:
Nuclear decommissioning trusts, at market (Note 1) 185,991 168,110
Other, net 11,990 11,958
--------- ---------
Total other property and investments 197,981 180,068
--------- ---------
Current Assets:
Cash and temporary cash investments 3,458 6,116
Special deposits 1,038 1,055
Accounts receivable:
Customers, net 68,260 65,156
Other 46,879 29,399
Unbilled revenues 38,637 39,747
Materials and supplies, at average cost or less:
Construction and maintenance 24,254 38,597
Fuel 8,332 11,323
Deferred income taxes 2,945 2,945
Prepayments 12,030 6,762
--------- ---------
Total current assets 205,833 201,100
--------- ---------
Deferred Debits and Other Assets:
Competitive transition charge (Notes 1 & 2) 657,655 -
Other regulatory assets, net (Note 1) 909,840 450,687
Deferred income taxes 713,183 87,332
Other 20,622 14,069
--------- ---------
Total deferred debits and other assets 2,301,300 552,088
--------- ---------
Total Assets $4,005,606 $2,509,786
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
11
<PAGE>
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
In Thousands
--------------------------
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock $ 66,273 $66,273
Capital surplus 370,200 370,200
Retained earnings 241,201 268,634
Accumulated other comprehensive income (Note 6) 11,595 12,487
------- -------
Total common stockholder's equity 689,269 717,594
Cumulative preferred stock 12,056 12,056
Company-obligated mandatorily
redeemable preferred securities 100,000 100,000
Long-term debt 576,903 576,924
--------- ----------
Total capitalization 1,378,228 1,406,574
--------- ----------
Current Liabilities:
Securities due within one year 24 22
Notes payable 76,200 67,279
Obligations under capital leases 27,030 38,372
Accounts payable:
Affiliates 57,333 62,873
Other 108,938 95,589
Taxes accrued 14,305 21,455
Interest accrued 10,335 15,903
Other 54,383 33,351
--------- ----------
Total current liabilities 348,548 334,844
--------- ----------
Deferred Credits and Other Liabilities:
Deferred income taxes 968,551 412,692
Three Mile Island Unit 2 future costs 232,102 224,354
Unamortized investment tax credits 27,632 29,134
Nuclear fuel disposal fee 31,554 30,343
Nonutility generation contract loss liability 792,830 -
Other 226,161 71,845
--------- ----------
Total deferred credits and other liabilities 2,278,830 768,368
--------- ----------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $4,005,606 $2,509,786
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
12
<PAGE>
<TABLE>
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
(Unaudited)
<CAPTION>
In Thousands
-----------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- ----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues $ 229,051 $ 248,161 $ 689,829 $ 711,975
-------- -------- --------- ----------
Operating Expenses:
Fuel 28,079 23,472 80,322 69,998
Power purchased and interchanged:
Affiliates 7,122 5,380 12,540 12,337
Others 68,413 59,325 168,896 164,525
Other operation and maintenance 68,586 58,219 175,871 161,251
Depreciation and amortization 29,879 26,711 82,597 78,642
Taxes, other than income taxes 13,368 15,235 44,421 44,989
-------- -------- --------- ----------
Total operating expenses 215,447 188,342 564,647 531,742
-------- -------- --------- ----------
Operating Income Before Income Taxes 13,604 59,819 125,182 180,233
Income taxes (791) 18,105 32,115 56,103
-------- -------- --------- ----------
Operating Income 14,395 41,714 93,067 124,130
-------- -------- --------- ----------
Other Income and Deductions:
Allowance for other funds used during
construction 4 138 85 439
Other income/(expense), net (5,417) 304 (14,798) 2,408
Income taxes 2,213 (165) 5,979 (1,087)
-------- -------- --------- ---------
Total other income and deductions (3,200) 277 (8,734) 1,760
-------- -------- --------- ---------
Income Before Interest Charges and
Dividends on Preferred Securities 11,195 41,991 84,333 125,890
-------- -------- --------- ---------
Interest Charges:
Long-term debt 10,623 10,981 31,870 33,275
Company-obligated mandatorily
redeemable preferred securities 2,250 2,250 6,750 6,750
Other interest 2,017 1,717 6,570 5,345
Allowance for borrowed funds used
during construction (151) (182) (591) (593)
-------- -------- --------- ---------
Total interest charges 14,739 14,766 44,599 44,777
-------- -------- --------- ---------
Income Before Extraordinary Item (3,544) 27,225 39,734 81,113
Extraordinary item (net of income taxes of
$128,102 and $4,708) (Notes 1 & 2) 180,475 - (6,805) -
-------- -------- --------- ---------
Net Income 176,931 27,225 32,929 81,113
Preferred stock dividends 120 120 362 362
-------- -------- --------- ---------
Earnings Available for Common Stock $ 176,811 $ 27,105 $32,567 $ 80,751
======== ========= ======== ==========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
13
</TABLE>
<PAGE>
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
In Thousands
--------------------------
Nine Months
Ended September 30,
--------------------------
1998 1997
------------ ------------
(Unaudited)
Operating Activities:
Net income $ 32,929 $ 81,113
Extraordinary item (net of income tax
benefit of $4,708) (Note 2) 6,805 -
---------- ---------
Income before extraordinary item 39,734 81,113
Adjustments to reconcile income to cash provided:
Depreciation and amortization 87,025 84,706
Amortization of property under capital leases 11,011 8,723
PaPUC restructuring rate orders (Notes 1 & 2) 32,900 -
Nuclear outage maintenance costs, net 4,709 (1,496)
Deferred income taxes and investment tax
credits, net (36,848) 8,786
Allowance for other funds used
during construction (85) (439)
Changes in working capital:
Receivables (19,474) (27,679)
Materials and supplies 2,162 2,480
Special deposits and prepayments (5,251) 5,171
Payables and accrued liabilities (16,513) 7,311
Nonutility generation contract buyout costs (6,667) (13,550)
Other, net 12,698 (16,665)
---------- ---------
Net cash provided by operating activities 105,401 138,461
-------- --------
Investing Activities:
Capital expenditures (33,356) (55,273)
Contributions to decommissioning trusts (13,328) (13,315)
Other, net 44 (312)
---------- ---------
Net cash used for investing activities (46,640) (68,900)
---------- ---------
Financing Activities:
Issuance of long-term debt - 13,577
Increase in notes payable, net 8,921 14,389
Retirement of long-term debt (22) (40,020)
Capital lease principal payments (9,956) (10,672)
Dividends paid on common stock (60,000) (45,000)
Dividends paid on preferred stock (362) (478)
---------- ---------
Net cash required by financing activities (61,419) (68,204)
---------- ---------
Net increase/(decrease) in cash and temporary
cash investments from above activities (2,658) 1,357
Cash and temporary cash investments, beginning of year 6,116 1,901
-------- --------
Cash and temporary cash investments, end of period $ 3,458 $ 3,258
======== ========
Supplemental Disclosure:
Interest and preferred dividends paid $ 50,146 $ 52,266
======== ========
Income taxes paid $ 60,189 $ 44,652
======== ========
New capital lease obligations incurred $ 39 $ 18,829
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
14
<PAGE>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
In Thousands
--------------------------
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
ASSETS
Utility Plant:
In service, at original cost $2,763,300 $2,812,720
Less, accumulated depreciation 1,156,972 1,091,965
---------- ----------
Net utility plant in service 1,606,328 1,720,755
Construction work in progress 47,762 69,089
Other, net 19,178 26,110
---------- -----------
Net utility plant 1,673,268 1,815,954
---------- -----------
Other Property and Investments:
Nuclear decommissioning trusts,
at market (Note 1) 73,731 68,129
Other, net 7,093 7,071
---------- ----------
Total other property and investments 80,824 75,200
---------- ----------
Current Assets:
Cash and temporary cash investments 4,343 -
Special deposits 2,530 2,449
Accounts receivable:
Customers, net 68,112 71,338
Other 28,287 21,051
Unbilled revenues 37,135 47,728
Materials and supplies, at average cost or less:
Construction and maintenance 40,667 47,853
Fuel 13,717 14,841
Deferred income taxes 7,589 7,589
Prepayments 35,767 29,856
---------- ----------
Total current assets 238,147 242,705
---------- ----------
Deferred Debits and Other Assets:
Competitive transition charge (Notes 1 & 2) 332,160 -
Other regulatory assets, net (Note 1) 1,197,776 360,315
Deferred income taxes 967,688 55,698
Other 13,142 13,118
---------- ----------
Total deferred debits and other assets 2,510,766 429,131
---------- ----------
Total Assets $4,503,005 $2,562,990
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
15
<PAGE>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
In Thousands
--------------------------
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock $ 105,812 $ 105,812
Capital surplus 285,486 285,486
Retained earnings 379,773 393,708
Accumulated other comprehensive income (Note 6) 5,862 6,332
---------- ----------
Total common stockholder's equity 776,933 791,338
Cumulative preferred stock 16,681 16,681
Company-obligated mandatorily
redeemable preferred securities 105,000 105,000
Long-term debt 626,434 676,444
---------- ----------
Total capitalization 1,525,048 1,589,463
---------- ----------
Current Liabilities:
Securities due within one year 50,012 30,011
Notes payable 79,600 77,581
Obligations under capital leases 14,269 19,939
Accounts payable:
Affiliates 55,178 24,811
Other 51,918 62,483
Taxes accrued 12,202 15,966
Interest accrued 10,074 20,902
Other 37,384 19,654
---------- ----------
Total current liabilities 310,637 271,347
---------- ----------
Deferred Credits and Other Liabilities:
Deferred income taxes 1,334,711 478,182
Three Mile Island Unit 2 future costs 116,101 112,227
Unamortized investment tax credits 37,553 39,353
Nuclear fuel disposal fee 15,777 15,172
Nonutility generation contract loss liability 1,017,520 -
Other 145,658 57,246
---------- ----------
Total deferred credits and other liabilities 2,667,320 702,180
---------- ----------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $4,503,005 $2,562,990
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
16
<PAGE>
<TABLE>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
---------------------------------
(Unaudited)
<CAPTION>
In Thousands
-----------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- ----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues $ 259,354 $ 257,569 $773,364 $ 795,184
-------- --------- -------- ---------
Operating Expenses:
Fuel 48,418 43,205 133,519 132,421
Power purchased and interchanged:
Affiliates 74 598 1,227 2,672
Others 73,820 50,937 178,632 155,450
Other operation and maintenance 81,097 71,816 206,210 190,151
Depreciation and amortization 29,332 25,534 82,716 78,935
Taxes, other than income taxes 14,854 15,808 50,875 49,629
-------- --------- --------- ---------
Total operating expenses 247,595 207,898 653,179 609,258
-------- --------- --------- ---------
Operating Income Before Income Taxes 11,759 49,671 120,185 185,926
Income taxes (7,013) 14,227 24,007 57,371
-------- --------- --------- ---------
Operating Income 18,772 35,444 96,178 128,555
-------- --------- --------- ---------
Other Income and Deductions:
Allowance for other funds used during
construction - 71 - 164
Other income/(expense), net (6,045) (57) (4,312) 1,198
Income taxes (2,782) (13) (3,487) (509)
-------- --------- --------- ---------
Total other income and deductions (8,827) 1 (7,799) 853
-------- --------- --------- ---------
Income Before Interest Charges and
Dividends on Preferred Securities 9,945 35,445 88,379 129,408
-------- ---------- --------- ---------
Interest Charges:
Long-term debt 11,948 12,453 35,922 36,672
Company-obligated mandatorily
redeemable preferred securities 2,297 2,297 6,891 6,891
Other interest 2,192 1,961 6,651 6,204
Allowance for borrowed funds used
during construction (632) (635) (1,621) (1,463)
-------- -------- --------- ---------
Total interest charges 15,805 16,076 47,843 48,304
-------- -------- --------- ---------
Income Before Extraordinary Item (5,860) 19,369 40,536 81,104
Extraordinary item (net of income taxes of
$50,688 and $11,592) (Notes 1 & 2) 68,880 - (18,950) -
-------- -------- --------- ---------
Net Income 63,020 19,369 21,586 81,104
Preferred stock dividends 174 173 521 491
-------- --------- --------- ---------
Earnings Available for Common Stock $ 62,846 $ 19,196 $21,065 $ 80,613
======== ========= ========= =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
17
</TABLE>
<PAGE>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
(Unaudited)
In Thousands
---------------------
Nine Months
Ended September 30,
---------------------
1998 1997
---- ----
Operating Activities:
Net income $ 21,586 $81,104
Extraordinary item (net of income tax
benefit of $11,592) (Note 2) 18,950 -
-------- --------
Income before extraordinary item 40,536 81,104
Adjustments to reconcile income to cash provided:
Depreciation and amortization 80,097 73,989
Amortization of property under capital leases 6,324 5,517
PaPUC restructuring rate orders (Notes 1 & 2) 35,600 -
Nuclear outage maintenance costs, net 2,359 (744)
Deferred income taxes and investment tax
credits, net (19,382) 8,373
Allowance for other funds used
during construction - (164)
Changes in working capital:
Receivables 6,583 (18,438)
Materials and supplies 721 (5,006)
Special deposits and prepayments (5,992) 1,681
Payables and accrued liabilities 12,766 (6,818)
Nonutility generation contract buyout costs - (5,000)
Other, net (17,098) (11,425)
-------- --------
Net cash provided by operating activities 142,514 123,069
-------- --------
Investing Activities:
Capital expenditures (64,869) (63,005)
Contributions to decommissioning trusts (3,954) (3,947)
Other, net (39) 417
-------- --------
Net cash used for investing activities (68,862) (66,535)
-------- --------
Financing Activities:
Issuance of long-term debt - 49,875
Increase/(Decrease) in notes payable, net 2,019 (24,151)
Retirement of long-term debt (30,011) (26,010)
Capital lease principal payments (5,796) (6,491)
Dividends paid on common stock (35,000) (45,000)
Dividends paid on preferred stock (521) (521)
-------- --------
Net cash required by financing activities (69,309) (52,298)
-------- --------
Net increase in cash and temporary
cash investments from above activities 4,343 4,236
Cash and temporary cash investments, beginning of year - -
-------- ---------
Cash and temporary cash investments, end of period $ 4,343 $ 4,236
======== ========
Supplemental Disclosure:
Interest and preferred dividends paid $ 58,549 $ 56,810
======== ========
Income taxes paid $ 53,178 $ 44,147
======== ========
New capital lease obligations incurred $ 33 $ 10,046
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
18
<PAGE>
GPU, Inc. and Subsidiary Companies
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GPU, Inc., a Pennsylvania corporation, is a holding company registered
under the Public Utility Holding Company Act of 1935. GPU, Inc. does not
directly operate any utility properties, but owns all the outstanding common
stock of three domestic electric utilities serving customers in New Jersey --
Jersey Central Power & Light Company (JCP&L) -- and Pennsylvania -- Metropolitan
Edison Company (Met-Ed) and Pennsylvania Electric Company (Penelec). The
customer service, transmission and distribution operations of these electric
utilities are conducting business under the name GPU Energy. JCP&L, Met-Ed and
Penelec considered together are referred to as the "GPU Energy companies." The
generation operations of the GPU Energy companies are conducted by GPU
Generation, Inc. (Genco) and GPU Nuclear, Inc. (GPUN). GPU, Inc. also owns all
the common stock of GPU International, Inc., GPU Power, Inc. and GPU Electric,
Inc. which develop, own and operate generation, transmission and distribution
facilities in the United States and in foreign countries. Collectively, these
are referred to as the "GPUI Group." Other wholly-owned subsidiaries of GPU,
Inc. are GPU Advanced Resources, Inc. (GPU AR), a subsidiary engaging in energy
services and retail energy sales; GPU Telcom Services, Inc. (GPU Telcom), a
subsidiary engaging in certain telecommunications-related businesses; and GPU
Service, Inc. (GPUS), which provides certain 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 1997 Annual Report on Form 10-K. The
December 31, 1997 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 1997 Annual Report
on Form 10-K.
1. COMMITMENTS AND CONTINGENCIES
COMPETITION AND THE CHANGING REGULATORY ENVIRONMENT
---------------------------------------------------
The Emerging Competitive Market and Stranded Costs:
- ---------------------------------------------------
The current market price of electricity being below the cost of some
utility-owned generation and power purchase commitments, combined with the
ability of some customers to choose their energy suppliers, has created the
potential for stranded costs in the electric utility industry. These stranded
costs, while potentially recoverable in a regulated environment, are at risk in
a deregulated and competitive environment. In October 1998, the Pennsylvania
Public Utility Commission (PaPUC) issued final Restructuring Orders (final
Restructuring Orders), which granted Met-Ed and Penelec recovery of a
substantial portion of their stranded costs. See Competitive Environment section
of Management's Discussion and Analysis.
In 1996, the Federal Energy Regulatory Commission (FERC) issued Order 888,
which permits electric utilities to recover their legitimate and verifiable
stranded costs incurred when a wholesale customer purchases power from another
supplier using the utility's transmission system. In addition,
19
<PAGE>
Pennsylvania adopted comprehensive legislation (Customer Choice Act) in 1996
which provides for the restructuring of the electric utility industry and will
permit utilities the opportunity to recover their prudently incurred stranded
costs through a PaPUC approved competitive transition charge (CTC), subject to
certain conditions, including that utilities attempt to mitigate these costs.
In June 1997, Met-Ed and Penelec filed with the PaPUC their proposed
restructuring plans to implement competition and customer choice in Pennsylvania
as required by the Customer Choice Act. In June 1998, the PaPUC entered
restructuring rate orders (Restructuring Orders) on the restructuring plans. In
the Restructuring Orders, the PaPUC, among other things, established a CTC which
(a) would not ensure Met-Ed and Penelec full recovery of the costs under their
contracts with nonutility generators (NUGs) as required by state and federal
law; (b) disallowed certain stranded cost claims by Met-Ed and Penelec; (c)
lowered unbundled transmission and distribution (T&D) rates for Met-Ed and
Penelec by reallocating certain T&D costs to generation; and (d) advanced the
phase-in for retail choice to January 2, 2000. Accordingly, Met-Ed and Penelec
wrote-off in the second quarter, $320 million and $150 million pre-tax,
respectively.
In July 1998, Met-Ed and Penelec appealed the Restructuring Orders to the
Commonwealth Court and filed Alternative Restructuring Plans with the PaPUC
which were ultimately rejected. Met-Ed and Penelec also filed complaints in the
U.S. District Court seeking both declaratory and injunctive relief challenging,
among other things, the PaPUC's refusal in the Restructuring Orders to ensure
full recovery of the costs of NUG contracts, as required by state and federal
law.
Following extended negotiations, on September 23, 1998, Met-Ed, Penelec,
the PaPUC and numerous intervenors in the restructuring proceedings entered into
Settlement Agreements providing for new restructuring plans. On October 16,
1998, the PaPUC adopted final Restructuring, approving the Settlement
Agreements. In the third quarter, as a result of the final Restructuring Orders,
Met-Ed and Penelec reversed $313 million and $142 million pre-tax, respectively,
of the writeoffs recorded in the second quarter and recorded additional
non-recurring charges of $38 million and $58 million pre-tax, for Met-Ed and
Penelec, respectively. For additional information, see Note 2 Accounting for
Non-recurring Items. In accordance with the final Restructuring Orders, Met-Ed
and Penelec have agreed to dismiss all of the pending Commonwealth Court and
U.S. District Court litigation.
In 1997, the New Jersey Board of Public Utilities (NJBPU) released Phase II
of the Energy Master Plan (NJEMP), which proposes that New Jersey electric
utilities should have an opportunity to recover their stranded costs associated
with generating capacity commitments and caused by electric retail competition,
provided that they attempt to mitigate these costs. Legislation to deregulate
New Jersey's electricity market was introduced in September 1998, and it is
currently anticipated that such legislation will be enacted by the end of 1998.
The proposed legislation provides for, among other things, customer choice
beginning no later than June 1, 1999 and expanding to include all customers by
October 1, 1999; a minimum five to ten percent rate reduction; the unbundling of
customer bills; the recovery of stranded costs and the ability to securitize
stranded costs.
20
<PAGE>
In July 1997, JCP&L filed with the NJBPU its proposed restructuring plan
for a competitive electric marketplace in New Jersey as required by the NJEMP.
JCP&L estimates that its total above-market costs related to power purchase
commitments and company-owned generation, on a present value basis at September
30, 1998, is $1.6 billion. The $1.6 billion excludes above-market generation
costs related to the Oyster Creek Nuclear Generating Station (Oyster Creek).
These estimates are subject to significant uncertainties including the future
market price of both electricity and other competitive energy sources, as well
as the timing of when these above-market costs become stranded due to customers
choosing another supplier. In July 1997, JCP&L proposed, in its restructuring
plan, recovery of its remaining Oyster Creek plant investment as a regulatory
asset, through a nonbypassable charge to customers. At September 30, 1998,
JCP&L's net investment in Oyster Creek was $688 million. Highlights of this plan
are presented in the Competitive Environment section of Management's Discussion
and Analysis.
In February 1998, hearings with respect to JCP&L's stranded cost and
unbundled rate filings were completed before an Administrative Law Judge (ALJ)
and a recommended decision was issued in September. See Competitive Environment
section of Management's Discussion and Analysis for highlights of the ALJ
recommended decision. Also in September 1998, identical bills to deregulate New
Jersey's electricity market were introduced into the state Assembly and Senate.
The NJBPU is not expected to issue final decisions on JCP&L's stranded cost,
unbundled rate and restructuring filings until legislation is enacted.
The inability of JCP&L to recover its stranded costs in whole or in part
would result in the recording of liabilities for above-market NUG costs,
decommissioning costs, and writedowns of uneconomic generation plant and
regulatory assets recorded in accordance with Statement of Financial Accounting
Standards No. 71 (FAS 71), "Accounting for the Effects of Certain Types of
Regulation." The inability to recover these stranded costs would have a material
adverse effect on GPU's results of operations.
In October 1997, GPU announced its intention to begin a process to sell,
through a competitive bid process, up to all of the fossil-fuel and
hydroelectric generating facilities owned by the GPU Energy companies. These
facilities, comprised of 26 operating stations, support organizations and
development sites, total approximately 5,300 MW (JCP&L 1,900 MW; Met-Ed 1,300
MW; Penelec 2,100 MW) of capacity and have a net book value of approximately
$1.1 billion (JCP&L $282 million; Met-Ed $290 million; Penelec $527 million) at
September 30, 1998. The net proceeds from the sale would be used to reduce the
capitalization of the respective GPU Energy companies and may also be applied to
reduce short-term debt, finance further acquisitions, repurchase GPU, Inc.
common stock, and to reduce acquisition debt of the GPUI Group.
In August 1998, Penelec and New York State Electric & Gas Corporation
(NYSEG) entered into definitive agreements with Edison Mission Energy to sell
the Homer City Station for a total purchase price of approximately $1.8 billion.
Penelec and NYSEG each own a 50% interest in the station, and will share equally
in the net sale proceeds. The sale, which is subject to various federal and
state regulatory approvals, is expected to be completed in the first quarter of
1999.
21
<PAGE>
On November 9, 1998, the GPU Energy companies entered into definitive
purchase agreements with Sithe Energies and FirstEnergy Corporation to sell,
with the exception of JCP&L's 50% ownership interest in the Yards Creek Pumped
Storage plant, all their remaining fossil-fuel and hydroelectric generating
facilities for a total purchase price of approximately $1.7 billion (JCP&L $442
million; Met-Ed $677 million; and Penelec $603 million). The sales are expected
to be completed in mid-1999, subject to the timely receipt of the necessary
regulatory and other approvals.
Nonutility Generation Agreements:
- ---------------------------------
Pursuant to the requirements of the federal Public Utility Regulatory
Policies Act and state regulatory directives, the GPU Energy companies have
entered into power purchase agreements with NUGs for the purchase of energy and
capacity for remaining periods of up to 23 years. The following table shows
actual payments from 1995 through 1997, and estimated payments from 1998 through
2002.
Payments Under NUG Agreements
-----------------------------
(in Millions)
Total JCP&L Met-Ed Penelec
----- ----- ------ -------
1995 $670 $381 $131 $158
1996 730 370 168 192
1997 759 384 172 203
* 1998 771 389 170 212
1999 763 395 150 218
2000 852 402 206 244
2001 892 411 245 236
2002 915 423 257 235
* The 1998 amounts consist of actual payments through September 30, 1998 and
estimated payments for the remainder of the year.
As of September 30, 1998, NUG facilities covered by agreements having 1,681
MW (JCP&L 912 MW; Met-Ed 364 MW; Penelec 405 MW) of capacity were in service.
While a few of these NUG facilities are dispatchable, most are must-run and
generally obligate the GPU Energy companies to purchase, at the contract price,
the output up to the contract limits. Substantially all unbuilt NUG facilities
for which the GPU Energy companies have executed agreements are fully
dispatchable.
The emerging competitive generation market has created uncertainty
regarding the forecasting of the companies' energy supply needs, which has
caused the GPU Energy companies to change their supply strategy to seek
shorter-term agreements offering more flexibility. The GPU Energy companies'
future supply plan will likely focus on short- to intermediate-term commitments
and reliance on spot market purchases. The projected cost of energy from new
generation supply sources has also decreased due to improvements in power plant
technologies and lower forecasted fuel prices. As a result of these
developments, the rates under virtually all of the GPU Energy companies' NUG
agreements for facilities currently in operation are substantially in excess of
current and projected prices from alternative sources.
22
<PAGE>
The October 1998 PaPUC final Restructuring Orders provide for, and the
proposed legislation and restructuring plans in New Jersey also contemplate,
full recovery of the above-market costs of NUG agreements. The GPU Energy
companies will continue efforts to reduce the above-market costs of these
agreements and will, where beneficial, attempt to renegotiate the prices of the
agreements, offer contract buyouts and attempt to convert must-run agreements to
dispatchable agreements. There can be no assurance as to the extent to which
these efforts will be successful in whole or in part.
In 1997, Met-Ed and Penelec issued requests for proposals (RFPs) to 24 NUG
projects which currently supply a total of approximately 760 MW under power
purchase agreements. The RFPs requested the NUGs to propose buyouts, buydowns
and/or restructurings of current power purchase contracts in return for cash
payments. In January 1998, Met-Ed and Penelec entered into definitive buyout
agreements with two bidders. These agreements were contingent upon Met-Ed and
Penelec obtaining a PaPUC order allowing for the full recovery of the buyout
payments through retail rates. The final Restructuring Orders issued by the
PaPUC in October 1998 established terms and conditions that would enable the
buyout agreements to proceed.
In February 1997, Met-Ed and Penelec entered into revised power purchase
agreements with AES Power Corporation (AES) for 377 MW and 80 MW of capacity and
related energy, respectively, related to a combined-cycle generating facility
that AES plans to construct in Pennsylvania. Met-Ed and Penelec have paid $63.4
million and $5 million, respectively, to previous developers and AES to
terminate the original power purchase agreements. In November 1997, in response
to an offer from AES, Met-Ed and Penelec agreed to increase the contract
capacity under the agreements by 163 MW. The final Restructuring Orders issued
by the PaPUC in October 1998 established terms and conditions that would enable
the AES power purchase agreements to proceed.
The GPU Energy companies are currently recovering certain of their NUG
costs (including certain buyout costs) from customers. The October 1998 final
Restructuring Orders provide assurance of full recovery of these costs for
Met-Ed and Penelec. Although the proposed restructuring legislation in New
Jersey includes provisions for the recovery of costs under NUG agreements and
certain NUG buyout costs, there can be no assurance that JCP&L will continue to
be able to recover similar costs which may be incurred in the future. (See
Management's Discussion and Analysis - Competitive Environment for additional
discussion.)
This discussion of "Nonutility Generation Agreements" contains estimates
which are based on current knowledge and expectations of the outcome of future
events. The estimates are subject to significant uncertainties, including
changes in fuel prices, improvements in technology, the changing regulatory
environment and the deregulation of the electric utility industry.
Regulatory Assets, Net:
- -----------------------
In June 1998, Met-Ed and Penelec received PaPUC Restructuring Orders which
were subsequently amended in October 1998 by the final Restructuring Orders. The
Restructuring Orders, among other things, essentially remove from regulation the
costs associated with providing electric generation service to Pennsylvania
consumers, effective January 1, 1999. Accordingly, Met-Ed and Penelec have
discontinued the application of FAS 71 and adopted the provisions
23
<PAGE>
of Statement of Financial Accounting Standards No. 101 (FAS 101), "Regulated
Enterprises - Accounting for the Discontinuation of Application of FASB
Statement No. 71" with respect to their electric generation operations, in
the second quarter of 1998. The transmission and distribution portion of
Met-Ed and Penelec's operations will continue to be subject to the provisions
of FAS 71. See Note 2 - Accounting for Non-recurring Items.
JCP&L will discontinue the application of FAS 71 and apply FAS 101 for its
electric generation operations no later than when it receives NJBPU approval of
its restructuring plans.
Regulatory Assets, Net as reflected in the September 30, 1998 and December
31, 1997 Consolidated Balance Sheets in accordance with the provisions of FAS
71, were as follows:
GPU, Inc. and Subsidiary Companies Assets (in thousands)
----------------------------
September 30, December 31,
1998 1997
------------- -------------
Competitive transition charge per PaPUC Order $ 989,815 $ -
========= =========
Other regulatory assets, net:
Reserve for generation divestiture (JCP&L) $ 132,748 $ -
Phase II reserve for generation divestiture 1,360,375 -
Income taxes recoverable through future rates 379,105 510,680
Income taxes refundable through future rates (54,519) (89,247)
Net investment in TMI-2 68,009 83,951
TMI-2 decommissioning costs 131,737 257,180
Nonutility generation contract buyout costs 131,458 245,568
Unamortized property losses 83,385 99,532
Other postretirement benefits 74,601 89,569
Environmental remediation 44,447 90,308
N.J. unit tax 34,929 39,797
Unamortized loss on reacquired debt 33,234 40,489
Load and demand-side management programs 16,445 23,164
N.J. low-level radwaste disposal 25,685 31,479
DOE enrichment facility decommissioning 29,542 33,472
Nuclear fuel disposal fee 21,467 21,512
Storm damage 31,255 31,097
Deferred nonutility generation costs
not in current rates (16,067) 24,857
Future nonutility generation costs not in CTC 375,820 -
Public utility realty taxes (PURTA) 6,881 -
Other regulatory liabilities (20,235) (13,959)
Other regulatory assets 10,283 28,029
--------- ---------
Total other regulatory assets, net $2,900,585 $1,547,478
========= =========
24
<PAGE>
JCP&L Assets (in thousands)
- ----- ----------------------------
September 30, December 31,
1998 1997
------------- -------------
Other regulatory assets, net:
Reserve for generation divestiture $ 132,749 $ -
Income taxes recoverable through future rates 134,028 128,111
Income taxes refundable through future rates (35,964) (37,759)
Net investment in TMI-2 68,009 75,541
TMI-2 decommissioning costs 29,474 30,024
Nonutility generation contract buyout costs 126,458 140,500
Unamortized property losses 83,346 94,726
Other postretirement benefits 47,317 49,807
Environmental remediation 44,447 61,324
N.J. unit tax 34,929 39,797
Unamortized loss on reacquired debt 26,655 28,729
Load and demand-side management programs 16,445 23,164
N.J. low-level radwaste disposal 25,685 31,479
DOE enrichment facility decommissioning 18,502 21,223
Nuclear fuel disposal fee 21,197 23,781
Storm damage 31,255 31,097
Other regulatory liabilities (19,311) (11,467)
Other regulatory assets 7,748 6,399
--------- ---------
Total other regulatory assets, net $ 792,969 $ 736,476
========= =========
Met-Ed Assets (in thousands)
- ----- ----------------------------
September 30, December 31,
1998 1997
------------- -------------
Competitive transition charge per PaPUC Order $ 657,655 $ -
========= =========
Other regulatory assets, net: Transmission & Distribution related:
Income taxes recoverable through future rates $ 111,303 $ 116,303
Income taxes refundable through future rates (11,081) (12,614)
Nonutility generation contract buyout costs 5,000 12,500
Other postretirement benefits 27,284 27,436
Unamortized loss on reacquired debt 2,011 3,411
DOE enrichment facility decommissioning 7,498 8,166
Other regulatory liabilities (924) (1,014)
Other regulatory assets 232 216
--------- ---------
Subtotal $ 141,323 $ 154,404
--------- ---------
Generation related:
Income taxes recoverable through future rates $ - $ 62,624
Income taxes refundable through future rates - (9,135)
Unamortized property losses 39 2,650
Other postretirement benefits - 12,326
Environmental remediation - 4,121
Unamortized loss on reacquired debt 1,131 1,918
Nuclear fuel disposal fee 151 (1,511)
Other regulatory liabilities - (1,432)
Other regulatory assets 321 3,227
--------- ---------
Subtotal $ 1,642 $ 74,788
--------- ---------
25
<PAGE>
Other:
Phase II reserve for generation divestiture $ 423,003 $ -
Net investment in TMI-2 - 1,187
TMI-2 decommissioning costs 71,103 145,103
Nonutility generation contract buyout costs - 63,868
Deferred nonutility generation costs
not in current rates (7,746) 10,265
Future nonutility generation costs not in CTC 276,660 -
Public utility realty taxes (PURTA) 3,130 -
Other regulatory assets 725 1,072
--------- ---------
Subtotal $ 766,875 $ 221,495
--------- ---------
Total other regulatory assets, net $ 909,840 $ 450,687
========= =========
Penelec Assets (in thousands)
- ------- ---------------------------
September 30, December 31,
1998 1997
------------- -------------
Competitive transition charge per PaPUC Order $ 332,160 $ -
========= =========
Other regulatory assets, net: Transmission & Distribution related:
Income taxes recoverable through future rates $ 133,774 $ 142,549
Income taxes refundable through future rates (7,475) (9,516)
Unamortized loss on reacquired debt 2,200 4,116
DOE enrichment facility decommissioning 3,542 4,083
Other regulatory liabilities - (46)
--------- ---------
Subtotal $ 132,041 $ 141,186
--------- ---------
Generation related:
Income taxes recoverable through future rates $ - $ 61,093
Income taxes refundable through future rates - (20,223)
Unamortized property losses - 2,156
Environmental remediation - 24,863
Unamortized loss on reacquired debt 1,237 2,315
Nuclear fuel disposal fee 119 (758)
Other regulatory assets 343 15,964
--------- ---------
Subtotal $ 1,699 $ 85,410
--------- ---------
Other:
Phase II reserve for generation divestiture $ 937,372 $ -
Net investment in TMI-2 - 7,223
TMI-2 decommissioning costs 31,160 82,053
Nonutility generation contract buyout costs - 28,700
Deferred nonutility generation costs
not in current rates (8,321) 14,592
Future nonutility generation costs not in CTC 99,160 -
Public utility realty taxes (PURTA) 3,751 -
Other regulatory assets 914 1,151
--------- ---------
Subtotal $1,064,036 $ 133,719
--------- ---------
Total other regulatory assets, net $1,197,776 $ 360,315
========= =========
26
<PAGE>
Competitive transition charge: Represents the stranded cost recovery amounts
allowed by the PaPUC, which are to be collected from customers of Met-Ed and
Penelec, beginning January 1, 1999, over twelve-year and eleven-year transition
periods, respectively. Stranded costs, as defined by the Pennsylvania
Competition Act, include an electric utility's known and measurable
generation-related costs, which would have been recoverable in the former
regulated market, but are not recoverable in a competitive electric generation
market.
Reserve for generation divestiture (JCP&L): Represents generation divestiture
shortfall which is probable of recovery in future rates, inclusive of
divestiture transaction costs.
Phase II reserve for generation divestiture (Met-Ed and Penelec): Represents
generation divestiture CTC shortfall to be addressed in a Phase II rate
restructuring order, inclusive of future closure costs of various ash disposal
sites; amounts related to the remediation of Penelec's Seward station property;
costs for a voluntary enhanced retirement program offered to Genco employees;
certain income tax-related items; and divestiture transaction costs.
Income taxes recoverable/refundable through future rates: Represents amounts
deferred due to the implementation of FAS 109, "Accounting for Income Taxes," in
1993.
Net investment in TMI-2: Represents costs that are recoverable through rates for
the GPU Energy companies' remaining investment in the plant and fuel core.
TMI-2 decommissioning costs: Represents costs that are recoverable through rates
for the GPU Energy companies' radiological decommissioning and the cost of
removal of nonradiological structures and materials in accordance with the 1995
site-specific study (in 1998 dollars). For additional information, see Nuclear
Plant Retirement Costs.
Nonutility generation contract buyout costs: Represents amounts incurred for
terminating power purchase contracts with NUGs, for which rate recovery has been
granted or is probable.
Unamortized property losses: Consists mainly of costs associated with JCP&L's
Forked River project, which are included in rates.
Other postretirement benefits: Includes costs associated with the adoption of
FAS 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," which are deferred in accordance with Emerging Issues Task Force
(EITF) Issue 92-12, "Accounting for OPEB Costs by Rate-Regulated
Enterprises."
Environmental remediation: Consists of amounts related to the investigation and
remediation of several manufactured gas plant sites formerly owned by JCP&L, as
well as several other JCP&L sites; Penelec's Seward station property; and future
closure costs of various ash disposal sites for the GPU Energy companies. For
additional information, see Environmental Matters.
N.J. unit tax: Represents certain state taxes, with interest, for which JCP&L
received NJBPU approval in 1993 to recover over a ten-year period.
27
<PAGE>
Unamortized loss on reacquired debt: Represents premiums and expenses incurred
in the early redemption of long-term debt. In accordance with FERC regulations,
reacquired debt costs are amortized over the remaining original life of the
retired debt.
Load and demand-side management (DSM) programs: Consists of load management
costs and other DSM program expenditures that are currently being recovered,
with interest, through JCP&L's retail base rates and demand-side factor. Also
includes provisions for lost revenues between base rate cases and performance
incentives.
N.J. low-level radwaste disposal: Represents the estimated assessment for the
siting of a disposal facility for low-level waste from Oyster Creek, less
amortization, as allowed in JCP&L's rates.
Department of Energy (DOE) enrichment facility decommissioning: Represents
payments to the DOE over a 15-year period which began in 1994.
Nuclear fuel disposal fee: Represents amounts recoverable through rates for
estimated future disposal costs for spent nuclear fuel at Oyster Creek and Three
Mile Island Unit 1 (TMI-1) in accordance with the Nuclear Waste Policy Act of
1982.
Storm damage: Relates to incremental noncapital costs associated with various
storms in the JCP&L service territory that are not recoverable through
insurance. These amounts were deferred based upon past rate recovery precedent.
An annual amortization amount is included in JCP&L's retail base rates and is
charged to expense.
Deferred nonutility generation costs not in current rates: Represents NUG
operating costs which are not reflected in Met-Ed and Penelec's current rates,
for which rate recovery has been assured (see Management's Discussion and
Analysis - Competitive Environment).
Future nonutility generation costs not in CTC: Represents future NUG operating
costs which are not presently included in Met-Ed and Penelec's CTC, for which
recovery has been assured. The amounts collected will be adjusted every five
years over the life of each NUG contract.
Public utility realty taxes (PURTA): Represents additional assessments under the
public utility realty tax, which are recoverable through Met-Ed and Penelec's
state tax adjustment surcharges.
Accounting Matters:
- -------------------
In June 1998, Statement of Financial Accounting Standards No. 133 (FAS
133), "Accounting for Derivative Instruments and Hedging Activities" was issued.
FAS 133 requires that companies recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value. To
comply with this statement, GPU will be required to include its derivative
transactions on its balance sheet at fair value, and recognize the subsequent
changes in fair value as either gains or losses in earnings or reported as a
component of other comprehensive income, depending upon the intended use and
designation of the derivative as a hedge. This statement is effective for all
fiscal quarters of fiscal years beginning after June 15,
28
<PAGE>
1999. GPU expects to adopt this statement in the first quarter of 2000. GPU is
in the process of evaluating the impact of FAS 133.
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.
Should the restructuring proceeding in New Jersey result in substantial
disallowance of certain capital additions; the disallowance of certain stranded
costs; reduction in cost of capital allowances on certain elements of plant and
cost deferrals; and tariff rate unbundling reflecting an allocation of costs to
the transmission and distribution activities lower than that proposed by JCP&L,
management believes that the outcome of that proceeding would have a material
adverse effect on GPU's future earnings.
NUCLEAR FACILITIES
------------------
The GPU Energy companies have made investments in three major nuclear
projects -- TMI-1 and Oyster Creek, both of which are operating generation
facilities, and TMI-2, which was damaged during a 1979 accident. TMI-1 and TMI-2
are jointly owned by JCP&L, Met-Ed and Penelec in the percentages of 25%, 50%
and 25%, respectively. Oyster Creek is owned by JCP&L. At September 30, 1998 and
December 31, 1997, the GPU Energy companies' net investment in TMI-1 and Oyster
Creek, including nuclear fuel, was as follows:
Net Investment (in millions)
----------------------------
TMI-1 Oyster Creek
----- ------------
September 30, 1998
------------------
JCP&L $ 22 $688
Met-Ed 43 -
Penelec 21 -
--- ---
Total $ 86 $688
=== ===
Net Investment (in millions)
----------------------------
TMI-1 Oyster Creek
----- ------------
December 31, 1997
-----------------
JCP&L $155 $701
Met-Ed 300 -
Penelec 147 -
--- ---
Total $602 $701
=== ===
The GPU Energy companies' net investment in TMI-2 at September 30, 1998 was
$68 million for JCP&L and $84 million, (JCP&L $76 million; Met-Ed $1 million;
and Penelec $7 million) at December 31 1997. JCP&L is collecting revenues for
TMI-2 on a basis which provides for the recovery of its remaining investment in
the plant by 2008. In June 1998, Met-Ed and Penelec received
29
<PAGE>
PaPUC Restructuring Orders which were subsequently amended in October 1998 by
the final Restructuring Orders. The companies discontinued the application of
FAS 71 and adopted the provisions of FAS 101 with respect to their electric
generation operations in the second quarter of 1998. Accordingly, Met-Ed and
Penelec wrote-off their remaining investment in TMI-2 of $1 million and $7
million, respectively.
Costs associated with the operation, maintenance and retirement of nuclear
plants have continued to be significant and less predictable than costs
associated with other sources of generation, in large part due to changing
regulatory requirements, safety standards, availability of nuclear waste
disposal facilities and experience gained in the construction and operation of
nuclear facilities. The GPU Energy companies may also incur costs and experience
reduced output at their nuclear plants because of the prevailing design criteria
at the time of construction and the age of the plants' systems and equipment. In
addition, for economic or other reasons, operation of these plants for the full
term of their operating licenses cannot be assured. Also, not all risks
associated with the ownership or operation of nuclear facilities may be
adequately insured or insurable. Consequently, the recovery of costs associated
with nuclear projects, including replacement power, any unamortized investment
at the end of each plant's useful life (whether scheduled or premature), the
carrying costs of that investment and retirement costs, is not assured. (See
Competition and the Changing Regulatory Environment.)
In addition to the continued operation of the Oyster Creek facility, JCP&L
has been exploring the sale or early retirement of the plant to mitigate costs
associated with its continued operation. In July 1998, GPU, Inc. announced that
it was unable to identify a buyer for the Oyster Creek facility. GPU does not
anticipate making a final decision on the plant before the NJBPU rules on
JCP&L's restructuring filing. If a decision is made to retire the plant early,
retirement would likely occur in 2000. Although management believes that the
current rate structure would allow for the recovery of and return on its net
investment in the plant and provide for decommissioning costs, there can be no
assurance that such costs will be fully recoverable. (See Management's
Discussion and Analysis - Competitive Environment).
In October 1998, GPU entered into definitive purchase agreements to sell
TMI-1 to AmerGen Energy Company, LLC (AmerGen), a joint venture between PECO
Energy and British Energy. Highlights of the agreements are presented in the
Competitive Environment section of Management's Discussion and Analysis.
TMI-2:
- ------
As a result of the 1979 TMI-2 accident, individual claims for alleged
personal injury (including claims for punitive damages), which are material in
amount, have been 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
30
<PAGE>
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 (JCP&L $7.5 million; Met-Ed $5 million; Penelec $2.5 million).
In October 1995, the U.S. Court of Appeals for the Third Circuit ruled that
the Price-Anderson Act provides coverage under its primary and secondary levels
for punitive as well as compensatory damages, but that punitive damages could
not be recovered against the Federal Government under the third level of
financial protection. In so doing, the Court of Appeals referred to the "finite
fund" (the $560 million of financial protection under the Price-Anderson Act) to
which plaintiffs must resort to get compensatory as well as punitive damages.
The Court of Appeals also ruled that the standard of care owed by the
defendants to a plaintiff was determined by the specific level of radiation
which was released into the environment, as measured at the site boundary,
rather than as measured at the specific site where the plaintiff was located at
the time of the accident (as the defendants proposed). The Court of Appeals also
held that each plaintiff still must demonstrate exposure to radiation released
during the TMI-2 accident and that such exposure had resulted in injuries. In
1996, the U.S. Supreme Court denied petitions filed by GPU, Inc. and the GPU
Energy companies to review the Court of Appeals' rulings.
In June 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
Nuclear Regulatory Commission (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
31
<PAGE>
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's remaining in long-term storage and being
decommissioned at the same time as TMI-1. Based on NRC studies, a comparable
funding target was developed for TMI-2 which took the accident into account.
Under the NRC regulations, the funding targets (in 1998 dollars) are as follows:
(in millions)
Oyster
TMI-1 TMI-2 Creek
----- ----- -----
JCP&L $ 47 $ 74 $319
Met-Ed 93 148 -
Penelec 47 74 -
--- --- ---
Total $187 $296 $319
=== === ===
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
establish residual radioactivity limits nor do they 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, that considered various decommissioning methods and
estimated the cost of decommissioning the radiological portions and the cost of
removal of the nonradiological portions of each plant, using the prompt
removal/dismantlement method. GPUN management has reviewed the methodology and
assumptions used in these studies, is in agreement with them, and believes the
results are reasonable. The NRC may require an acceleration of the
decommissioning funding for Oyster Creek if the plant is retired early. The
retirement cost estimates under the site-specific studies are as follows (in
1998 dollars):
(in millions)
Oyster
TMI-1 TMI-2 Creek
----- ----- -----
Radiological decommissioning $342 $415 $402
Nonradiological cost of removal 84 34 * 39
--- --- ---
Total $426 $449 $441
=== === ===
* Net of $12.0 million spent as of September 30, 1998.
Each of the GPU Energy companies is responsible for retirement costs in
proportion to its respective ownership percentage.
In October 1998, GPU entered into definitive agreements to sell TMI-1 to
AmerGen. The agreements provide, among other things, that upon closing, the GPU
Energy companies will fund the TMI-1 decommissioning trusts up to $320 million
and AmerGen will assume all TMI-1 decommissioning liabilities. If all the
necessary regulatory approvals, as well as certain Internal Revenue Service
rulings, are obtained, then the transfer of all the TMI-1 decommissioning
liabilities and expenses to AmerGen will take place at the financial closing.
32
<PAGE>
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. Accounting for retirement costs may
change based upon the FASB Exposure Draft discussed below.
The FASB has issued an Exposure Draft titled "Accounting for Certain
Liabilities Related to Closure or Removal of Long-Lived Assets," which includes
nuclear plant retirement costs. If the Exposure Draft is adopted, Oyster Creek
and TMI-1 future retirement costs would have to be recognized as a liability
immediately, rather than the current industry practice of accruing these costs
in accumulated depreciation over the life of the plants. A regulatory asset for
amounts probable of recovery through rates would also be established. Any
amounts not probable of recovery through rates would have to be charged to
expense. (For TMI-2, a liability (in 1998 dollars) has already been recognized,
based on the 1995 site-specific study because the plant is no longer operating
(see TMI-2)). The effective date of this proposed accounting change has not yet
been established.
TMI-1 and Oyster Creek:
- -----------------------
The NJBPU has granted JCP&L annual revenues for TMI-1 and Oyster Creek
retirement costs of $2.5 million and $13.5 million, respectively. These annual
revenues are based on both the NRC funding targets for radiological
decommissioning costs and a site-specific study which was performed in 1988 for
nonradiological costs of removal. The Stipulation of Final Settlement approved
by the NJBPU in 1997 allows for JCP&L's future collection of retirement costs to
increase annually to $5.2 million and $22.5 million for TMI-1 and Oyster Creek,
respectively, beginning in 1998, based on the 1995 site-specific study
estimates.
The PaPUC has granted Met-Ed annual revenues for TMI-1 retirement costs of
$8.5 million based on both the NRC funding target for radiological
decommissioning costs and the 1988 site-specific study for nonradiological costs
of removal. The PaPUC also granted Penelec annual revenues of $4.2 million for
its share of TMI-1 retirement costs, on a basis consistent with that granted
Met-Ed. As part of their restructuring plans filed with the PaPUC in June 1997,
Met-Ed and Penelec have requested that these amounts be increased to reflect the
estimated retirement costs contained in the 1995 site-specific study for
radiological decommissioning and nonradiological costs of removal. In October
1998, Met-Ed and Penelec received final PaPUC Restructuring Orders, which
granted recovery of an interim level of TMI-1 decommissioning costs as part of
the CTC. This amount will be adjusted in Phase II of Met-Ed and Penelec's
restructuring proceedings, once the net
33
<PAGE>
proceeds from the nuclear, fossil-fuel and hydroelectric generation
divestiture are determined.
The amounts charged to depreciation expense for the nine months ended
September 30, 1998 and the provisions for the future expenditure of these funds,
which have been made in accumulated depreciation, are as follows:
(in millions)
Oyster
TMI-1 Creek
----- -----
Amount expensed for the nine months ended September 30, 1998:
JCP&L $ 4 $ 17
Met-Ed 6 -
Penelec 3 -
--- ---
$ 13 $ 17
=== ===
(in millions)
Oyster
TMI-1 Creek
----- -----
Accumulated depreciation provision at September 30, 1998:
JCP&L $ 43 $243
Met-Ed 77 -
Penelec 36 -
--- ---
$156 $243
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
September 30, 1998 and December 31, 1997 are as follows:
(in millions)
GPU JCP&L Met-Ed Penelec
--- ----- ------ -------
September 30, 1998 $464 $116 $232 $116
December 31, 1997 $449 $112 $225 $112
These amounts are based upon the 1995 site-specific study estimates (in
1998 and 1997 dollars, respectively) discussed above and an estimate for
remaining incremental monitored storage costs of $16 million (JCP&L $4 million;
Met-Ed $8 million; Penelec $4 million) as of September 30, 1998 and December 31,
1997, as a result of TMI-2's entering long-term monitored storage in 1993. The
GPU Energy companies are incurring annual incremental monitored storage costs of
approximately $1 million (JCP&L $250 thousand; Met-Ed $500 thousand; Penelec
$250 thousand).
Offsetting the $464 million liability at September 30, 1998 is $259 million
which management believes is probable of recovery from customers and
34
<PAGE>
included in Competitive transition charge (Met-Ed $74 million; Penelec $50
million) and Other regulatory assets, net (JCP&L $33 million; Met-Ed $71
million; Penelec $31 million) on the Consolidated Balance Sheets, and $233
million (JCP&L $91 million; Met-Ed $93 million; Penelec $49 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 Competitive transition
charge and Other regulatory assets. TMI-2 decommissioning costs charged to
depreciation expense during the nine months ended September 30, 1998 amounted to
$10 million (JCP&L $2 million; Met-Ed $7 million; Penelec $1 million).
The NJBPU has granted JCP&L, TMI-2 decommissioning revenues for the NRC
funding target and allowances for the cost of removal of nonradiological
structures and materials. In addition, JCP&L is recovering its share of TMI-2's
incremental monitored storage costs. The Stipulation of Final Settlement
approved by the NJBPU in 1997 adjusts JCP&L's future revenues for retirement
costs based on the 1995 site-specific study estimates, beginning in 1998. In
October 1998, Met-Ed and Penelec received final PaPUC Restructuring Orders,
which granted recovery of TMI-2 decommissioning costs as part of the CTC, but
also allowed Met-Ed and Penelec to defer as a regulatory asset those amounts
that are above the level provided for in the CTC.
At September 30, 1998, the accident-related portion of TMI-2 radiological
decommissioning costs is considered to be $73 million (JCP&L $18 million, Met-Ed
$37 million; Penelec $18 million), which is the difference between the 1995
TMI-1 and TMI-2 site-specific study estimates (in 1998 dollars). In connection
with rate case resolutions at the time, JCP&L, Met-Ed and Penelec made
contributions to irrevocable external trusts relating to their shares of the
accident-related portions of the decommissioning liability. In 1990, JCP&L
contributed $15 million and in 1991, Met-Ed and Penelec contributed $40 million
and $20 million, respectively, to irrevocable external trusts. These
contributions were not recovered from customers and have been expensed. The GPU
Energy companies will not pursue recovery from customers for any of these
amounts contributed in excess of the $73 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
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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 $9.9 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 $16.8
million; Met-Ed $6.7 million; Penelec $3.3 million) in any one year under
insurance policies applicable to nuclear operations and facilities.
The GPU Energy companies have insurance coverage for incremental
replacement power costs resulting from an accident-related outage at their
nuclear plants. Coverage commences after a 17 week waiting period at $3.5
million per week, and after 23 weeks of an outage, continues for three years
beginning at $1.8 million and $2.6 million per week for the first year for
Oyster Creek and TMI-1, respectively, decreasing to 80% of such amounts for
years two and three.
ENVIRONMENTAL MATTERS
---------------------
As a result of existing and proposed legislation and regulations, and
ongoing legal proceedings dealing with environmental matters, including but not
limited to acid rain, water quality, ambient air quality, global warming,
electromagnetic fields, and storage and disposal of hazardous and/or toxic
wastes, GPU may be required to incur substantial additional costs to construct
new equipment, modify or replace existing and proposed equipment, remediate,
decommission or cleanup waste disposal and other sites currently or formerly
used by it, including formerly owned manufactured gas plants (MGP), coal mine
refuse piles and generation facilities.
To comply with Titles I and IV of the federal Clean Air Act Amendments of
1990 (Clean Air Act), the GPU Energy companies expect to spend up to $248
million (JCP&L $44 million; Met-Ed $98 million; Penelec $106 million) for air
pollution control equipment by the year 2000, of which approximately $242
million (JCP&L $43 million; Met-Ed $96 million; Penelec $103 million) has
already been spent. In developing their least-cost plan to comply with the Clean
Air Act, the GPU Energy companies will continue to evaluate major capital
investments compared to participation in the sulfur dioxide (SO2) emission
allowance market, the expected nitrogen oxide (NOx) emissions trading market and
the use of low-sulfur fuel or retirement of facilities. In 1994, the Ozone
Transport Commission (OTC), consisting of representatives of 12
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northeast states (including New Jersey and Pennsylvania) and the District of
Columbia, proposed reductions in NOx emissions it believes necessary to meet
ambient air quality standards for ozone and the statutory deadlines set by the
Clean Air Act. Effective November 1997, the Pennsylvania Environmental Quality
Board adopted regulations implementing the OTC's proposed NOx reductions 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 state implementation plans,
including those in Pennsylvania and New Jersey, and that as a result, they will
spend an estimated $6 million (JCP&L $0.2 million; Met-Ed $2.8 million; Penelec
$3.0 million) (included in the above total), to meet the 1999 seasonal
reductions agreed upon by the OTC. The OTC has stated that it anticipates that
additional NOx reductions will be necessary to meet the Clean Air Act's 2005
National Ambient Air Quality Standard for ozone. However, the specific
requirements that will have to be met at that time have not been finalized. In
addition, in July 1997 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. Also, legislation has
been introduced in the Congress that would impose a four-year moratorium on any
new standards under the Clean Air Act. The GPU Energy companies are unable to
determine what additional costs, if any, will be incurred if the EPA rules are
upheld.
GPU has been formally notified by the EPA and state environmental
authorities that it is among the potentially responsible parties (PRPs) who may
be jointly and severally liable to pay for the costs associated with the
investigation and remediation at hazardous and/or toxic waste sites in the
following number of instances (in some cases, more than one company is named for
a given site):
JCP&L MET-ED PENELEC GPUN GPU,INC. TOTAL
----- ------ ------- ---- -------- -----
7 4 2 1 1 12
In addition, certain of the GPU companies have been requested to participate
in the remediation or supply information to the EPA and state environmental
authorities on several other sites for which they have not been formally named
as PRPs, although the EPA and state authorities may nevertheless consider them
as PRPs. Certain of the GPU companies have also been named in lawsuits
requesting damages (which are material in amount) for hazardous and/or toxic
substances allegedly released into the environment. The ultimate cost of
remediation will depend upon changing circumstances as site investigations
continue, including (a) the existing technology required for site cleanup, (b)
the remedial action plan chosen and (c) the extent of site contamination and the
portion attributed to the GPU companies involved.
In 1997, the EPA filed a complaint against GPU, Inc. in the United States
District Court for the District of Delaware for enforcement of its unilateral
order issued against GPU, Inc. to clean up the former Dover Gas Light Company
(Dover) manufactured gas production site in Dover, Delaware. Dover was part of
the AGECO/AGECORP group of companies from 1929 until 1942 and GPU, Inc. emerged
from the AGECO/AGECORP reorganization proceedings. All of the common stock of
Dover was sold in 1942 by a member of the AGECO/AGECORP group to an
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unaffiliated entity, and was subsequently acquired by Chesapeake Utilities
Corporation. According to the complaint, the EPA is seeking up to $0.5 million
in past costs, $4.2 million for work in connection with the cleanup of the Dover
site and approximately $19 million in penalties. GPU, Inc. has responded to the
EPA complaint stating that such claims should be dismissed because, among other
things, they are barred by the operation of the Final Decree entered by the
United States District Court for the Southern District of New York at the
conclusion of the 1946 reorganization proceedings of AGECO/AGECORP. Chesapeake
Utilities Corporation has also sued GPU, Inc. for a contribution to the cleanup
of the Dover site. In December 1997, the Court refused to dismiss the complaint;
GPU, Inc. has requested that the Court reconsider its decision. There can be no
assurance as to the outcome of these proceedings.
Pursuant to federal environmental monitoring requirements, Penelec has
reported to the Pennsylvania Department of Environmental Protection (PaDEP) that
contaminants from coal mine refuse piles were identified in storm water run-off
at Penelec's Seward station property. Penelec signed a modified Consent Order,
which became effective December 1996, that establishes a schedule for submitting
a plan for long-term remediation, based on future operating scenarios. Penelec
currently estimates that the remediation of the Seward station property will
range from $12 million to $20 million and has a recorded liability of $12
million at September 30, 1998. These cost estimates are subject to uncertainties
based on continuing discussions with the PaDEP as to the method of remediation,
the extent of remediation required and available cleanup technologies. Penelec
expects recovery of these remediation costs in Phase II of its restructuring
proceeding and has recorded a corresponding deferred debit of approximately $12
million at September 30, 1998.
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 September 30, 1998. JCP&L has requested recovery
of its share of closure costs in its restructuring plan filed with the NJBPU in
July 1997. Met-Ed and Penelec expect recovery of these costs in Phase II of
their restructuring proceedings. As a result, a deferred debit of $17 million is
reflected on the Consolidated Balance Sheets at September 30, 1998.
JCP&L has entered into agreements with the New Jersey Department of
Environmental Protection for the investigation and remediation of 17 formerly
owned MGP sites. JCP&L has also entered into various cost-sharing agreements
with other utilities for most of the sites. As of September 30, 1998, JCP&L has
spent approximately $30 million in connection with the cleanup of these sites.
In addition, JCP&L has recorded an estimated environmental liability of $46
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 $46 million due to significant uncertainties,
including changes in acceptable remediation methods and technologies.
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In 1997, JCP&L's request to establish a Remediation Adjustment Clause for
the recovery of MGP remediation costs was approved by the NJBPU as part of the
Stipulation of Final Settlement. At September 30, 1998, JCP&L had recorded on
its Consolidated Balance Sheet a regulatory asset of $38 million. JCP&L is
continuing to pursue reimbursement from its insurance carriers for remediation
costs already spent and for future estimated costs. In 1994, JCP&L filed a
complaint with the Superior Court of New Jersey against several of its insurance
carriers, relative to these MGP sites. Pretrial discovery is continuing.
OTHER COMMITMENTS AND CONTINGENCIES
-----------------------------------
GPUI Group:
- -----------
At September 30, 1998, the GPUI Group had investments totaling
approximately $2.4 billion in businesses and facilities located in foreign
countries. Although management attempts to mitigate the risk of investing in
certain foreign countries by securing political risk insurance, the GPUI Group
faces additional risks inherent to operating in such locations, including
foreign currency fluctuations (see Management's Discussion and Analysis - GPUI
Group).
At September 30, 1998, GPU, Inc.'s aggregate investment in the GPUI Group
was $526 million; GPU, Inc. has also guaranteed up to an additional $996 million
of GPUI Group obligations. Of this amount, $733 million is included in Long-term
debt and Securities due within one year on GPU's Consolidated Balance Sheet at
September 30, 1998; $30 million of that amount relates to a GPU International,
Inc. (GPUI) revolving credit agreement; and $233 million relates to various
other obligations of the GPUI Group.
GPUI has ownership interests in three NUG projects which have long-term
power purchase agreements with Niagara Mohawk Power Corporation (NIMO). In June
1998, NIMO executed a master agreement with 29 independent power producers
(IPP), including GPUI, whereby each of the IPP agreements were renegotiated and
resulted in lump sum payments and/or new contracts with NIMO. As a result, the
three GPUI NUG projects with NIMO were restructured. GPUI has deferred its net
gain on the proceeds received from the settlements, which ensures recovery of
the investment, and will recognize the gain in income over the ten year period
of their restructured agreements with NIMO or until such time as an independent
system operator (ISO) is established in New York State. The ISO for New York is
expected to be implemented as early as 1999, at which time the net deferred gain
resulting from the lump sum proceeds will be recognized in income.
Midlands Electricity (Midlands) has invested in a power project in Pakistan
(Uch Power Project) which was originally scheduled to begin commercial operation
in late 1998. The Uch Power Project is a 586 MW facility of which Midlands is a
40% owner. The Pakistani government-owned utility has issued a notice of intent
to terminate certain key project agreements. The notice asserts that various
forms of corruption were involved in the original granting of the agreements to
the Uch investors by the predecessor Pakistani government. GPU Electric, Inc.
believes that this notice is similar to notices received by a number of other
independent power projects in Pakistan.
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The Uch investors, including Midlands, strongly deny the allegations and
are pursuing all available legal options to enforce their contractual rights
under the project agreements. Construction of the Uch Power Project is complete,
but commercial operations have been delayed pending resolution of the dispute
with the Pakistani government. The Uch investors are continuing to explore
remedies to the situation with officials of the Pakistani government and are
working with the project lenders to ensure their continued support of the
project. The project contractor has given notice of its desire to invoke dispute
resolution procedures in relation to a claim for additional costs arising from
the failure of the Uch Power Project to provide fuel gas and interconnection
facilities. The Uch Power Project denies that it is liable for any additional
costs arising from this delay.
Through its 50% ownership in Midlands, GPU Electric, Inc.'s current
investment in the Uch Power Project is approximately $32 million. In addition,
the project lenders could require investors to make additional investments to
the project under certain conditions. GPU Electric, Inc.'s share of the
additional investment could amount to a maximum of approximately $12 million.
There can be no assurance as to the outcome of this matter.
Other:
- ------
GPU's capital programs, for which substantial commitments have been
incurred and which extend over several years, contemplate expenditures of $471
million (JCP&L $169 million; Met-Ed $77 million; Penelec $87 million; Other $138
million) during 1998.
The GPU Energy companies have entered into long-term contracts with
nonaffiliated mining companies for the purchase of coal for certain generating
stations in which they have ownership interests. The contracts, which expire at
various dates between 1998 and 2007, require the purchase of either fixed or
minimum amounts of the stations' coal requirements. The price of the coal under
the contracts is based on adjustments of indexed cost components. The GPU Energy
companies' share of the cost of coal purchased under these agreements is
expected to aggregate $171 million (JCP&L $26 million; Met-Ed $55 million;
Penelec $90 million) for 1998.
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
614 MW in 1998, declining to 529 MW in 1999 and 345 MW in 2000, through the
expiration of the final agreement in 2004. Payments pursuant to these agreements
are estimated to be $129 million in 1998, $111 million in 1999, $83 million in
2000, $92 million in 2001, and $101 million in 2002.
In accordance with the Nuclear Waste Policy Act of 1982 (NWPA), the GPU
Energy companies have entered into contracts with, and have been paying fees to,
the DOE for the future disposal of spent nuclear fuel in a repository or interim
storage facility. In December 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
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Nuclear Waste Fund until the DOE complies with the NWPA. The DOE's inability to
accept spent nuclear fuel by 1998 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 disposal facility in New Jersey, which
should commence operation by the end of 2003. GPUN's total share of the cost for
developing, constructing and site licensing the facility is estimated to be $58
million, which will be paid through 2002. Through September 30, 1998, $6 million
has been paid. As a result, at September 30, 1998, a liability of $52 million is
reflected on the Consolidated Balance Sheets. JCP&L is recovering these costs
from customers, and a regulatory asset has also been recorded. 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 intended to return
the unused funds to the generators, but the Governor has overruled this
decision. Legislation is pending in the state Senate and the Assembly, however,
that would mandate returning the unused funds to the generators, of which GPUN's
share is approximately $2.6 million. GPUN cannot determine at this time what
effect, if any, this matter will have on its operations.
Pennsylvania, Delaware, Maryland and West Virginia have established the
Appalachian Compact to construct a facility for the disposal of low-level
radwaste in those states, including low-level radwaste from TMI-1. To date,
pre-construction costs of $33 million, out of an estimated $88 million, have
been paid. Eleven nuclear plants have so far shared equally in the
pre-construction costs; GPUN has contributed $3 million on behalf of TMI-1.
Pennsylvania has stated that it may suspend the search for a low level radwaste
disposal site in the state. GPUN cannot determine at this time what effect, if
any, this may have on its operations.
JCP&L's two operating nuclear units are subject to the NJBPU's annual
nuclear performance standard. Operation of these units at an aggregate annual
generating capacity factor below 65% or above 75% would trigger a charge or
credit based on replacement energy costs. At current cost levels, the maximum
annual effect on net income of the performance standard charge at a 40% capacity
factor would be approximately $11 million before tax. While a capacity factor
below 40% would generate no specific monetary charge, it would require the issue
to be brought before the NJBPU for review. The annual measurement period, which
begins in March of each year, coincides with that used for the Levelized Energy
Adjustment Clause.
At September 30, 1998, GPU, Inc. and consolidated affiliates had 9,264
employees worldwide, of which 8,923 employees were located in the U.S. The
majority of the U.S. workforce is employed by the GPU Energy companies, of which
approximately 4,800 are represented by unions for collective bargaining
purposes. JCP&L, Met-Ed and Penelec's collective bargaining agreements with the
International Brotherhood of Electrical Workers expire in 1999, 2000 and
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<PAGE>
2002, respectively. Penelec's collective bargaining agreement with the Utility
Workers Union of America expires in 2001.
During the normal course of the operation of its businesses, in addition to
the matters described above, GPU is from time to time involved in disputes,
claims and, in some cases, as a defendant in litigation in which compensatory
and punitive damages are sought by the public, customers, contractors, vendors
and other suppliers of equipment and services and by employees alleging unlawful
employment practices. While management does not expect that the outcome of these
matters will have a material effect on GPU's financial position or results of
operations, there can be no assurance that this will continue to be the case.
2. ACCOUNTING FOR NON-RECURRING ITEMS
Pennsylvania Restructuring Write-offs
Historically, the rates an electric utility charges its customers have been
based on the utility's costs of operation. As a result, the GPU Energy companies
were required to account for the economic effects of cost-based ratemaking
regulation under the provisions of Statement of Financial Accounting Standards
No. 71 (FAS 71), "Accounting for the Effects of Certain Types of Regulation."
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
Financial Accounting Standards Board's (FASB) EITF concluded in June 1997 that
utilities are no longer subject to FAS 71, for a separable 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.
In June 1998, Met-Ed and Penelec received PaPUC Restructuring Orders, which
were subsequently amended in October 1998 by the final Restructuring Orders. The
Restructuring Orders, among other things, essentially remove from regulation the
costs associated with providing electric generation service to Pennsylvania
consumers, effective January 1, 1999. Accordingly, Met-Ed and Penelec have
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 FAS 71" with respect to
their electric generation operations, in the second quarter of 1998. The
transmission and distribution portion of Met-Ed and Penelec's operations will
continue to be subject to the provisions of FAS 71. JCP&L expects to discontinue
the application of FAS 71 and adopt FAS 101 for its electric generation
operations no later than when it receives NJBPU approval of its restructuring
plans.
As of September 30, 1998, the net effect on earnings of the PaPUC's final
Restructuring Orders was as follows:
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<PAGE>
(in millions)
Met-Ed Penelec Total
------ ------- -----
Write-off of existing Pennsylvania
generation regulatory assets $ 8.0 $ 2.8 $ 10.8
Write-off of existing FERC
generation regulatory assets 1.5 17.6 19.1
TMI-1 impairment write-off (FERC) and
TMI-1 decommissioning write-off (FERC) 2.0 10.2 12.2
------- ------- -------
Extraordinary loss (pre-tax) -
FAS 101 write-off 11.5 30.6 42.1
Obligation to refund 1998 revenues 27.2 29.2 56.4
Establishment of sustainable energy fund 5.7 6.4 12.1
------- ------- -------
Total pre-tax write-off 44.4 66.2 110.6
Income tax benefit (18.4) (26.4) (44.8)
------- ------- -------
Total after-tax write-off $ 26.0 $ 39.8 $ 65.8
======= ======= =======
GPU loss per average common share
due to Pennsylvania restructuring $ 0.21 $ 0.31 $ 0.52
======= ======= =======
FAS 121 Impairment Tests on Generation Facilities:
In accordance with FAS 121, GPU performed impairment tests on the September
30, 1998 net book value of the GPU Energy companies' generation facilities.
These tests determined that GPU's net investment in TMI-1 was impaired. No
impairment existed for the fossil-fuel and hydroelectric generating plants or
for the Oyster Creek Nuclear Station as of that date. For the nine months ended
September 30, 1998, GPU's investment in TMI-1 was written down by $505 million
(pre-tax) (JCP&L $131 million; Met-Ed $251 million; Penelec $123 million) to
reflect its fair market value.
Re-establishment of TMI-1 Impairment as a Regulatory Asset:
Of the amount written down for TMI-1, $496 million (JCP&L $131 million;
Met-Ed $250 million; Penelec $115 million) was re-established as a regulatory
asset since management believes it is probable of recovery in the restructuring
process due to expected gains on the sale of the fossil fuel and hydroelectric
generating plants being projected to exceed the TMI-1 writedown amount.
3. ACCOUNTING FOR DERIVATIVE INSTRUMENTS
GPU's use of derivative financial and commodity instruments is principally
limited to the GPUI Group. GPU does not hold or issue derivative financial or
commodity instruments for trading purposes.
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Interest Rate Swap Agreements:
- ------------------------------
The GPUI Group uses interest rate swap agreements to manage the risk of
increases in variable interest rates. At September 30, 1998, these agreements
covered approximately $1.1 billion of debt and are scheduled to expire on
various dates through November 2007. The GPUI Group records amounts paid and
received under the agreements as adjustments to the interest expense of the
underlying debt since the swaps are related to specific assets, liabilities or
anticipated transactions of the GPUI Group. For the nine months ended September
30, 1998, fixed rate interest expense exceeded variable rate interest by
approximately $12.8 million.
4. GPUI GROUP EQUITY INVESTMENTS
The GPUI Group uses the equity method of accounting for investments in
which it has the ability to exercise significant influence over the operating
and financial policies of the investee (generally evidenced by a 20% to 50%
ownership interest). Investments accounted for under the equity method follow:
Ownership
Investment Location of Operations Percentage
- ---------- ---------------------- ----------
Midlands Electricity plc United Kingdom 50%
Mid-Georgia Cogen, L.P. United States 50%
Prime Energy, L.P. United States 50%
Pasco Cogen, Ltd. United States 50%
GPU Solar, Inc. United States 50%
Termobarranquilla S.A. Colombia 29%
Selkirk Cogeneration Partners, L.P. United States 19%
EnviroTech Investment Fund United States 10%
Project Orange Associates, L.P. United States 4%
OLS Power, L.P. United States 1%
Summarized financial information for the GPUI Group's equity method
investments (which are not consolidated in the financial statements), including
both the GPUI Group's ownership interests and the non-ownership interests, is as
follows:
Ownership
--------------------------------
Balance Sheet Data (in thousands) GPUI Group Other Owners
- ------------------ ---------- ------------
September 30, 1998
Current Assets $ 226,908 $ 345,213
Noncurrent Assets 2,646,665 3,261,245
Current Liabilities (883,268) (928,390)
Long-Term Debt (1,123,791) (1,610,929)
Other Noncurrent Liabilities (252,870) (395,405)
---------- ----------
Equity in Net Assets $ 613,644 $ 671,734
========== ===========
December 31, 1997
Current Assets $ 284,033 $ 391,018
Noncurrent Assets 2,918,125 3,616,461
Current Liabilities (755,499) (814,572)
Long-Term Debt (1,497,982) (2,086,257)
Other Noncurrent Liabilities (307,504) (396,675)
---------- ----------
Equity in Net Assets $ 641,173 $ 709,975
========== ==========
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Ownership
--------------------------------
Earnings Data (in thousands) GPUI Group Other Owners
- -------------- ---------- ------------
For the nine months ended September 30, 1998
Operating Revenues $ 1,070,234 $ 1,142,546
Depreciation and Amortization (54,723) (60,624)
Operating Income 124,357 172,206
Other Income and Deductions 5,701 (19,988)
Interest and Preferred Dividends (87,176) (101,907)
---------- ----------
Equity in Net Income $ 42,882 $ 50,311
========== ==========
For the nine months ended September 30, 1997
Operating Revenues $ 939,572 $ 1,017,577
Depreciation and Amortization (35,593) (42,329)
Operating Income 142,390 217,311
Other Income and Deductions (134,123) (91,049)
Interest and Preferred Dividends (94,260) (114,589)
---------- ----------
Equity in Net Income $ 85,993 $ 11,673
========== ==========
For the nine months ended September 30, 1998 and 1997, the GPUI Group received
cash distributions totaling $12.9 million and $37.0 million, respectively.
As of September 30, 1998 and December 31, 1997, GPUI Group equity
investments on the Consolidated Balance Sheets included goodwill (net of
accumulated amortization) of approximately $24 million and $66 million,
respectively, which is amortized to expense over periods not exceeding 40 years.
Amortization expense for the nine months ended September 30, 1998 and 1997
amounted to $1.2 million and $3.4 million, respectively. In January 1998, the
GPUI Group recorded a decrease in goodwill of $41.2 million as a result of GPU
Electric, Inc.'s sale of its 50% stake in Solaris Power. In July 1998, GPU
Electric, Inc. sold its 10.36% stake in Allgas Energy Limited which it had
acquired as part of the sale of Solaris Power in January 1998.
5. SEGMENT INFORMATION
In 1997, GPU adopted Statement of Financial Accounting Standards No. 131
(FAS 131), "Disclosures about Segments of an Enterprise and Related
Information," which requires the reporting of certain financial information by
business segment and geographic area. For the purpose of providing segment
information, the GPU Energy companies consist of the three domestic electric
utility companies serving customers in Pennsylvania and New Jersey, as well as
Genco, GPUN, GPU Telcom and GPUS. The GPUI Group primarily develops, owns and
operates generation, transmission and distribution facilities in the United
States and in foreign countries. GPU AR is engaged in energy services and 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:
45
<PAGE>
Balance Sheet Segment Data (in thousands)
Current Noncurrent Current
September 30, 1998 Assets Assets Liabilities
- ------------------ ------- ---------- -----------
Domestic:
GPU Energy companies $ 876,390 $12,425,467 $1,153,391
GPUI Group* 123,492 393,680 49,732
Less: GPUI Group equity investments
included above (46,522) (197,577) (18,579)
Add: Original equity investment and
income/(loss) less dividends to date - 84,573 -
GPU AR 2,771 83 4,044
Corporate 184 6,261 71,675
--------- ---------- ---------
Subtotal 956,315 12,712,487 1,260,263
--------- ---------- ---------
Foreign: (GPUI Group only)
Australia 260,838 1,623,505 278,628
United Kingdom* 169,573 2,243,012 851,853
Other* 75,677 321,733 50,622
Less: GPUI Group equity investments
included above (180,386) (2,449,088) (864,689)
Add: Original equity investment and
income/(loss) less dividends to date - 563,731 -
--------- ---------- ---------
Subtotal 325,702 2,302,893 316,414
--------- ---------- ---------
Consolidated Total $1,282,017 $15,015,380 $1,576,677
========= ========== =========
Other Cash
Long-Term Noncurrent Capital
September 30, 1998 Debt Liabilities Expenditures
- ------------------ ---------- ---------- ------------
Domestic:
GPU Energy companies $2,398,809 $6,191,853 $ 213,132
GPUI Group* 183,770 222,342 25,529
Less: GPUI Group equity investments
included above (183,770) (12,328) (4,326)
Add: Original equity investment and
income/(loss) less dividends to date - - -
GPU AR - 118 22
Corporate - 1,398 -
--------- --------- ---------
Subtotal 2,398,809 6,403,383 234,357
--------- --------- ---------
Foreign: (GPUI Group only)
Australia 1,409,435 69,857 16,930
United Kingdom* 1,146,932 229,467 70,153
Other* 198,902 61,010 12,081
Less: GPUI Group equity investments
included above (940,021) (240,542) (70,939)
Add: Original equity investment and
income/(loss) less dividends to date - 1,501 -
--------- --------- ---------
Subtotal 1,815,248 121,293 28,225
--------- --------- ---------
Consolidated Total $4,214,057 $6,524,676 $ 262,582
========= ========= =========
* Includes the effect of consolidating the GPUI Group's ownership interest in
investments accounted for under the equity method (pro-rata consolidation),
which are not consolidated in the audited consolidated financial statements.
46
<PAGE>
Balance Sheet Segment Data (in thousands) (continued)
Current Noncurrent Current
December 31, 1997 Assets Assets Liabilities
- ----------------- ------- ----------- -----------
Domestic:
GPU Energy companies $ 831,269 $ 9,015,913 $1,140,492
GPUI Group* 81,027 352,139 90,097
Less: GPUI Group equity investments
included above (43,777) (182,384) (21,360)
Add: Original equity investment and
income/(loss) less dividends to date - 79,458 -
GPU AR 4,961 161 3,301
Corporate 165 6,313 155,977
--------- ---------- ---------
Subtotal 873,645 9,271,600 1,368,507
--------- ---------- ---------
Foreign: (GPUI Group only)
Australia* 86,226 2,091,619 558,496
United Kingdom* 188,462 2,152,977 785,152
Other* 114,786 396,078 43,419
Less: GPUI Group equity investments
included above (240,256) (2,735,741) (734,139)
Add: Original equity investment and
income/(loss) less dividends to date 106,317 517,221 -
--------- ---------- ---------
Subtotal 255,535 2,422,154 652,928
--------- ---------- ---------
Consolidated Total $1,129,180 $11,693,754 $2,021,435
========= ========== =========
Other Cash
Long-Term Noncurrent Capital
December 31, 1997 Debt Liabilities Expenditures
---------- ----------- -----------
Domestic:
GPU Energy companies $2,448,672 $2,721,527 $ 356,416
GPUI Group* 263,378 46,880 111,125
Less: GPUI Group equity investments
included above (171,665) (12,321) (120)
Add: Original equity investment and
income/(loss) less dividends to date - - -
GPU AR - - -
Corporate - 1,418 -
--------- --------- ---------
Subtotal 2,540,385 2,757,504 467,421
--------- --------- ---------
Foreign: (GPUI Group only)
Australia* 1,485,639 115,390 1,811,921
United Kingdom* 1,367,471 245,105 77,706
Other* 258,794 64,803 1,213
Less: GPUI Group equity investments
included above (1,326,317) (295,183) (89,624)
Add: Original equity investment and
income/(loss) less dividends to date - - -
--------- --------- ---------
Subtotal 1,785,587 130,115 1,801,216
--------- --------- ---------
Consolidated Total $4,325,972 $2,887,619 $2,268,637
========= ========= =========
* Includes the effect of consolidating the GPUI Group's ownership interest in
investments accounted for under the equity method (pro-rata consolidation),
which are not consolidated in the audited consolidated financial statements.
47
<PAGE>
Earnings Segment Data (in thousands)
Depreciation
For the nine months Operating and Operating
ended September 30, 1998 Revenues Amortization Income
- ------------------------ --------- ----------- ---------
Domestic:
GPU Energy companies $3,009,856 $ 352,427 $ 451,855
GPUI Group* 138,758 8,936 21,554
Less: GPUI Group equity investments
included above (89,661) (6,869) (22,768)
Add: Equity in undistributed earnings
of affiliates, net - - -
GPU AR 8,337 - (1,477)
Corporate - - (3,193)
--------- --------- ---------
Subtotal 3,067,290 354,494 445,971
--------- --------- ---------
Foreign: (GPUI Group only)
Australia 135,886 30,455 82,534
United Kingdom* 958,365 43,474 100,824
Other* 46,007 9,039 8,537
Less: GPUI Group equity investments
included above (980,573) (47,854) (101,589)
Add: Equity in undistributed earnings
of affiliates, net - - -
--------- --------- ---------
Subtotal 159,685 35,114 90,306
--------- --------- ---------
Consolidated Total $3,226,975 $ 389,608 $ 536,277
========= ========= =========
Other Interest and
For the nine months Income and Preferred
ended September 30, 1998 Deductions Dividends Net Income
- ------------------------ ---------- --------- ----------
Domestic:
GPU Energy companies $ (12,067) $ 181,747 $ 232,286
GPUI Group* 4,071 15,148 10,477
Less: GPUI Group equity investments
included above 2,601 (14,944) (5,223)
Add: Equity in undistributed earnings
of affiliates, net 5,223 - 5,223
GPU AR 49 - (1,428)
Corporate (1,024) 4,910 (9,127)
--------- --------- ---------
Subtotal (1,147) 186,861 232,208
--------- --------- ---------
Foreign: (GPUI Group only)
Australia 23,464 81,979 24,019
United Kingdom* 6,127 88,088 18,863
Other* 3,440 8,957 1,563
Less: GPUI Group equity investments
included above (8,302) (72,232) (37,659)
Add: Equity in undistributed earnings
of affiliates, net 37,659 - 37,659
--------- --------- ---------
Subtotal 62,388 106,792 44,445
--------- --------- ---------
Consolidated Total $ 61,241 $ 293,653 $ 276,653
========= ========= =========
* Includes the effect of consolidating the GPUI Group's ownership interest in
investments accounted for under the equity method (pro-rata consolidation),
which are not consolidated in the audited consolidated financial statements.
48
<PAGE>
Earnings Segment Data (in thousands)(continued)
Depreciation
For the nine months Operating and Operating
ended September 30, 1997 Revenues Amortization Income
- ------------------------ --------- ------------ ---------
Domestic:
GPU Energy companies $3,062,926 $ 347,755 $ 508,335
GPUI Group* 126,611 8,591 19,691
Less: GPUI Group equity investments
included above (102,137) (8,089) (21,417)
Add: Equity in undistributed earnings/
(losses) of affiliates, net - - -
GPU AR 460 - (2,158)
Corporate - - (6,791)
--------- --------- ---------
Subtotal 3,087,860 348,257 497,660
--------- --------- ---------
Foreign: (GPUI Group only)
Australia* 112,833 9,089 33,446
United Kingdom* 717,651 18,789 95,671
Other* 30,026 6,624 550
Less: GPUI Group equity investments
included above (837,435) (27,501) (120,974)
Add: Equity in undistributed earnings/
of affiliates, net - - -
--------- --------- ---------
Subtotal 23,075 7,001 8,693
--------- --------- ---------
Consolidated Total $3,110,935 $ 355,258 $ 506,353
========= ========= =========
Other Interest and
For the nine months Income and Preferred
ended September 30, 1997 Deductions Dividends Net Income
- ------------------------ ---------- ----------- ----------
Domestic:
GPU Energy companies $ 3,823 $ 188,565 $ 323,593
GPUI Group* (8,118) 19,681 (8,108)
Less: GPUI Group equity investments
included above 2,414 (19,145) 142
Add: Equity in undistributed earnings/
(losses) of affiliates, net (142) - (142)
GPU AR 2 - (2,156)
Corporate (418) 4,135 (11,344)
--------- --------- ---------
Subtotal (2,439) 193,236 301,985
--------- --------- ---------
Foreign: (GPUI Group only)
Australia* (27,051) 21,781 (15,386)
United Kingdom* (55,064) 82,971 (42,364)
Other* 2,089 3,648 (2,044)
Less: GPUI Group equity investments
included above 131,710 (75,117) 85,853
Add: Equity in undistributed earnings
of affiliates, net (85,853) - (85,853)
--------- --------- ---------
Subtotal (34,169) 33,283 (59,794)
--------- --------- ---------
Consolidated Total $ (36,608) $ 226,519 $ 242,191
========== ========= =========
* Includes the effect of consolidating the GPUI Group's ownership interest in
investments accounted for under the equity method (pro-rata consolidation),
which are not consolidated in the audited consolidated financial statements.
49
<PAGE>
GPU, Inc. and Subsidiary Companies
6. COMPREHENSIVE INCOME
For the nine months ended September 30, 1998 and 1997, comprehensive income
was as follows:
(in thousands)
Nine months
Ended September 30,
-------------------
GPU, Inc. and Subsidiary Companies 1998 1997
- ---------------------------------- ---- -----
Net income $276,653 $242,191
-------- -------
Other comprehensive income/(loss), net of tax:
Net unrealized gains on investments 728 4,131
Foreign currency translation (15,175) (5,702)
-------- -------
Total other comprehensive income/(loss) (14,447) (1,571)
-------- -------
Comprehensive income $262,206 $240,620
======== ========
Met-Ed
Net income $ 32,929 $ 81,113
-------- -------
Other comprehensive income/(loss), net of tax:
Net unrealized gains/(losses) on investments (892) 2,754
-------- -------
Comprehensive income $ 32,037 $ 83,867
======== =======-
Penelec
Net income $ 21,586 $ 81,104
-------- --------
Other comprehensive income/(loss), net of tax:
Net unrealized gains/(losses) on investments (470) 1,377
-------- -------
Comprehensive income $ 21,116 $ 82,481
======== =======
50
<PAGE>
GPU, Inc. and Subsidiary Companies
COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GPU, Inc. owns all the outstanding common stock of three domestic electric
utilities -- Jersey Central Power & Light Company (JCP&L), Metropolitan Edison
Company (Met-Ed) and Pennsylvania Electric Company (Penelec). The customer
service, transmission and distribution operations of these electric utilities
are conducting business under the name GPU Energy. JCP&L, Met-Ed and Penelec
considered together are referred to as the "GPU Energy companies." The
generation operations of the GPU Energy companies are conducted by GPU
Generation, Inc. (Genco) and GPU Nuclear, Inc. (GPUN). GPU, Inc. also owns all
the common stock of GPU International, Inc., GPU Power, Inc. and GPU Electric,
Inc., which develop, own and operate generation, transmission and distribution
facilities in the United States and in foreign countries. Collectively, these
are referred to as the "GPUI Group." Other wholly-owned subsidiaries of GPU,
Inc. are GPU Advanced Resources, Inc. (GPU AR), a subsidiary engaging in energy
services and retail energy sales; GPU Telcom Services, Inc. (GPU Telcom), a
subsidiary engaging in certain telecommunications-related businesses; and GPU
Service, Inc. (GPUS), which provides certain 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 third quarter ended September 30, 1998 were $338.1
million, compared with earnings of $16.9 million for the quarter ended September
30, 1997. The earnings per share on a diluted basis for the third quarter 1998
was $2.65, compared with earnings per share of $0.14 in 1997. Both periods
include non-recurring items. Excluding the non-recurring items, GPU's third
quarter 1998 and 1997 earnings would have been $128.8 million, or $1.01 per
share, and $126.2 million, or $1.04 per share, respectively.
Previously, GPU recorded a second quarter 1998 non-recurring charge of
$275.1 million after-tax, or $2.16 per share, as a result of Pennsylvania Public
Utility Commission (PaPUC) restructuring rate orders received by Met-Ed and
Penelec. In the third quarter 1998, as a result of amended PaPUC restructuring
rate orders, GPU reversed $266.3 million after-tax, or $2.09 per share, of the
non-recurring charge taken in the second quarter, primarily related to
above-market nonutility generation costs; and recorded an additional
non-recurring charge of $57.0 million after-tax, or $0.45 per share, related to
customer rate refunds, the write-off of regulatory assets related to its
wholesale energy customers and start up payments to an environmental fund. The
year-to-date effect of the PaPUC's rate actions was a charge to income of $65.8
million after-tax, or $0.52 per share. In the third quarter of 1997, a
non-recurring charge of $109.3 million, or $0.90 per share, was taken for a
windfall profits tax assessed on privatized utilities by the Government of the
United Kingdom.
For the nine months ended September 30, 1998, GPU's earnings were $276.7
million, or $2.18 per share, compared with earnings of $242.2 million, or $2.00
per share for the nine months ended September 30, 1997. Excluding the effect of
the non-recurring items mentioned above, earnings for the nine months ended
September 30, 1998 and 1997 would have been $342.5 million,
51
<PAGE>
GPU RESULTS OF OPERATIONS (continued)
- -------------------------
or $2.70 per share, and $351.5 million, or $2.90 per share, respectively. The
earnings decrease on this basis was due to lower income from GPU's domestic
utility operations, which are conducted by the GPU Energy companies, and the
dilutive effect of the sale of GPU, Inc. common stock in February 1998. The GPU
Energy companies' earnings reduction for the nine month period was mainly due to
the absence in 1998 of a step increase in unbilled revenue recorded by Met-Ed
and Penelec as a result of including their energy cost rates (ECRs) in base
rates and the cessation of deferred energy accounting, both effective January 1,
1997; and increased computer costs.
Partially offsetting the earnings decrease for the nine months ended
September 30, 1998 versus the nine months ended September 30, 1997, was higher
GPUI Group income due to gains on the sale of its interest in Solaris Power
(Solaris), the sale of Allgas Energy stock, and the sale of half its interest in
the Mid-Georgia cogeneration plant (Mid-Georgia). These gains were partially
offset by lower Midlands Electricity plc (Midlands) earnings due in part to
lower weather-related sales.
OPERATING REVENUES:
- -------------------
Operating revenues for the third quarter of 1998 increased 4.6% to $1.17
billion, as compared to the third quarter of 1997. For the nine months ended
September 30, 1998, revenues increased 3.7% to $3.23 billion as compared to the
same period last year. The components of the changes are as follows:
(in millions)
--------------------------------------
Three Months Nine Months
Ended Ended
September 30, 1998 September 30, 1998
------------------ -------------------
GPU Energy companies:
Kilowatt-hour (KWH) revenues $ 61.5 $ 42.7
Energy-related revenues 33.4 50.7
Obligation to refund 1998 revenues
to customers per PaPUC Order (56.4) (56.4)
GPU Telcom revenues 6.8 12.6
Other revenues (36.1) (102.7)
----- -----
Total GPU Energy companies 9.2 (53.1)
GPUI Group 39.7 161.2
GPU AR 2.7 7.9
----- -----
Total increase in revenues $ 51.6 $116.0
===== =====
GPU Energy Companies
Kilowatt-hour revenues
- ----------------------
The increase in KWH revenues for the three month period was due primarily
to higher residential and commercial customer usage at JCP&L and increased sales
to other utilities by Met-Ed and Penelec.
The increase in KWH revenues for the nine month period was primarily due
52
<PAGE>
GPU RESULTS OF OPERATIONS (continued)
- -------------------------
to higher residential and commercial customer usage at JCP&L; and increased
sales to other utilities by Met-Ed and Penelec. These increases were partially
offset by the absence in 1998 of the step increase in unbilled revenue recorded
by Met-Ed and Penelec as a result of including their ECRs in base rates. KWH
revenues now include Met-Ed and Penelec's energy and tax revenues, consistent
with the inclusion of their ECRs and State Tax Adjustment Surcharges (STAS) in
base rates, effective January 1, 1997.
Energy-related revenues (JCP&L only)
- ------------------------------------
Generally, changes in energy-related revenues do not affect earnings as
they reflect corresponding changes in JCP&L's levelized energy adjustment clause
(LEAC) billed to customers and expensed. The increase for the three and nine
month periods was due primarily to increased sales to other utilities and higher
residential and commercial customer sales.
Obligation to refund 1998 revenues to customers per PaPUC Order
- ---------------------------------------------------------------
The decrease in revenues reflect transmission and distribution (T&D) rate
reductions resulting from the PaPUC's final Restructuring Orders for Met-Ed and
Penelec. The T&D rate reductions reflect Met-Ed and Penelec's obligation to make
refunds to customers from 1998 revenues (2.5 percent for Met-Ed customers and
3.0 percent for Penelec customers from December 1996 levels).
GPU Telcom revenues
- -------------------
GPU Telcom, a subsidiary engaged in certain telecommunication related
businesses, was formed in 1997. Its 1998 revenues were derived from contracts
for the leasing and construction of telecommunication infrastructure.
Other revenues
- --------------
Generally, changes in other revenues do not affect earnings as they are
offset by corresponding changes in expense. The decrease for the three and nine
month periods is primarily due to a decrease in revenue taxes as a result of New
Jersey tax legislation that eliminated the gross receipts and franchise tax on
utility bills and replaced it with a sales tax, a corporate business tax and a
transitional energy facilities assessment, effective January 1, 1998. (See
COMPETITIVE ENVIRONMENT.)
GPUI Group
The increase in GPUI Group revenues for the three and nine month periods
was due mainly to the inclusion of revenues from GPU PowerNet (PowerNet), which
was acquired by GPU Electric in November 1997.
53
<PAGE>
GPU RESULTS OF OPERATIONS (continued)
- -------------------------------------
GPU AR
GPU AR, which was formed in the second quarter of 1997, derived its
revenues from energy sales to customers who chose it as their energy supplier as
part of the retail access pilot programs in Pennsylvania (see COMPETITIVE
ENVIRONMENT). Some of GPU AR's customers are located in the GPU Energy
companies' service territories.
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, beginning on January 1, 1997, such cost variances for Met-Ed and
Penelec are not subject to deferred accounting and have a current impact on
earnings. In October 1998, the PaPUC approved the use of deferred accounting for
above-market NUG costs as part of the final Restructuring Orders for Met-Ed and
Penelec. The increase in PP&I includes a one-time charge by Met-Ed and Penelec
for the NUG portion of unbilled revenue.
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. Effective January 1, 1997, Met-Ed and Penelec ceased deferred energy
accounting as their ECRs were combined with base rates; therefore, cost
variances have a current impact on earnings. Higher fuel expenses for Met-Ed and
Penelec affected earnings for the three and nine months ended September 30,
1998.
Other operation and maintenance (O&M)
- -------------------------------------
The increase in other O&M expenses for the three and nine month periods
was due primarily to increased computer costs resulting from the reengineering
of business processes to position the GPU Energy companies for deregulation;
employee reduction costs; and increased GPUI Group O&M expenses resulting from
the inclusion of PowerNet. The inclusion of O&M expenses for GPU Telcom, which
was formed in 1997, also contributed to the increase for the three and nine
month periods.
Depreciation and amortization
- -----------------------------
The increase in depreciation and amortization expense for the three and
nine month periods was due mainly to the inclusion of PowerNet and additions to
plant in service.
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. However,
54
<PAGE>
GPU RESULTS OF OPERATIONS (continued)
- -------------------------
effective January 1, 1997, Met-Ed and Penelec's STAS were combined with base
rates and are no longer subject to annual adjustment. This did not have a
significant impact on earnings for the first nine months of 1998.
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 nine month periods was primarily due to higher GPUI Group
investment income. The increase was due primarily to the absence in 1998 of a
$109.3 million charge taken in 1997 for a windfall profits tax imposed on
Midlands by the Government of the United Kingdom.
Other income/(expense), net
- ---------------------------
The increase in other income/(expense), net for the nine month period was
due primarily to gains realized by the GPUI Group from the sale of its interest
in Solaris, the sale of Allgas Energy stock and the sale of half its interest in
Mid-Georgia. This increase was partially offset by a charge for start-up
payments for the establishment of an environmental fund for Met-Ed and Penelec;
and a charge to terminate a contract with one of Met-Ed's wholesale customers.
INTEREST CHARGES AND PREFERRED DIVIDENDS:
- -----------------------------------------
Long-term debt
- --------------
The increase in interest on long-term debt for the three and nine month
periods was due primarily to debt associated with the PowerNet acquisition. A
portion of this debt was reduced in 1998 from proceeds received from GPU
Electric's sale of its interest in Solaris and the sale of GPU, Inc. common
stock.
Other interest
- --------------
The decrease in other interest for the three and nine month periods was
due to lower JCP&L short-term debt levels.
EXTRAORDINARY ITEM:
- -------------------
Extraordinary item, net of income taxes
- ---------------------------------------
The extraordinary income for the three month period was due to the amended
PaPUC restructuring rate orders received by Met-Ed and Penelec, which
substantially reversed the extraordinary charge taken in the second quarter,
primarily related to above-market nonutility generation costs. The extraordinary
income was partially offset by additional charges taken for the writeoff of
regulatory assets related to wholesale energy customers. The extraordinary loss
for the nine month period was due to the net impact of the PaPUC Restructuring
Orders for Met-Ed and Penelec.
55
<PAGE>
JCP&L RESULTS OF OPERATIONS
---------------------------
JCP&L's earnings for the third quarter ended September 30, 1998 were $89.3
million, compared to 1997 third quarter earnings of $74.7 million. The increase
in earnings was due primarily to higher residential and commercial customer
sales. For the nine months ended September 30, 1998, earnings were $177.1
million, compared to $162.2 million for the same period last year.
OPERATING REVENUES:
- -------------------
Operating revenues for the third quarter of 1998 increased 7.4% to $647.6
million, as compared to the third quarter of 1997. For the nine months ended
September 30, 1998, revenues increased 0.5% to $1.6 billion as compared to the
same period last year. The components of the changes are as follows:
(in millions)
------------------------------------------
Three Months Nine Months
Ended Ended
September 30, 1998 September 30, 1998
------------------ ------------------
KWH revenues $ 47.2 $ 60.5
Energy-related revenues 33.2 50.7
Other revenues (35.7) (103.9)
----- ------
Increase in revenues $ 44.7 $ 7.3
===== ======
Kilowatt-hour revenues
- ----------------------
The increase in KWH revenues for the three and nine month periods was due
to higher residential and commercial customer usage and an increase in the
number of residential and commercial customers.
Energy-related revenues
- -----------------------
Changes in energy-related revenues do not affect earnings as they reflect
corresponding changes in the LEAC billed to customers and expensed. The increase
for the three and nine month periods was due primarily to increased sales to
other utilities and higher residential and commercial customer sales.
Other revenues
- --------------
Generally, changes in other revenues do not affect earnings as they are
offset by corresponding changes in expense. The decrease for the three and nine
month periods is primarily due to lower revenue taxes as a result of New Jersey
tax legislation that eliminated the gross receipts and franchise tax on utility
bills and replaced it with a sales tax, a corporate business tax, and a
transitional energy facilities assessment effective January 1, 1998.
(See COMPETITIVE ENVIRONMENT.)
56
<PAGE>
JCP&L RESULTS OF OPERATIONS (continued)
- ---------------------------
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.
Other operation and maintenance
- -------------------------------
The increase in other O&M expenses for the three and nine month periods was
due primarily to increased computer costs resulting from the reengineering of
business processes to position JCP&L for deregulation; and employee reduction
costs.
Depreciation and amortization
- -----------------------------
The decrease in depreciation and amortization expense for the three month
period was due primarily to the reversal of charges taken in the first six
months of 1998 relating to JCP&L's Final Settlement representing the portion of
JCP&L's return on equity which exceeds the maximum amount allowed and must be
applied against JCP&L's stranded cost pool.
Taxes, other than income taxes
- ------------------------------
Generally, changes in taxes other than income taxes do not significantly
affect earnings as they are substantially recovered in revenues.
OTHER INCOME AND DEDUCTIONS:
- ----------------------------
Other income, net
- -----------------
The increase in other income, net for the nine month period was due
primarily to a second quarter 1997 charge of $5.5 million to settle a lawsuit
related to the termination of the Freehold NUG contract.
INTEREST CHARGES:
- -----------------
Other interest
- --------------
The decrease in other interest for the three and nine month periods was
due to lower JCP&L short-term debt levels.
57
<PAGE>
MET-ED RESULTS OF OPERATIONS
----------------------------
Met-Ed's earnings for the third quarter ended September 30, 1998 were
$176.8 million, compared with earnings of $27.2 million for the quarter ended
September 30, 1997. Excluding the effect of non-recurring items, Met-Ed's third
quarter 1998 earnings would have been $15.5 million.
Previously, Met-Ed recorded a second quarter 1998 non-recurring charge of
$187.3 million after-tax, as a result of PaPUC restructuring rate orders. In the
third quarter 1998, as a result of amended PaPUC restructuring rate orders,
Met-Ed reversed $183.2 million after-tax, of the non-recurring charge taken in
the second quarter, primarily related to above-market nonutility generation
costs; and recorded an additional non-recurring charge of $21.9 million
after-tax related to customer rate refunds, the write-off of regulatory assets
related to its wholesale energy customers and start-up payments to an
environmental fund.
For the nine months ended September 30, 1998, Met-Ed's earnings were $32.6
million, compared with earnings of $80.8 million, for the nine months ended
September 30, 1997. Excluding the effect of the non-recurring items mentioned
above, earnings for the nine months ended September 30, 1998 would have been
$58.6 million. The earnings decrease on this basis was due to the absence in
1998 of a step increase in unbilled revenue recorded by Met-Ed as a result of
including their energy cost rates (ECRs) in base rates and the cessation of
deferred energy accounting, both effective January 1, 1997; and increased
computer costs.
OPERATING REVENUES:
- -------------------
Operating revenues for the third quarter of 1998 decreased 7.7% to $229.0
million, as compared to the third quarter of 1997. For the nine months ended
September 30, 1998, revenues decreased 3.1% to $689.8 million as compared to the
same period last year. The components of the changes are as follows:
(in millions)
-------------------------------------------
Three Months Nine Months
Ended Ended
September 30, 1998 September 30, 1998
------------------ ------------------
KWH revenues $ 5.7 $ (1.1)
Obligation to refund 1998 revenues
to customers per PaPUC Order (27.2) (27.2)
Other revenues 2.3 6.1
----- -----
Decrease in revenues $(19.2) $(22.2)
===== =====
Kilowatt-hour revenues
- ----------------------
The increase in KWH revenues for the three month period was due mainly to
increased sales to other utilities and increased commercial customer usage. The
decrease in KWH revenues for the nine month period was due primarily to the
absence in 1998 of the step increase in unbilled revenue as a result of Met-Ed
including its ECR in base rates, amounting to $13 million; partially offset by
increased sales to other utilities and increased commercial customer usage.
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<PAGE>
MET-ED RESULTS OF OPERATIONS (continued)
- ----------------------------
Obligation to refund 1998 revenues to customers per PaPUC Order
- ---------------------------------------------------------------
The decrease in revenues reflect a T&D rate reduction resulting from the
PaPUC's final Restructuring Order for Met-Ed. The T&D rate reduction reflects
Met-Ed's obligation to make refunds to customers from 1998 revenues (2.5 percent
from December 1996 levels).
Other revenues
- --------------
Generally, changes in other revenues do not affect earnings as they are
offset by corresponding changes in expense.
OPERATING EXPENSES:
- -------------------
Fuel and Power purchased and interchanged
- -----------------------------------------
Effective January 1, 1997, Met-Ed ceased deferred energy accounting as its
ECR was combined with base rates. Thus, energy cost variances now have a current
impact on earnings. In October 1998, the PaPUC approved the use of deferred
accounting for above-market NUG costs as part of the final Restructuring Order
for Met-Ed. The increase in PP&I includes a one-time charge by Met-Ed for the
NUG portion of unbilled revenue.
Other operation and maintenance
- -------------------------------
The increase in other O&M expenses for the three and nine month periods was
due primarily to increased computer costs resulting from the reengineering of
business processes to position Met-Ed for deregulation; and employee reduction
costs.
OTHER INCOME AND DEDUCTIONS:
- ----------------------------
Other income/(expense), net
- ---------------------------
The decrease in other income/(expense), net for the nine month period was
due to a charge for start-up payments for the establishment of an environmental
fund and a charge to terminate a contract with one of Met-Ed's wholesale
customers.
EXTRAORDINARY ITEM:
- -------------------
Extraordinary item, net of income taxes
- ---------------------------------------
The extraordinary income for the three month period was due to the amended
PaPUC restructuring rate order received by Met-Ed which substantially reversed
the extraordinary charge taken in the second quarter, primarily related to
above-market nonutility generation costs. The extraordinary income was partially
offset by additional charges taken for the writeoff of regulatory assets related
to wholesale energy customers. The extraordinary loss for the nine month period
was due to the net impact of the PaPUC Restructuring Orders on Met-Ed.
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<PAGE>
PENELEC RESULTS OF OPERATIONS
-----------------------------
Penelec's earnings for the third quarter ended September 30, 1998 were
$62.9 million, compared with earnings of $19.2 million for the quarter ended
September 30, 1997. Excluding the effect of non-recurring items, Penelec's third
quarter 1998 earnings would have been $14.9 million.
Previously, Penelec recorded a second quarter 1998 non-recurring charge of
$87.8 million after-tax, as a result of Pennsylvania Public Utility Commission
(PaPUC) restructuring rate orders. In the third quarter 1998, as a result of
amended PaPUC restructuring rate orders, Penelec reversed $83.1 million
after-tax, of the non-recurring charge taken in the second quarter, primarily
related to above-market nonutility generation costs; and recorded an additional
non-recurring charge of $35.1 million after-tax related to customer rate
refunds, the write-off of regulatory assets related to its wholesale energy
customers and start-up payments to an environmental fund.
For the nine months ended September 30, 1998, Penelec's earnings were $21.1
million, compared with earnings of $80.6 million, for the nine months ended
September 30, 1997. Excluding the effect of the non-recurring items mentioned
above, earnings for the nine months ended September 30, 1998 would have been
$60.9 million. The earnings decrease on this basis was due to the absence in
1998 of a step increase in unbilled revenue recorded by Penelec as a result of
including its energy cost rates (ECRs) in base rates and the cessation of
deferred energy accounting, both effective January 1, 1997; and increased
computer costs.
OPERATING REVENUES:
- -------------------
Operating revenues for the third quarter of 1998 increased 0.7% to $259.4
million, as compared to the third quarter of 1997. For the nine months ended
September 30, 1998, revenues decreased 2.7% to $773.4 million as compared to the
same period last year. The components of the changes are as follows:
(in millions)
---------------------------------------
Three Months Nine Months
Ended Ended
September 30, 1998 September 30, 1998
------------------ ------------------
KWH revenues $ 33.6 $ 13.5
Obligation to refund 1998 revenues
to customers per PaPUC Order (29.2) (29.2)
Other revenues (2.6) (6.1)
----- -----
Increase/(decrease) in revenues $ 1.8 $(21.8)
===== =====
Kilowatt-hour revenues
- ----------------------
The increase in KWH revenues for the three and nine month periods was
primarily due to increased sales to other utilities. The nine month revenue
comparison was affected by the absence in 1998 of the step increase in unbilled
revenue as a result of Penelec including its ECR in base rates, amounting to $15
million.
60
<PAGE>
PENELEC RESULTS OF OPERATIONS (continued)
- -----------------------------
Obligation to refund 1998 revenues to customers per PaPUC Order
- ---------------------------------------------------------------
The decrease in revenues reflect a T&D rate reduction resulting from the
PaPUC's final Restructuring Order for Penelec. The T&D rate reduction reflects
Penelec's obligation to make refunds to customers from 1998 revenues (3.0
percent from December 1996 levels).
Other revenues
- --------------
Generally, changes in other revenues do not affect earnings as they are
offset by corresponding changes in expense. However, lower transmission revenues
negatively affected the nine month earnings comparison.
OPERATING EXPENSES:
- -------------------
Fuel and Power purchased and interchanged
- -----------------------------------------
Effective January 1, 1997, Penelec ceased deferred energy accounting as
its ECR was combined with base rates. Thus, energy cost variances now have a
current impact on earnings. In October 1998, the PaPUC approved the use of
deferred accounting for above-market NUG costs as part of the final
Restructuring Order for Penelec. The increase in PP&I includes a one-time charge
for the NUG portion of unbilled revenue.
Other operation and maintenance
- -------------------------------
The increase in other O&M expenses for the three and nine month periods was
due primarily to increased computer costs resulting from the reengineering of
business processes to position Penelec for deregulation; and employee reduction
costs.
OTHER INCOME AND DEDUCTIONS:
- ----------------------------
Other income/(expense), net
- ---------------------------
The decrease in other income/(expense), net for the three and nine month
periods was due to a charge for start-up payments for the establishment of an
environmental fund.
EXTRAORDINARY ITEM:
- -------------------
Extraordinary item, net of income taxes
- ---------------------------------------
The extraordinary income for the three month period was due to the amended
PaPUC restructuring rate order received by Penelec which substantially reversed
the extraordinary charge taken in the second quarter, primarily related to
above-market nonutility generation costs. The extraordinary income was partially
offset by additional charges taken for the writeoff of regulatory assets related
to wholesale energy customers. The extraordinary loss for the nine month period
was due to the net impact of the PaPUC Restructuring Orders on Penelec.
61
<PAGE>
GPUI GROUP
----------
The GPUI Group develops, owns and operates electric generation,
transmission and distribution facilities in the U.S. and foreign countries. It
has also made investments in certain advanced technologies related to the
electric power industry. The GPUI Group has ownership interests in transmission,
distribution and supply businesses in England and Australia. It also has
ownership interests in nine operating cogeneration plants in the U.S. totaling
1,147 megawatts (MW) (of which the GPUI Group's equity interest represents 498
MW) of capacity, and ten operating generating facilities located in foreign
countries totaling 3,820 MW (of which the GPUI Group's equity interest
represents 713 MW) of capacity. It also has investments in five generating
facilities under construction totaling 1,833 MW (of which the GPUI Group's
equity interest represents 339 MW) of capacity. The business of the GPUI Group
includes investment, development and operation of these businesses and, when
appropriate, purchase and sale of interests in particular businesses.
At September 30, 1998, GPU, Inc.'s aggregate investment in the GPUI Group
was $526 million; GPU, Inc. has also guaranteed up to an additional $996 million
of GPUI Group obligations. GPU, Inc. has Securities and Exchange Commission
(SEC) authorization to finance investments in foreign utility companies (FUCOs)
and exempt wholesale generators (EWGs) up to an aggregate amount equal to 100%
of GPU's average consolidated retained earnings, or approximately $2.2 billion
as of September 30, 1998. At September 30, 1998, GPU, Inc. has remaining
authorization to finance approximately $869 million of additional investments in
FUCOs and EWGs.
Management expects that the GPUI Group will provide a substantial portion
of GPU's future earnings growth and intends to make additional investments in
its business activities. The timing and amount of these investments, however,
will depend upon the availability of appropriate opportunities and financing
capabilities.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
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. GPU is developing
remediation plans, and has begun to take corrective actions. The remediation
plans include, among other things, the modification or replacement of Year 2000
Components which are not ready for use beyond the Year 2000.
GPU continues to respond to requests for information concerning its Year
2000 readiness. Inquiries have been made by the New Jersey Board of Public
Utilities (NJBPU), the PaPUC, the U.S. Nuclear Regulatory Commission, the
Department of Energy and by numerous third parties with which GPU has business
relationships.
62
<PAGE>
Costs
- -----
The GPU Energy companies have purchased and are installing an integrated
information system (Project Enterprise) designed to help manage business growth
and meet the mandates of electric utility deregulation. The system is scheduled
to be substantially operational for the GPU Energy companies and GPUS by March
1999 and fully operational for all such companies by June 1999. GPUN and Genco
are not installing Project Enterprise prior to the Year 2000, but rather are
making modifications to their systems to achieve Year 2000 readiness. These
modifications are expected to be completed by March 31, 1999 for critical
systems, and by July 31, 1999 for their remaining systems. By implementing
Project Enterprise as a part of their Year 2000 solution, the GPU Energy
companies will avoid spending $8.1 million (JCP&L, Met-Ed and Penelec $2.7
million each) on modifications to systems that are being replaced. The GPU
Energy companies estimate they will spend $106-$115 million for the purchase and
implementation of Project Enterprise.
In addition to the purchase and implementation of Project Enterprise as a
part of their Year 2000 solution, the GPU Energy companies currently estimate
they will spend $26.5 million (JCP&L $11.9 million; Met-Ed $7.7 million; Penelec
$6.9 million) on the remediation of Year 2000 Components. Approximately 45
percent of the expected costs are for system modifications or replacements; 35
percent for labor (including contract labor); and 20 percent for contingencies.
These costs are being funded by the GPU Energy companies through operating cash
flows. Of this amount, the GPU Energy companies would have in any event spent
$7.4 million (JCP&L $3.6 million; Met-Ed $2.2 million; Penelec $1.6 million) for
maintenance and cyclical replacement plans. Through September 30, 1998, a total
of approximately $10.6 million (JCP&L $4.5 million; Met-Ed $3.2 million; Penelec
$2.9 million) has already been spent on the Year 2000 issue, of which $5.9
million (JCP&L $2.3 million; Met-Ed $1.8 million; Penelec $1.8 million) was
spent in 1998.
Approximately 4.8 percent of the 1998 and 3.3 percent of the 1999 operating
and capital budgets for Information Technology Services (ITS) are allocated to
Year 2000 remediation. This level of spending, which includes employee costs and
time, is not expected to cause any material delay in ITS performing other
planned projects.
The GPUI Group currently estimates they will spend approximately $9 million
to address the Year 2000 issue, primarily to replace or modify equipment at
Midlands Electricity plc. Through September 30, 1998, a total of approximately
$1.6 million has already been spent, primarily all of which was spent in 1998.
Milestones
- ----------
GPU has established Inventory, Assessment, Remediation, Testing and
Monitoring as the primary phases for its Year 2000 program. The Inventories of
critical systems and components are essentially complete. The milestones for
Assessment, Remediation, Testing and Monitoring are as follows:
63
<PAGE>
Assessment Remediation Testing Monitoring
---------- ----------- ------- ----------
GPU Energy companies 12/31/1998 03/31/1999 03/31/1999 03/31/2000
and GPUS
GENCO 10/31/1998 11/15/1999 11/15/1999 05/31/2000
GPUN 03/31/1999 10/31/1999 10/31/1999 03/31/2000
GPUI Group 12/31/1998 10/31/1999 10/31/1999 03/01/2000
Genco expects to complete modifications and testing of Year 2000 Components
involved in 83 percent of its generation capacity by May 31, 1999. Modifications
and testing of the remaining components, primarily for three generating units
with outages scheduled in the Fall of 1999, will not be completed until
mid-November 1999. GPUN expects to complete modifications and testing for most
of its systems and components by July 1, 1999. Modifications and testing of
fewer than a dozen components at TMI-1, which is scheduled for a refueling
outage in September 1999, are not expected to be completed until late October
1999.
Third Party Qualification
- -------------------------
Due to the interdependence of computer systems and the reliance on other
organizations for supplies, materials or services, GPU is addressing the Year
2000 issue as it relates to the readiness of third parties. As part of its Year
2000 strategy, GPU is contacting key customers, lenders, trading partners,
vendors, suppliers and service providers to assess whether they are adequately
addressing the Year 2000 issue.
With respect to computer software and equipment with embedded systems, GPU
has analyzed where it is dependent upon third party data and has identified four
principal critical areas: (1) the Pennsylvania-New Jersey-Maryland (PJM)
Interconnection; (2) electric generation suppliers, such as cogeneration
operators and nonutility generators (NUGs); (3) Electronic Data Interchange
(EDI) with trading partners; and (4) Electronic Funds Transfer (EFT) with
financial institutions.
The following summarizes the actions that have taken place with critical
third parties:
- PJM - A test plan is in place and awaiting a November 1998 upgrade of PJM
systems to enable data link testing. While some testing of PJM systems has
already begun, the major testing will not be performed until February
1999.
- Electric generation suppliers - All electric generation suppliers have
been contacted and information as to their readiness status has been
received from a small percentage. Those that have responded have readiness
dates established generally for July 1999.
- EDI/EFT - Readiness questionnaires have been sent to approximately 160
organizations with which GPU exchanges data electronically and conducts
electronic funds transfers. GPU has currently received responses from only
a few of these organizations.
64
<PAGE>
Scenarios and Contingencies
- ---------------------------
If GPU, or critical third parties upon whom GPU relies, are unable to
successfully address their Year 2000 problems 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 problem
will have on its operations, one possible scenario may include, among other
things, interruptions in delivering electric service, a temporary inability to
process transactions, provide bills or operate electric generating stations. GPU
currently has no cost estimates related to its Year 2000 risks.
While there can be no assurance as to the outcome of this matter, GPU
believes that its Year 2000 preparations will be successful relative to its
mission-critical Year 2000 Components. In addition, GPU is developing
contingency plans in accordance with the contingency planning schedule proposed
by the North American Electric Reliability Council. These plans, which are
currently expected to be finalized in mid- to late-1999, will include
supplementing present general emergency procedures with specific measures for
Year 2000 problems and placing troubleshooting teams at sites where critical
components are located.
Capital Expenditures
- --------------------
GPU Energy Companies
The GPU Energy companies' capital spending for the nine months ended
September 30, 1998 was $213 million (JCP&L $112 million; Met-Ed $33 million;
Penelec $65 million; Other $3 million), and was used primarily for new customer
connections and to maintain and improve existing transmission and distribution
facilities. For 1998, capital expenditures are forecasted to be $336 million
(JCP&L $169 million; Met-Ed $77 million; Penelec $87 million; Other $3), mainly
related to the GPU Energy companies and will be used primarily for ongoing
system development. Expenditures for maturing obligations will total $43 million
(JCP&L $13 million; Penelec $30 million) in 1998. A substantial portion of the
GPU Energy companies' 1998 capital outlays will be satisfied through internally
generated funds.
GPUI Group
The GPUI Group's capital spending was $49 million for the nine months ended
September 30, 1998. For 1998, capital expenditures are forecasted to be $133
million. Expenditures for maturing obligations are estimated to total $589
million in 1998. A substantial portion of the GPUI Group's 1998 capital outlays
will be required to be satisfied through external financings.
Financing
- ---------
GPU, Inc.
GPU, Inc. has received SEC approval to issue and sell up to $300 million
of unsecured debentures through 2001. Further significant investments by the
GPUI Group, or otherwise, may require GPU, Inc. to issue additional debt
65
<PAGE>
and/or common stock (see GPUI GROUP for a discussion of GPU, Inc.'s remaining
investment authorization).
GPU is in the process of arranging a new unsecured commercial paper credit
facility to finance up to $1 billion of investments in FUCOs and EWGs. GPU
expects that the proceeds from the sale of commercial paper (guaranteed by GPU,
Inc.) will be used to repay a portion of outstanding acquisition debt and to
finance future investments.
GPUI Group
In August 1998, Austran Holdings, Inc. (Austran), a wholly owned subsidiary
of GPU Electric, Inc., entered into a A$500 million (approximately U.S. $297
million) revolving commercial paper program. GPU PowerNet has guaranteed
Austran's obligations under this program. As of September 30, 1998, Austran
borrowed approximately A$342 million (approximately U.S. $203 million) under the
commercial paper program and intends to borrow an additional A$100 million
(approximately U.S. $59 million) to refinance the current portion of the senior
debt credit facility used to finance the PowerNet acquisition. These borrowings
have been classified as noncurrent since it is management's intent to reissue
the commercial paper on a long-term basis.
GPU Energy Companies
JCP&L and Penelec have regulatory authority to issue and sell first
mortgage bonds (FMBs), including secured medium-term notes, and preferred stock
through June 1999. Met-Ed has similar authority through December 1999. Under
existing authorizations, JCP&L, Met-Ed and Penelec may issue these senior
securities in aggregate amounts of $145 million, $190 million and $70 million,
respectively, of which up to $100 million for JCP&L and Met-Ed and $70 million
for Penelec may consist of preferred stock. Met-Ed and Penelec are seeking
regulatory approvals to issue and sell 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 intends
to seek regulatory approval to issue and sell senior notes and preferred
securities in an aggregate amount of $300 million, of which up to $200 million
may consist of preferred securities. The GPU Energy companies also have
regulatory authority to incur short-term debt, a portion of which may be through
the issuance of commercial paper.
The GPU Energy companies' bond indentures and articles of incorporation
include provisions that limit the amount of long-term debt, preferred stock and
short-term debt the companies may issue. The GPU Energy companies' interest and
preferred dividend coverage ratios are currently in excess of indenture and
charter restrictions. The amount of FMBs that the GPU Energy companies could
issue based on the bondable value of property additions is in excess of amounts
currently authorized.
Current plans call for the GPU Energy companies to issue senior securities
during the next three years to fund the redemption of maturing senior
securities, refinance outstanding senior securities if economic, and finance
construction activities.
66
<PAGE>
COMPETITIVE ENVIRONMENT
-----------------------
Managing the Transition
- -----------------------
As competition in the electric utility industry increases, the price of
electricity and quality of customer service will be critical. 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.
In October 1997, GPU announced its intention to begin a process to sell,
through a competitive bid process, up to all of the fossil-fuel and
hydroelectric generating facilities owned by the GPU Energy companies. These
facilities, comprised of 26 operating stations, support organizations and
development sites, total approximately 5,300 MW (JCP&L 1,900 MW; Met-Ed 1,300
MW; Penelec 2,100 MW) of capacity and have a net book value of approximately
$1.1 billion (JCP&L $282 million; Met-Ed $290 million; Penelec $527 million) at
September 30, 1998. The net proceeds from the sale would be used to reduce the
capitalization of the respective GPU Energy companies and may also be applied to
reduce short-term debt, finance further acquisitions, repurchase GPU, Inc.
common stock, and to reduce acquisition debt of the GPUI Group.
In August 1998, Penelec and New York State Electric & Gas Corporation
(NYSEG) entered into definitive agreements with Edison Mission Energy to sell
the Homer City Station for a total purchase price of approximately $1.8 billion.
Penelec and NYSEG each owns a 50% interest in the station, and will share
equally in the net sale proceeds. The sale, which is subject to various federal
and state regulatory approvals, is expected to be completed in the first quarter
of 1999.
On November 9, 1998, the GPU Energy companies entered into definitive
purchase agreements with Sithe Energies and FirstEnergy Corporation to sell,
with the exception of JCP&L's 50% ownership interest in the Yards Creek Pumped
Storage plant, all their remaining fossil-fuel and hydroelectric generating
facilities for a total purchase price of approximately $1.7 billion (JCP&L $442
million; Met-Ed $677 million; and Penelec $603 million). The sales are expected
to be completed in mid-1999, subject to the timely receipt of the necessary
regulatory and other approvals.
In addition to the continued operation of the Oyster Creek Nuclear
Generating Station (Oyster Creek), JCP&L has been exploring the sale or early
retirement of the plant to mitigate costs associated with its continued
operation. In July 1998, GPU announced that it was unable to identify a buyer
for the facility. GPU does not anticipate making a final decision on the plant
before the NJBPU rules on JCP&L's restructuring filing.
In October 1998, GPU entered into definitive purchase agreements to sell
TMI-1 to AmerGen Energy Company, LLC (AmerGen), a joint venture between PECO
Energy and British Energy. Terms of the purchase agreements are summarized as
follows:
67
<PAGE>
- - The total cash purchase price is $100.6 million, which represents $23
million to be paid at financial closing for the plant, and $77.6 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 is
subject to certain adjustments for capital expenditures and other items.
- - AmerGen will make certain 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 financial closing, GPU will make additional deposits into the TMI-1
decommissioning trusts to bring the trust totals up to $320 million. At
financial closing, AmerGen will 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), which would not be included in the sale agreement. No liability
for TMI-2 or its decommissioning will be assumed by AmerGen.
- - AmerGen will employ all employees located at TMI-1 at financial 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 financial
closing. AmerGen will accept 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 prior to financial closing.
In addition, certain rulings from the Internal Revenue Service will be necessary
with respect to the maintenance or transfer of the decommissioning trusts at the
closing. There can be no assurance as to the outcome of these matters.
Recent Regulatory Actions
- -------------------------
Pennsylvania
- ------------
In 1996, Pennsylvania adopted comprehensive legislation which provides for
the restructuring of the electric utility industry. The legislation, among other
things, permits one-third of Pennsylvania retail consumers to choose their
electric supplier beginning January 1, 1999, two-thirds to choose by January 1,
2000 and all retail consumers to do so by January 1, 2001. The legislation
requires the unbundling of rates for transmission, distribution and generation
services. Utilities would have the opportunity to recover their prudently
incurred stranded costs that result from customers choosing another supplier
through a PaPUC approved competitive transition charge, subject to certain
conditions, including that they attempt to mitigate these costs. For a
discussion of stranded costs, see Note 1 of the Notes to Consolidated Financial
Statements - Competition and the Changing Regulatory Environment.
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<PAGE>
The legislation provides utilities the opportunity to reduce their stranded
costs through the issuance of transition bonds with maturities of up to 10
years. The sale proceeds could be used to buy out or buy down uneconomic NUG
contracts, to reduce capitalization, or both. Principal and interest payments on
the bonds would be paid by all distribution service customers through a
nonbypassable intangible transition charge. Reduced financing costs associated
with the sale of transition bonds would be used to provide rate reductions for
all customers.
Effective January 1, 1997, transmission and distribution (T&D) rates
charged to Pennsylvania retail customers are generally capped for 4 1/2 years,
and generation rates are generally capped for up to nine years. Transmission and
distribution of electricity will continue as a regulated monopoly. An
independent system operator (ISO) will be responsible for coordinating the
generation and transmission of electricity in an efficient and nondiscriminatory
manner.
In June 1997, Met-Ed and Penelec filed with the PaPUC their proposed
restructuring plans to implement competition and customer choice in
Pennsylvania. In June 1998, the PaPUC entered Restructuring Orders on the plans.
On July 20, 1998, however, Met-Ed and Penelec appealed the Restructuring
Orders to the Commonwealth Court and also filed complaints in the U.S. District
Court seeking both declaratory and injunctive relief challenging, among other
things, the PaPUC's refusal in the Restructuring Orders to ensure full recovery
of the costs of NUG contracts, as required by state and federal law.
In addition, on July 20, 1998 Met-Ed and Penelec filed Alternative
Restructuring Plans (Alternative Plans) with the PaPUC based on the provision in
the Customer Choice Act that enables a utility to file an alternate plan if the
PaPUC rejects the utility's initial plan. On August 5, 1998, the PaPUC rejected
the Alternative Plans as invalid and on August 17, 1998, Met-Ed and Penelec
appealed this action.
Following extended negotiations, on September 23, 1998, Met-Ed, Penelec,
the PaPUC and numerous intervenors in the restructuring proceedings entered into
Settlement Agreements providing for new restructuring plans. On October 16,
1998, the PaPUC adopted final Restructuring Orders approving the Settlement
Agreements. For additional information, see Note 2, Accounting for Non-recurring
Items. The major elements of the final Restructuring Order are as follows:
- - A transmission and distribution tariff rate which provides adequate funding
for maintaining the reliability of Met-Ed and Penelec's electric
distribution systems;
- - A rate reduction from January 1, 1999 through December 31, 1999, for all
customers, whether they choose an alternate supplier or not, reflecting
Met-Ed and Penelec's obligation to make refunds to customers from 1998
revenues (2.5 percent for Met-Ed customers and 3.0 percent for Penelec
customers from December 1996 levels);
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<PAGE>
- - The ability of all customers to participate in electric choice on January
1, 1999 - two years sooner than called for in Pennsylvania's Electricity
Competition Act;
- - Customers will receive a "shopping credit" that will result in savings if
they buy electricity from an alternate supplier that charges less than the
shopping credit. The average shopping credit in 1999 will be 4.350 cents
per kilowatt-hour for Met-Ed and 4.404 cents per kilowatt-hour for Penelec.
Actual prices will vary by customer rate class;
- - Assurance of full recovery of the above-market costs of government-mandated
contracts to buy electricity from NUGs (Beginning in 2005, the amount
collected will be adjusted every five years over the life of each
contract);
- - A rate cap for the cost of delivering electricity (transmission and
distribution) until 2004, three-and-one-half years longer than the period
called for in Pennsylvania's Electricity Competition Act (with the
exception of a pending federal order requiring a transmission rate increase
in Pennsylvania);
- - A rate cap for electricity purchased from GPU Energy, as provider of
last resort, until 2010;
- - PaPUC approval for Met-Ed and Penelec to sell their generating stations,
including TMI-1;
- - Recovery of $658.14 million in stranded costs for Met-Ed over 12 years and
$332.16 million for Penelec over 11 years (These amounts reflect the
effects of using the estimated net proceeds from selling Met-Ed and
Penelec's generating plants to reduce stranded costs and will be adjusted
based on actual net sale proceeds);
- - $2.7 million and $3.4 million assistance in 1999 for low-income customers
of Met-Ed and Penelec, respectively; increasing to $6.4 million and $6.9
million in 2002.
- - A sustainable energy fund to promote the development and use of renewable
energy and clean energy technologies with one-time payments in 1998 of $5.7
million from Met-Ed and of $6.4 million from Penelec;
- - The ability of some customers to choose another licensed supplier to
provide metering services beginning January 1, 1999, and billing services
beginning January 1, 2000;
- - A phase-in of competitive bidding beginning no later than June 1, 2000, for
other suppliers to be the "provider of last resort" for customers who do
not shop; and
- - The dismissal of all pending litigation in accordance with the
Settlement Agreements.
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New Jersey
- ----------
In April 1997, the NJBPU issued final Findings and Recommendations for
Restructuring the Electric Power Industry in New Jersey. The NJBPU recommended,
among other things, that certain electric retail customers be permitted to
choose their supplier beginning October 1998, expanding to include all retail
customers by July 1, 2000. It is currently expected that retail competition in
New Jersey will not commence before the second quarter of 1999. The NJBPU also
recommended a near-term electric rate reduction of 5% to 10% with the phase-in
of retail competition, as well as additional rate reductions accomplished as a
result of new energy tax legislation, as discussed below.
The NJBPU has proposed that utilities have an opportunity to recover their
stranded costs associated with generating capacity commitments provided that
they attempt to mitigate these costs. Also, NUG contracts which cannot be
mitigated would be eligible for stranded cost recovery. The determination of
stranded cost recovery by the NJBPU would be undertaken on a case-by-case basis,
with no guaranty for full recovery of these costs. A separate market transition
charge (MTC) would be established for each utility to allow utilities to recover
stranded costs over 4 to 8 years. The MTC would be capped to ensure that
customers experience the NJBPU's recommended overall rate reduction of 5-10%.
In addition, the NJBPU is proposing that utilities unbundle their rates and
allow customers to choose their electric generation supplier. Transmission and
distribution of electricity would continue as a regulated monopoly and utilities
would be responsible for connecting customers to the system and for providing
distribution service. Transmission service would be provided by an ISO, which
would be responsible for maintaining the reliability of the regional power grid
and would be regulated by the Federal Energy Regulatory Commission (FERC).
In July 1997, New Jersey enacted energy tax legislation which eliminated
the 13% gross receipts and franchise tax on utility bills effective January 1,
1998. Utilities are collecting from customers a 6% sales tax and paying a
corporate business tax which amounts to 1-2% of revenues. Utilities are also
paying a transitional energy facilities assessment which will phase out over
five years and result in a 5-6% rate reduction to customers.
In July 1997, JCP&L filed with the NJBPU its proposed restructuring plan
for a competitive electric marketplace in New Jersey. Included in the plan were
stranded cost, unbundled rate and restructuring filings. In December 1997, JCP&L
submitted supplemental information regarding the proposed sale of its
fossil-fuel and hydroelectric generating facilities (see Managing the
Transition). Highlights of the plan include:
- - Some electric retail customers would be able to choose their supplier
beginning on October 1, 1998, as initially recommended by the NJBPU,
expanding to include all retail customers by July 1, 2000.
- - As required by the NJBPU's final findings and recommendations, JCP&L would
unbundle its rates and these rates would apply to all distribution
customers, with the exception of a Production Charge, which would be
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charged only to customers who do not choose an alternative energy
supplier. The proposed unbundled rate structure would include:
-- a flat monthly Customer Charge for the costs associated with
metering, billing and customer account administration.
-- a Delivery Charge consisting of capital and O&M costs associated
with the transmission and distribution system; the recovery of
regulatory assets, including those associated with generation; the
cost of social programs; and certain costs related to the proposed
ratemaking treatment of Oyster Creek.
-- a Market Energy and Capacity (MEC) Charge would be established on a
monthly basis for a six-month period for electricity provided to
customers for whom JCP&L continues to act as their electric
generation supplier. JCP&L would be the supplier of last resort for
customers who cannot or do not wish to purchase energy from an
alternative supplier. The MEC would be based upon competitively
"bidding out" the discrepancy between projected needs and projected
resources. JCP&L would true-up the MEC charges for sales differences
against its actual cost to provide that power, plus interest. The
true-up would be recovered from, or credited to, the customers who
were customers during that period, based upon their usage during
such period. The MEC would be established every six months.
-- a Societal Benefits Charge to recover demand-side management costs,
manufactured gas plant remediation costs, and nuclear
decommissioning costs.
-- a MTC to recover non-NUG stranded generation costs (other than
Oyster Creek). This charge would include both owned generation and
utility purchase power commitments. It is expected that the MTC
would be in effect for less than a three-year period.
-- a NUG Transition Charge (NTC) to recover ongoing above-market NUG
costs over the life of the contracts and provide a mechanism to flow
through to customers the benefits of future NUG mitigation efforts.
The NTC would be subject to an annual true-up for actual cost
escalations or reductions, changes in availability or dispatch
levels and other cost variations over the life of each NUG project.
The NTC would also be subject to adjustment in the future to reflect
additional NUG buyout or restructuring costs and any related
savings.
- - The unbundling plan calls for an estimated 10% rate reduction, of which 2.1%
became effective as part of JCP&L's Stipulation of Final Settlement (Final
Settlement) approved by the NJBPU in 1997. The remaining reductions would be
phased in over a two-year period beginning after the commencement of retail
choice, and would be achieved through, among other things, the proposed early
retirement of Oyster Creek for ratemaking purposes in September 2000 and, if
legislation is enacted, the securitization of certain above-market costs. In
addition to this rate reduction, JCP&L customers would receive an additional
rate reduction of approximately 6% to
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<PAGE>
be phased in over the next five years as a result of energy tax legislation
signed into law in July 1997.
- - In addition to the continued operation of the Oyster Creek facility, JCP&L is
exploring the early retirement of the plant to mitigate costs associated with
its continued operation. A final decision on the plant's future will not be
made until the NJBPU rules on JCP&L's restructuring filing. Nevertheless,
JCP&L has proposed that the NJBPU approve an early retirement of Oyster Creek
in September 2000, for ratemaking purposes. The ratemaking treatment being
requested for Oyster Creek is as follows:
-- The market value of Oyster Creek's generation output would be
recovered in the Production Charge.
-- The above-market operating costs would be recovered as a component
of the Delivery Charge through September 2000. If the plant is
operated beyond that date, these costs would not be included in
customer rates.
-- Existing Oyster Creek regulatory assets would, like other regulatory
assets, be recovered as part of the Delivery Charge.
-- Oyster Creek decommissioning costs would, like TMI-1 decommissioning
costs, be recovered as a component of the Societal Benefits Charge.
-- JCP&L's net investment in Oyster Creek would be recovered through
the Delivery Charge as a levelized annuity, effective with the
commencement of retail choice through its original expected
operating life, 2009.
- - Stranded costs at the time originally proposed by the NJBPU for initial
customer choice (September 30, 1998), on a present value basis, are
estimated at $1.6 billion, of which $1.5 billion is for above-market NUG
contracts. The $1.6 billion excludes above-market generation costs related
to Oyster Creek.
Numerous parties have intervened in this proceeding and are actively
contesting various aspects of JCP&L's filings, including, among other things,
recovery by JCP&L of plant capital additions since its last base rate case in
1992, projections of future electricity prices on which stranded cost recovery
calculations are based, the appropriate level of return and the appropriateness
of earning a return on stranded investment.
Consultants retained by the NJBPU Staff, the Division of Ratepayer Advocate
and other parties have proposed that JCP&L's stranded cost recoveries should be
substantially lower than the levels JCP&L is seeking.
In a February 1998 order, the NJBPU substantially affirmed an ALJ ruling
which required that rates be unbundled based on the 1992 cost of service levels
which were the basis for JCP&L's last base rate case, but clarified that (1)
JCP&L could update its 1992 cost of service study to reflect adjustments
consistent with the NJBPU approved Final Settlement which, among other things,
recognized certain increased expense levels and reductions to
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<PAGE>
base rates and (2) all of the other updated post-1992 cost information that
JCP&L had submitted in the proceeding should remain in the record, which the
NJBPU will utilize after issuance of the ALJ's initial decision to establish a
reasonable level of rates going forward.
Furthermore, the NJBPU emphasized in its order that the final unbundled
rates established as a result of this proceeding will be lower than the current
bundled rates. This directive has been recognized in JCP&L's July 1997
restructuring plan which proposed annual revenue reductions totaling
approximately $185 million. The NJBPU will render final and comprehensive
decisions on the precise level of aggregate rate reductions required in order to
accomplish its primary goals of introducing retail competition and lowering
electricity costs for consumers.
If the NJBPU were to accept the positions of various parties or their
consultants, or were ultimately to deny JCP&L's request to recover post-1992
capital additions and increased expenses, it would have a material adverse
impact on JCP&L's stranded cost recovery, restructuring proceeding and future
earnings.
Hearings with respect to the stranded cost and unbundled rate filings have
been completed. On September 4, 1998, the ALJ issued a recommended decision
containing the following major elements:
- - The ALJ did not consider current cost levels as the basis for unbundling
rates, but instead used 1992 costs. With the exception of JCP&L's investment
in a new combustion turbine plant, the ALJ denied recovery of post-1992 rate
case capital additions. However, the ALJ did recommend that the NJBPU
reconsider these matters.
- - The ALJ recommended that the Oyster Creek investment be recovered over a
period of between four and eleven years, but once the plant is retired for
ratemaking purposes, no return should be provided on the unamortized
investment.
- - The ALJ recommended that the 2.1% rate reduction implemented in April 1997
as part of JCP&L's Global Settlement should not be part of the 5-10% rate
reduction mandated by the NJBPU's Final Report.
- - The ALJ endorsed a market line higher than that proposed by JCP&L.
- - The ALJ approved recovery of actual NUG costs through a NUG Transition
Charge (NTC), over the lives of the contracts.
- - The ALJ accepted JCP&L's proposal for recovery of nuclear decommissioning
costs through a Societal Benefits Charge, but disallowed the inclusion of
fossil decommissioning costs in the calculation of stranded costs.
- - The ALJ accepted GPU Energy's generation asset divestiture plan and the
position that the net proceeds be applied to reduce other stranded costs.
Evidentiary hearings before the NJBPU with respect to the separate
restructuring filing were held jointly with the other New Jersey utilities, and
briefs have been filed. GPU Energy expects a NJBPU decision coincident
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<PAGE>
with decisions in the stranded cost and unbundled rates proceedings. There
can be no assurance as to the outcome of these proceedings.
In September 1998, legislation to deregulate New Jersey's electricity
market was introduced in the Assembly and Senate. The proposed legislation
provides for, among other things, customer choice beginning no later than June
1, 1999 and expanding to include all customers by October 1, 1999; a minimum
five to ten percent rate reduction; the unbundling of customer bills; the
recovery of stranded costs; and the ability to securitize stranded costs. The
NJBPU is not expected to issue final decisions on JCP&L's stranded cost,
unbundled rate and restructuring filings until after legislation is enacted,
which is currently anticipated by the end of 1998.
JCP&L has received NJBPU approval for a one-year pilot program offering
customers in Monroe Township, New Jersey, a choice of their electric energy
supplier. The pilot program began in September 1997, and has been extended until
December 31, 1998. Monroe Township had been exploring the possibility of
establishing its own municipal electric system.
Other
- -----
In November 1997, the FERC issued an order to the Pennsylvania-New
Jersey-Maryland (PJM) Power Pool which, among other things, directed the GPU
Energy companies to implement a single-system transmission rate, effective
January 1, 1998. The implementation of a single-system rate is not expected to
affect total transmission revenues. It would, however, increase the pricing for
transmission service in Met-Ed and Penelec's service territories and reduce the
pricing for transmission service in JCP&L's service territory.
The GPU Energy companies have requested the FERC to reconsider its ruling
requiring a single-system transmission rate. The final 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 since the NJBPU has
recommended a 5-10% rate reduction effective with the implementation of customer
choice. 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
propose, among other things, retail choice for all utility customers, the
opportunity for utilities to recover their prudently incurred stranded costs in
varying degrees, and repeal of both the Public Utility Regulatory Policies Act
(PURPA) and the Public Utility Holding Company Act of 1935 (PUHCA).
The Clinton administration announced a Comprehensive Electricity
Competition Plan which proposes, among other things, customer choice by January
1, 2003, stranded cost recovery, reliability standards, environmental
provisions, and the repeal of both PURPA and PUHCA. The plan does, however,
allow states to opt out of the mandate if they believe consumers would be better
served by an alternative policy. The administration's plan was submitted to
Congress in June 1998.
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<PAGE>
Nonutility Generation Agreements
- --------------------------------
Pursuant to the requirements of PURPA and state regulatory directives, the
GPU Energy companies have entered into power purchase agreements with NUGs for
the purchase of energy and capacity for remaining periods of up to 23 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 September 30, 1998, facilities
covered by these agreements having 1,681 MW (JCP&L 912 MW; Met-Ed 364 MW;
Penelec 405 MW) of capacity were in service. Although the Pennsylvania
legislation and the Energy Master Plan in New Jersey both include provisions for
the recovery of costs under NUG agreements and certain NUG buyout costs, there
can be no assurance that the GPU Energy companies will continue to be able to
recover similar costs which may be incurred in the future. (See Note 1 of the
Notes to Consolidated Financial Statements Competition and the Changing
Regulatory Environment.)
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. They are also attempting to renegotiate, and in some
cases buy out, existing high cost long-term NUG agreements where it is economic
to do so (see THE GPU ENERGY COMPANIES' SUPPLY PLAN).
THE GPU ENERGY COMPANIES' SUPPLY PLAN
-------------------------------------
Supplier of Last Resort
- -----------------------
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. 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 continue to receive energy
supplied by the GPU Energy companies and for whom the GPU Energy companies
continue to have an obligation to serve. Based upon the PaPUC final
Restructuring Orders for Met-Ed and Penelec, electric utility customers in
Pennsylvania will be able to shop for their generation supplier beginning
January 1, 1999. Met-Ed and Penelec will furnish, through a competitive bid
process, provider of last resort service (PLR) for 20% of their retail customers
on June 1, 2000, 40% on June 1, 2001, 60% on June 1, 2002, and 80% on June 1,
2003, 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
provide PLR service at the rate cap levels unless modified by the PaPUC. Any
retail customers assigned to CDS may elect a competitive generation supplier or
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. JCP&L's obligation as supplier of last resort will be
determined after restructuring legislation in New Jersey is enacted. There can
be no assurance as to the outcome of these proceedings.
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Following the completion of the sale of the GPU Energy companies'
generation facilities, and the evolving competitive climate in which the GPU
Energy companies' existing customers will be able to choose their electric
generation supplier, the GPU Energy companies' future supply plan will likely
focus on short- to intermediate-term commitments and reliance on spot market
purchases. The GPU Energy companies' present strategy includes minimizing the
financial exposure associated with new long-term purchase commitments.
Managing Nonutility Generation
- ------------------------------
The October 1998 PaPUC final Restructuring Orders provide for, and the
proposed legislation and restructuring plans in New Jersey also contemplate,
full recovery of the above-market costs of NUG agreements. The GPU Energy
companies will continue efforts to reduce the above-market costs of these
agreements and will, where beneficial, attempt to renegotiate the prices of the
agreements, offer contract buyouts and attempt to convert must-run agreements to
dispatchable agreements. There can be no assurance as to the extent to which
these efforts will be successful in whole or in part.
In 1997, the NJBPU approved a Stipulation of Final Settlement which, among
other things, provides for the recovery of costs associated with the buyout of
the Freehold Cogeneration project. The Final Settlement provides for recovery
through the LEAC of: (1) buyout costs up to $130 million, and 50% of any costs
from $130 million to $140 million, over a seven-year period for the termination
of the Freehold power purchase agreement. The Freehold cost recovery was granted
on an interim basis subject to refund, pending further review by the NJBPU,
before which the matter is pending.
In 1997, Met-Ed and Penelec issued requests for proposals (RFPs) to 24 NUG
projects which currently supply a total of approximately 760 MW under power
purchase agreements. The RFPs requested the NUGs to propose buyouts, buydowns
and/or restructurings of current power purchase contracts in return for cash
payments. In January 1998, Met-Ed and Penelec entered into definitive buyout
agreements with two bidders. These agreements were contingent upon Met-Ed and
Penelec obtaining a PaPUC order allowing for the full recovery of the buyout
payments through retail rates. In October 1998, the PaPUC issued final
Restructuring Orders that, among other things, established terms and conditions
that would enable the buyout agreements to proceed.
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) concluded
in June 1997 that utilities are no longer subject to FAS 71, for a separable
portion of their business, when they know details of their individual transition
plans. The EITF also concluded that utilities
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<PAGE>
can continue to carry previously recorded regulated assets, as well as any newly
established regulated assets (including those related to generation), on their
balance sheets if regulators have guaranteed a regulated cash flow stream to
recover the cost of these assets.
In June and October 1998, Met-Ed and Penelec received PaPUC Restructuring
Orders, which among other things, essentially remove from regulation the costs
associated with providing electric generation service to Pennsylvania consumers,
effective January 1, 1999. Accordingly, Met-Ed and Penelec have 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" with respect to
their electric generation operations in the second quarter of 1998. The
transmission and distribution portion of Met-Ed and Penelec's operations will
continue to be subject to the provisions of FAS 71. JCP&L will discontinue the
application of FAS 71 and adopt FAS 101 for its electric generation operations
no later than when it receives NJBPU approval of its restructuring plans.
In accordance with Statement of Financial Accounting Standards No. 121 (FAS
121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," GPU performed impairment tests on the net book value
of the GPU Energy companies' generation facilities. These tests determined that
GPU's net investment in TMI-1 was impaired. No impairment existed for the fossil
fuel and hydroelectric generating plants or for Oyster Creek as of September 30,
1998. For the nine months ended September 30, 1998, GPU's investment in TMI-1
was written down by $505 million (pre-tax) (JCP&L $131 million; Met-Ed $251
million; Penelec $123 million) to reflect its fair market value. The amounts
written off were re-established as a regulatory asset since management believes
it is probable of recovery in the restructuring process due to expected gains on
the sale of the fossil-fuel and hydroelectric generating plants being projected
to exceed the TMI-1 writedown amount.
In June 1998, Statement of Financial Accounting Standards No. 133 (FAS
133), "Accounting for Derivative Instruments and Hedging Activities" was issued.
FAS 133 requires that companies recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value. To
comply with this statement, GPU will be required to include its derivative
transactions on its balance sheet at fair value, and recognize the subsequent
changes in fair value as either gains or losses in earnings or reported as a
component of other comprehensive income, depending upon the intended use and
designation of the derivative as a hedge. The statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. GPU expects to
adopt this statement in the first quarter of 2000. GPU is in the process of
evaluating the impact of FAS 133.
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PART II
ITEM 1 - LEGAL PROCEEDINGS
-----------------
Information concerning the current status of certain legal
proceedings instituted against the 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 October 2, 1998, under Item 5 (Other Events).
Dated October 22, 1998, under Item 5 (Other Events).
Jersey Central Power & Light Company:
-------------------------------------
Dated October 22, 1998, under Item 5 (Other Events).
Metropolitan Edison Company:
----------------------------
Dated October 2, 1998, under Item 5 (Other Events).
Dated October 22, 1998, under Item 5 (Other Events).
Pennsylvania Electric Company:
-------------------------------
Dated October 2, 1998, under Item 5 (Other Events).
Dated October 22, 1998, under Item 5 (Other Events).
79
<PAGE>
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.
November 9, 1998 By: /s/ J. G. Graham
------------------------------------
J. G. Graham, Senior Vice President
(Chief Financial Officer)
November 9, 1998 By: /s/ F. A. Donofrio
------------------------------------
F. A. Donofrio, Vice President
and Comptroller
(Chief Accounting Officer)
JERSEY CENTRAL POWER & LIGHT COMPANY
METROPOLITAN EDISON COMPANY
PENNSYLVANIA ELECTRIC COMPANY
November 9, 1998 By: /s/ D. Baldassari
------------------------------------
D. Baldassari, President
(Principal Operating Officer)
November 9, 1998 By: /s/ D. W. Myers
------------------------------------
D. W. Myers, Vice President
and Comptroller
(Principal Accounting Officer)
80
EXHIBIT INDEX
-------------
(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
Exhibit 12A
Page 1 of 2
GPU, INC. AND SUBSIDIARY COMPANIES
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
(In Thousands)
- --------------------------------------------------------------------------------
UNAUDITED
Nine Months Ended
-----------------------------
September 30, September 30,
1998 1997
---- ----
OPERATING REVENUES $3,226,975 $3,110,935
--------- ---------
OPERATING EXPENSES 2,525,769 2,420,586
Interest portion of rentals (A) 21,424 18,225
Fixed charges of service company
subsidiaries (B) 1,891 2,160
--------- ---------
Net expense 2,502,454 2,400,201
--------- ---------
OTHER INCOME AND DEDUCTIONS:
Allowance for funds used
during construction 4,285 4,482
Equity in undistributed earnings/(losses)
of affiliates, net 42,882 (85,995)
Other income, net 44,377 1,472
Minority interest net income (1,457) (1,035)
--------- --------
Total other income and deductions 90,087 (81,076)
--------- --------
EARNINGS AVAILABLE FOR FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS (excluding
taxes based on income) $ 814,608 $ 629,658
========= =========
FIXED CHARGES:
Interest on funded indebtedness $ 241,264 $ 172,603
Other interest (C) 49,312 50,132
Preferred stock dividends of
subsidiaries on a pretax basis (E) 13,762 18,204
Interest portion of rentals (A) 21,424 18,225
--------- ---------
Total fixed charges $ 325,762 $ 259,164
========= =========
RATIO OF EARNINGS TO FIXED CHARGES 2.50 2.43
==== ====
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS (D) 2.50 2.43
==== ====
<PAGE>
Exhibit 12A
Page 2 of 2
GPU, INC. AND SUBSIDIARY COMPANIES
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
(In Thousands)
- --------------------------------------------------------------------------------
UNAUDITED
- ------------------------
NOTES:
(A) GPU has included the equivalent of the interest portion of all rentals
charged to income as fixed charges for this statement and has excluded
such components from Operating Expenses.
(B) Represents fixed charges of GPU Service, Inc. and GPU Nuclear, Inc. which
are accounted for as operating expenses in the consolidated income
statement. GPU has removed the fixed charges from operating expenses and
included such amounts in fixed charges as interest on funded indebtedness
and other interest for this statement.
(C) Includes amount for subsidiary-obligated mandatorily redeemable preferred
securities of $21,666 for the nine month periods ended September 30, 1998
and 1997, respectively.
(D) GPU, Inc., the parent holding company, does not have any preferred stock
outstanding, therefore, the ratio of earnings to combined fixed charges
and preferred stock dividends is the same as the ratio of earnings to
fixed charges.
(E) Calculation of preferred stock dividends of subsidiaries on a pretax basis
is as follows:
Nine Months Ended
------------------------------
September 30, September 30,
1998 1997
---- ----
Income before provision for income taxes and
preferred stock dividends of subsidiaries $502,608 $482,658
Income before extraordinary item in 1998
and preferred stock dividends of subsidiaries 310,924 251,682
Pretax earnings ratio 161.6% 191.8%
Preferred stock dividends of subsidiaries 8,516 9,491
Preferred stock dividends of subsidiaries on
a pretax basis 13,762 18,204
Exhibit 12B
Page 1 of 2
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
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
(In Thousands)
UNAUDITED
Nine Months Ended
-----------------------------
September 30, September 30,
1998 1997
---- ----
OPERATING REVENUES $1,598,853 $1,591,569
--------- ---------
OPERATING EXPENSES 1,218,704 1,250,453
Interest portion of rentals (A) 7,573 8,039
--------- ---------
Net expense 1,211,131 1,242,414
--------- ---------
OTHER INCOME:
Allowance for funds used
during construction 1,988 1,823
Other income, net 7,232 2,122
--------- ---------
Total other income 9,220 3,945
--------- ---------
EARNINGS AVAILABLE FOR FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS (excluding
taxes based on income) $ 396,942 $ 353,100
========= =========
FIXED CHARGES:
Interest on funded indebtedness $ 65,455 $ 67,779
Other interest (B) 16,670 19,705
Interest portion of rentals (A) 7,573 8,039
--------- ---------
Total fixed charges $ 89,698 $ 95,523
========= =========
RATIO OF EARNINGS TO FIXED CHARGES 4.43 3.70
==== ====
Preferred stock dividend requirement $ 7,633 $ 8,638
Ratio of income before provision for
income taxes to net income (C) 166.3% 150.7%
--------- ---------
Preferred stock dividend requirement
on a pretax basis 12,694 13,017
Fixed charges, as above 89,698 95,523
--------- ---------
Total fixed charges and
preferred stock dividends $ 102,392 $ 108,540
========= =========
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS 3.88 3.25
==== ====
<PAGE>
Exhibit 12B
Page 2 of 2
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
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
(In Thousands)
UNAUDITED
- ---------------------
NOTES:
(A) JCP&L has included the equivalent of the interest portion of all rentals
charged to income as fixed charges for this statement and has excluded
such components from Operating Expenses.
(B) Includes amount for company-obligated mandatorily redeemable preferred
securities of $8,025 for the nine month periods ended September 30, 1998
and 1997, respectively.
(C) Represents income before provision for income taxes of $307,244 and
$257,577 for the nine month periods ended September 30, 1998 and 1997,
respectively, divided by net income of $184,708 and $170,867, respectively
for the same periods.
Exhibit 12C
Page 1 of 2
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
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
(In Thousands)
- --------------------------------------------------------------------------------
UNAUDITED
Nine Months Ended
----------------------------
September 30, September 30,
1998 1997
----------- ------------
OPERATING REVENUES $689,829 $711,975
------- -------
OPERATING EXPENSES 564,647 531,742
Interest portion of rentals (A) 7,560 4,195
------- -------
Net expense 557,087 527,547
------- -------
OTHER INCOME AND DEDUCTIONS:
Allowance for funds used
during construction 676 1,032
Other income/(expense), net (14,798) 2,408
------- -------
Total other income and deductions (14,122) 3,440
------- --------
EARNINGS AVAILABLE FOR FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS (excluding
taxes based on income) $118,620 $187,868
======= =======
FIXED CHARGES:
Interest on funded indebtedness $ 31,870 $ 33,275
Other interest (B) 13,320 12,095
Interest portion of rentals (A) 7,560 4,195
------- -------
Total fixed charges $ 52,750 $ 49,565
======= =======
RATIO OF EARNINGS TO FIXED CHARGES 2.25 3.79
==== ====
Preferred stock dividend requirement $ 362 $ 362
Ratio of income before provision for
income taxes to net income (C) 165.8% 170.5%
------- -------
Preferred stock dividend requirement
on a pretax basis 600 617
Fixed charges, as above 52,750 49,565
------- -------
Total fixed charges and
preferred stock dividends $ 53,350 $ 50,182
======= =======
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS 2.22 3.74
==== ====
<PAGE>
Exhibit 12C
Page 2 of 2
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
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
(In Thousands)
- --------------------------------------------------------------------------------
UNAUDITED
NOTES:
(A) Met-Ed has included the equivalent of the interest portion of all rentals
charged to income as fixed charges for this statement and has excluded
such components from Operating Expenses.
(B) Includes amount for company-obligated mandatorily redeemable preferred
securities of $6,750 for the nine month periods ended September 30, 1998
and 1997, respectively.
(C) Represents income before provision for income taxes of $65,870 and
$138,303 for the nine month periods ended September 30, 1998 and 1997,
respectively, divided by income before extraordinary item of $39,734 and
net income of $81,113, respectively for the same periods.
Exhibit 12D
Page 1 of 2
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
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
(In Thousands)
- --------------------------------------------------------------------------------
UNAUDITED
Nine Months Ended
-----------------------------
September 30, September 30,
1998 1997
------------ -------------
OPERATING REVENUES $773,364 $795,184
------- -------
OPERATING EXPENSES 653,179 609,258
Interest portion of rentals (A) 3,729 3,120
------- -------
Net expense 649,450 606,138
------- -------
OTHER INCOME AND DEDUCTIONS:
Allowance for funds used
during construction 1,621 1,627
Other income/(expense), net (4,312) 1,198
------- --------
Total other income and deductions (2,691) 2,825
------- -------
EARNINGS AVAILABLE FOR FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS (excluding
taxes based on income) $121,223 $191,871
======= =======
FIXED CHARGES:
Interest on funded indebtedness $ 35,922 $ 36,672
Other interest (B) 13,542 13,095
Interest portion of rentals (A) 3,729 3,120
------- -------
Total fixed charges $ 53,193 $ 52,887
======= =======
RATIO OF EARNINGS TO FIXED CHARGES 2.28 3.63
==== ====
Preferred stock dividend requirement $ 521 $ 491
Ratio of income before provision for
income taxes to net income (C) 167.8% 171.4%
------- -------
Preferred stock dividend requirement
on a pretax basis 874 842
Fixed charges, as above 53,193 52,887
------- -------
Total fixed charges and
preferred stock dividends $ 54,067 $ 53,729
======= =======
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS 2.24 3.57
==== ====
<PAGE>
Exhibit 12D
Page 2 of 2
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
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
(In Thousands)
- --------------------------------------------------------------------------------
UNAUDITED
- -------------------
NOTES:
(A) Penelec has included the equivalent of the interest portion of all rentals
charged to income as fixed charges for this statement and has excluded
such components from Operating Expenses.
(B) Includes amount for company-obligated mandatorily redeemable preferred
securities of $6,891 for the nine month periods ended September 30, 1998
and 1997, respectively.
(C) Represents income before provision for income taxes of $68,030 and
$138,984 for the nine month periods ended September 30, 1998 and 1997,
respectively, divided by income before extraordinary item of $40,536 and
net income of $81,104, respectively for the same periods.
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000040779
<NAME> GPU, INC.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 6,815,527
<OTHER-PROPERTY-AND-INVEST> 2,139,204
<TOTAL-CURRENT-ASSETS> 1,282,017
<TOTAL-DEFERRED-CHARGES> 6,060,649
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 16,297,397
<COMMON> 331,958
<CAPITAL-SURPLUS-PAID-IN> 1,010,373
<RETAINED-EARNINGS> 2,235,027 <F1>
<TOTAL-COMMON-STOCKHOLDERS-EQ> 3,499,009 <F2>
416,500 <F3>
66,478
<LONG-TERM-DEBT-NET> 4,214,057
<SHORT-TERM-NOTES> 298,393
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 262,110
2,500
<CAPITAL-LEASE-OBLIGATIONS> 2,035
<LEASES-CURRENT> 129,440
<OTHER-ITEMS-CAPITAL-AND-LIAB> 7,406,875
<TOT-CAPITALIZATION-AND-LIAB> 16,297,397
<GROSS-OPERATING-REVENUE> 3,226,975
<INCOME-TAX-EXPENSE> 164,929
<OTHER-OPERATING-EXPENSES> 2,525,769
<TOTAL-OPERATING-EXPENSES> 2,690,698
<OPERATING-INCOME-LOSS> 536,277
<OTHER-INCOME-NET> 61,241
<INCOME-BEFORE-INTEREST-EXPEN> 597,518
<TOTAL-INTEREST-EXPENSE> 293,653 <F4>
<NET-INCOME> 276,653 <F5>
0
<EARNINGS-AVAILABLE-FOR-COMM> 276,653
<COMMON-STOCK-DIVIDENDS> 192,149
<TOTAL-INTEREST-ON-BONDS> 178,400
<CASH-FLOW-OPERATIONS> 572,800
<EPS-PRIMARY> 2.18 <F5>
<EPS-DILUTED> 2.18 <F5>
<FN>
<F1> INCLUDES ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS) OF
<F1> ($43,743).
<F2> INCLUDES REACQUIRED COMMON STOCK OF $78,349.
<F3> INCLUDES AMOUNT FOR SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE
<F3> PREFERRED SECURITIES OF $330,000.
<F4> INCLUDES AMOUNT FOR SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE
<F4> PREFERRED SECURITIES OF $21,666 AND PREFERRED STOCK DIVIDENDS OF
<F4> SUBSIDIARIES OF $8,516.
<F5> INCLUDES MINORITY INTEREST NET (INCOME)/LOSS OF ($1,457) AND
<F5> AN AFTER-TAX CHARGE FOR AN EXTRAORDINARY ITEM OF $25,755
<F5> ($.20 PER SHARE).
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000053456
<NAME> JERSEY CENTRAL POWER & LIGHT COMPANY
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,719,940
<OTHER-PROPERTY-AND-INVEST> 500,320
<TOTAL-CURRENT-ASSETS> 471,744
<TOTAL-DEFERRED-CHARGES> 996,787
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 4,688,791
<COMMON> 153,713
<CAPITAL-SURPLUS-PAID-IN> 510,769
<RETAINED-EARNINGS> 942,714
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,607,196
211,500 <F1>
37,741
<LONG-TERM-DEBT-NET> 1,173,472
<SHORT-TERM-NOTES> 47,500
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 24,993
<LONG-TERM-DEBT-CURRENT-PORT> 12
2,500
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 87,929
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,495,948
<TOT-CAPITALIZATION-AND-LIAB> 4,688,791
<GROSS-OPERATING-REVENUE> 1,598,853
<INCOME-TAX-EXPENSE> 119,099
<OTHER-OPERATING-EXPENSES> 1,218,704
<TOTAL-OPERATING-EXPENSES> 1,337,803
<OPERATING-INCOME-LOSS> 261,050
<OTHER-INCOME-NET> 4,447
<INCOME-BEFORE-INTEREST-EXPEN> 265,497
<TOTAL-INTEREST-EXPENSE> 80,789 <F2>
<NET-INCOME> 184,708
7,633
<EARNINGS-AVAILABLE-FOR-COMM> 177,075
<COMMON-STOCK-DIVIDENDS> 110,000 <F3>
<TOTAL-INTEREST-ON-BONDS> 87,545
<CASH-FLOW-OPERATIONS> 343,210
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> INCLUDES AMOUNT FOR COMPANY-OBLIGATED MANDATORILY REDEEMABLE
<F1> PREFERRED SECURITIES OF $125,000.
<F2> INCLUDES AMOUNT FOR COMPANY-OBLIGATED MANDATORILY REDEEMABLE
<F2> PREFERRED SECURITIES OF $8,025.
<F3> REPRESENTS COMMON STOCK DIVIDENDS PAID TO PARENT CORPORATION.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000065350
<NAME> METROPOLITAN EDISON COMPANY
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,300,492
<OTHER-PROPERTY-AND-INVEST> 197,981
<TOTAL-CURRENT-ASSETS> 205,833
<TOTAL-DEFERRED-CHARGES> 2,301,300
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 4,005,606
<COMMON> 66,273
<CAPITAL-SURPLUS-PAID-IN> 370,200
<RETAINED-EARNINGS> 252,796 <F1>
<TOTAL-COMMON-STOCKHOLDERS-EQ> 689,269
100,000 <F2>
12,056
<LONG-TERM-DEBT-NET> 576,903
<SHORT-TERM-NOTES> 76,200
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 24
0
<CAPITAL-LEASE-OBLIGATIONS> 30
<LEASES-CURRENT> 27,030
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,524,094
<TOT-CAPITALIZATION-AND-LIAB> 4,005,606
<GROSS-OPERATING-REVENUE> 689,829
<INCOME-TAX-EXPENSE> 32,115
<OTHER-OPERATING-EXPENSES> 564,647
<TOTAL-OPERATING-EXPENSES> 596,762
<OPERATING-INCOME-LOSS> 93,067
<OTHER-INCOME-NET> (8,734)
<INCOME-BEFORE-INTEREST-EXPEN> 84,333
<TOTAL-INTEREST-EXPENSE> 44,599 <F3>
<NET-INCOME> 32,929 <F4>
362
<EARNINGS-AVAILABLE-FOR-COMM> 32,567
<COMMON-STOCK-DIVIDENDS> 60,000 <F5>
<TOTAL-INTEREST-ON-BONDS> 42,480
<CASH-FLOW-OPERATIONS> 105,401
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> INCLUDES ACCUMULATED OTHER COMPREHENSIVE INCOME OF $11,595.
<F2> REPRESENTS COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
<F2> SECURITIES.
<F3> INCLUDES AMOUNT FOR COMPANY-OBLIGATED MANDATORILY REDEEMABLE
<F3> PREFERRED SECURITIES OF $6,750.
<F4> INCLUDES AN AFTER-TAX CHARGE FOR AN EXTRAORDINARY ITEM OF $6,805.
<F5> REPRESENTS COMMON STOCK DIVIDENDS PAID TO PARENT CORPORATION.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000077227
<NAME> PENNSYLVANIA ELECTRIC COMPANY
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,673,268
<OTHER-PROPERTY-AND-INVEST> 80,824
<TOTAL-CURRENT-ASSETS> 238,147
<TOTAL-DEFERRED-CHARGES> 2,510,766
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 4,503,005
<COMMON> 105,812
<CAPITAL-SURPLUS-PAID-IN> 285,486
<RETAINED-EARNINGS> 385,635 <F1>
<TOTAL-COMMON-STOCKHOLDERS-EQ> 776,933
105,000 <F2>
16,681
<LONG-TERM-DEBT-NET> 626,434
<SHORT-TERM-NOTES> 79,600
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 50,012
0
<CAPITAL-LEASE-OBLIGATIONS> 2,005
<LEASES-CURRENT> 14,269
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,832,071
<TOT-CAPITALIZATION-AND-LIAB> 4,503,005
<GROSS-OPERATING-REVENUE> 773,364
<INCOME-TAX-EXPENSE> 24,007
<OTHER-OPERATING-EXPENSES> 653,179
<TOTAL-OPERATING-EXPENSES> 677,186
<OPERATING-INCOME-LOSS> 96,178
<OTHER-INCOME-NET> (7,799)
<INCOME-BEFORE-INTEREST-EXPEN> 88,379
<TOTAL-INTEREST-EXPENSE> 47,843 <F3>
<NET-INCOME> 21,586 <F4>
521
<EARNINGS-AVAILABLE-FOR-COMM> 21,065
<COMMON-STOCK-DIVIDENDS> 35,000 <F5>
<TOTAL-INTEREST-ON-BONDS> 48,375
<CASH-FLOW-OPERATIONS> 142,514
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> INCLUDES ACCUMULATED OTHER COMPREHENSIVE INCOME OF $5,862.
<F2> REPRESENTS COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
<F2> SECURITIES.
<F3> INCLUDES AMOUNT FOR COMPANY-OBLIGATED MANDATORILY REDEEMABLE
<F3> PREFERRED SECURITIES OF $6,891.
<F4> INCLUDES AN AFTER-TAX CHARGE FOR AN EXTRAORDINARY ITEM OF $18,950.
<F5> REPRESENTS COMMON STOCK DIVIDENDS PAID TO PARENT CORPORATION.
</FN>
</TABLE>
