SEC File No. 70-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-1
DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 ("Act")
GPU, INC. ("GPU")
300 Madison Avenue
Morristown, New Jersey 07960
(Name of company filing this statement and address
--------------------------------------------------
of principal executive office)
T.G. Howson, Vice President and Douglas E. Davidson, Esq.
Treasurer Berlack, Israels & Liberman LLP
M. A. Nalewako, Secretary 120 West 45th Street
M.J. Connolly, New York, New York 10036
Assistant General Counsel
GPU Service, Inc.
310 Madison Avenue
Morristown, New Jersey 07962
- --------------------------------------------------------------------------------
(Names and addresses of agents for service)
<PAGE>
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTIONS.
-------------------------------------
A. GPU proposes to issue and sell from time to time commencing with the
granting of the authorization herein sought through December 31, 2003,
commercial paper ("Commercial Paper") in the aggregate amount of up to $100
million outstanding at any time. The Commercial Paper would be issued either in
the form of book-entry unsecured promissory notes evidenced by a master note or
in certificated form, and will be issued in minimum denominations of $100,000
with integral increments of $1,000 in excess thereof. The notes will have
maturities of up to 270 days and would not be prepayable prior to maturity.(1)
GPU proposes to issue and sell the Commercial Paper in the following manner:
1. GPU may utilize one or more commercial paper placement agents
through whom it would sell the Commercial Paper directly to one or more
institutional investors. The placement agent would arrange for the sale of
Commercial Paper and would be compensated for its services at such rates
as GPU and such placement agent may agree from time to time. GPU will
offer and sell the Commercial Paper in such a manner as to not constitute
a public offering under the Securities Act of 1933.
2. The Commercial Paper may also be sold directly to one or more
commercial paper dealers at a discount rate prevailing at the date of
issuance for commercial paper of
- --------
(1) GPU is also authorized in SEC File No. 70-7926 to borrow up to $250
million of bank loans and other short-term borrowings. As of September 30,
1998, GPU had approximately $70,100,000 million in aggregate principal
amount of short-term borrowings outstanding. The amount of Commercial
Paper outstanding under the authorization sought herein and of short-term
debt under the authorization granted in SEC File No. 70-7926, will not
exceed $250 million.
<PAGE>
comparable quality and of the particular maturity sold by other issuers of
commercial paper. No fee or commission would be payable by GPU in
connection with such issuance and sale of Commercial Paper. The Commercial
Paper will be reoffered by the purchasing dealer or dealers to
institutional investors at a discount of not more than 1/8 of 1% per annum
less than the prevailing discount rate to GPU. The commercial paper
dealers will reoffer such Commercial Paper in such a manner as to not
constitute a public offering under the Securities Act of 1933.
B. The Commercial Paper will bear interest at a rate (after giving effect
to any fee) not exceeding 125% of the base rate for commercial borrowings
offered by The Chase Manhattan Bank in effect from time to time. However, the
effective interest cost of the Commercial Paper is based on the supply of, and
demand for, that and similar commercial paper at the time of sale. Specifically,
on occasion short-term money markets have become very volatile during brief
periods, and the interest costs of commercial paper have during such periods
exceeded bank base rates. Because such volatile market conditions usually exist
for brief periods, it is not anticipated that any sale of Commercial Paper with
interest costs in excess of bank base rates would have a significant marginal
impact on the annual interest cost to GPU. Therefore, while it is not
anticipated that the effective annual cost of borrowing through Commercial Paper
will exceed 125% of the annual base rate from The Chase Manhattan Bank, in order
to obtain maximum flexibility during the periods described above, Commercial
Paper may be issued with a maturity of not more than 90 days with an
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<PAGE>
effective cost in excess of 125% of the base rate for commercial borrowings
offered by The Chase Manhattan Bank.
C. The net proceeds from the issuance of the Commercial Paper would be
used by GPU for general corporate purposes, including to acquire exempt
wholesale generators ("EWGs") and foreign utility companies ("FUCOs").
D. Rule 53 Analysis.
-----------------
(a) As described below, GPU meets all of the conditions of Rule 53
under the Act, except for Rule 53(a)(1). By Order dated November 5, 1997 (HCAR
No. 35-26773) (the "November 5 Order"), the Commission authorized GPU to
increase to 100% of its "average consolidated retained earnings," as defined in
Rule 53, the aggregate amount which it may invest in EWGs and FUCOs. At
September 30, 1998, GPU's average consolidated retained earnings was
approximately $2.16 billion, and GPU's aggregate investment in EWGs and FUCOs
was approximately $1.29 billion. Accordingly, under the November 5 Order, GPU
may invest up to an additional $869 million in EWGs and FUCOs as of September
30, 1998.
(i) GPU maintains books and records to identify investments in, and
earnings from, each EWG and FUCO in which it directly or indirectly holds
an interest.
(A) For each United States EWG in which GPU directly or
indirectly holds an interest:
(1) the books and records for such EWG will be kept in
conformity with United States
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<PAGE>
generally accepted accounting principles ("GAAP");
(2) the financial statements will be prepared in
accordance with GAAP; and
(3) GPU directly or through its subsidiaries undertakes to
provide the Commission access to such books and
records and financial statements as the Commission may
request.
(B) For each FUCO or foreign EWG which is a majority-owned
subsidiary of GPU:
(1) the books and records for such subsidiary will be kept
in accordance with GAAP;
(2) the financial statements for such subsidiary will be
prepared in accordance with GAAP; and
(3) GPU directly or through its subsidiaries undertakes to
provide the Commission access to such books and
records and financial statements, or copies thereof in
English, as the Commission may request.
(C) For each FUCO or foreign EWG in which GPU owns 50% or less
of the voting securities, GPU directly or through its
subsidiaries will proceed in good faith, to the extent
reasonable under the circumstances, to cause:
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<PAGE>
(1) such entity to maintain books and records
in accordance with GAAP;
(2) the financial statements of such entity to be
prepared in accordance with GAAP; and
(3) access by the Commission to such books and records
and financial statements (or copies thereof) in English as
the Commission may request and, in any event, will provide
the Commission on request copies of such materials as are
made available to GPU and its subsidiaries. If and to the
extent that such entity's books, records or financial
statements are not maintained in accordance with GAAP, GPU
will, upon request of the Commission, describe and quantify
each material variation therefrom as and to the extent
required by subparagraphs (a) (2) (iii) (A) and (a) (2)
(iii) (B) of Rule 53.
(ii) No more than 2% of GPU's domestic public utility subsidiary
employees will render any services, directly or indirectly, to any EWG or
FUCO in which GPU directly or indirectly holds an interest.
(iii) Copies of this Declaration on Form U-1 are being provided to
the New Jersey Board of Public Utilities ("NJBPU") and the Pennsylvania
Public Utility Commission, the only federal, state or local regulatory
agencies having
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<PAGE>
jurisdiction over the retail rates of GPU's electric utility
subsidiaries.(2) In addition, GPU will submit to each such commission
copies of any amendments to this Declaration, Rule 24 certificates
required hereunder, as well as a copy of Item 9 of GPU's Form U5S and
Exhibits H and I thereof (commencing with the Form U5S to be filed for the
calendar year in which the authorization herein requested is granted).
(iv) None of the provisions of paragraph (b) of Rule 53 render
paragraph (a) of that Rule unavailable for the proposed transactions.
(A) Neither GPU nor any subsidiary of GPU having a book value
exceeding 10% of GPU's consolidated retained earnings is
the subject of any pending bankruptcy or similar
proceeding.
(B) GPU's average consolidated retained earnings for the four
most recent quarterly periods (approximately $2.16 billion)
represented an increase of approximately $25.8 million (or
approximately 1.2%) compared to the average consolidated
retained earnings for the previous four quarterly periods
(approximately $2.135 billion).
- --------
(2) Pennsylvania Electric Company ("Penelec") is also subject to retail rate
regulation by the New York Public Service Commission with respect to
retail service to approximately 3,700 customers in Waverly, New York
served by Waverly Electric Power & Light Company, a Penelec subsidiary.
Waverly Electric's revenues are immaterial, accounting for less than 1% of
Penelec's total operating revenues.
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<PAGE>
(C) GPU did not incur operating losses from direct or indirect
investments in EWGs and FUCOs in 1997 in excess of 5% of
GPU's December 31, 1997 consolidated retained earnings.
As described above, GPU meets all the conditions of Rule 53(a),
except for clause (1). With respect to clause (1), the Commission determined in
the November 5 Order that GPU's financing of investments in EWGs and FUCOs in an
amount greater than 50% of GPU's average consolidated retained earnings as
otherwise permitted by Rule 53(a)(1) would not have either of the adverse
effects set forth in Rule 53(c).
Moreover, even if the effect of the capitalization and earnings of
subsidiary EWGs and FUCOs were considered, there is no basis for the Commission
to withhold or deny approval for the transactions proposed herein. The
transactions would not, by themselves, or even considered in conjunction with
the effect of the capitalization and earnings of GPU's subsidiary EWGs and
FUCOs, have a material adverse effect on the financial integrity of the GPU
system, or an adverse impact on GPU's public utility subsidiaries, their
customers, or the ability of State commissions to protect such public utility
customers.
The November 5 Order was predicated, in part, upon the assessment of
GPU's overall financial condition which took into account, among other factors,
GPU's consolidated capitalization ratios and the recent growth trend in GPU's
retained earnings. As
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<PAGE>
of June 30, 1997, the most recent quarterly period for which financial statement
information was evaluated in the November 5 Order, GPU's consolidated
capitalization consisted of 49.2% equity and 50.8% debt. As stated in the
November 5 Order, GPU's June 30, 1997 pro forma capitalization, reflecting the
November 6, 1997 acquisition of PowerNet Victoria, was 39.3% equity and 60.7%
debt.
GPU's September 30, 1998 consolidated capitalization consists of
45.6% equity and 54.4% debt. Thus, since the date of the November 5 Order, there
has been no material adverse change in GPU's consolidated capitalization ratio,
which remains within acceptable ranges and limits as evidenced by the credit
ratings of GPU's electric utility subsidiaries.(3)
GPU's consolidated retained earnings grew on average approximately
4.5% per year from 1991 through 1997. Earnings attributable to GPU's investments
in EWGs and FUCOs have contributed positively to consolidated earnings,
excluding the impact of the windfall profits tax on the Midlands Electricity plc
investment.(4)
Accordingly, since the date of the November 5 Order, the
capitalization and earnings attributable to GPU's investments in EWGs and FUCOs
have not had any adverse impact on GPU's financial integrity.
- --------
(3) Indeed, on November 20, 1998, Moody's Investor's Service increased the
long term debt ratings of Met-Ed and Penelec to A3 and A2, respectively.
(4) As discussed in the November 5 Order, GPU incurred a loss for 1997 from
its investments in EWGs and FUCOs as a result of the windfall profits tax
imposed on Midlands Electricity, plc.
-8-
<PAGE>
Reference is made to Exhibit H filed herewith which sets forth GPU's
consolidated capitalization and earnings at September 30, 1998 and after giving
effect to the transactions proposed herein. As set forth in such exhibit, the
proposed transactions will not have a material impact on GPU's capitalization or
earnings.
ITEM 2. FEES, COMMISSIONS AND EXPENSES.
-------------------------------
The estimated fees, commission and expenses expected to be
incurred by GPU in connection with the proposed transactions will be supplied by
amendment.
ITEM 3. APPLICABLE STATUTORY PROVISIONS.
--------------------------------
GPU believes that Sections 6(a) and 7 of the Act and Rules 53 and 54
under the Act are applicable to the issuance and sale of the Commercial Paper.
ITEM 4. REGULATORY APPROVAL.
--------------------
No state commission has jurisdiction with respect to any aspect of
the proposed transactions and no Federal commission other than your Commission
has jurisdiction with respect to any aspect thereof.
ITEM 5. PROCEDURE.
----------
It is requested that the Commission issue an order with respect to
the transactions proposed herein at the earliest practicable date but, in any
event, not later than February
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<PAGE>
28, 1999. It is further requested that (i) there not be a recommended decision
by an Administrative Law Judge or other responsible officer of the Commission,
(ii) the Office of Public Utilities be permitted to assist in the preparation of
the Commission's decision, and (iii) there be no waiting period between the
issuance of the Commission's order and the date on which it is to become
effective.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS.
----------------------------------
(a) Exhibits:
A-1 - Form of unsecured promissory notes to be issued and
sold as Commercial Paper -- to be filed by
amendment.
B - Not applicable.
C - Not applicable.
D - Not applicable.
E - None.
F-1 - Opinion of Berlack, Israels & Liberman
LLP -- to be filed by amendment.
F-2 - Opinion of Ballard Spahr Andrews & Ingersoll,
LLP -- to be filed by amendment.
G - Proposed Form of Public Notice
H - GPU Actual and Pro Forma Capitalization ratios.
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<PAGE>
(b) Financial Statements:
1-A - GPU (Corporate) Balance Sheets, actual and pro
forma, as at September 30, 1998, and Statements of
Income and Retained Earnings, actual and pro
forma, for the twelve months ended September 30,
1998; pro forma journal entries.
1-B - GPU and Subsidiary Companies Consolidated Balance
Sheets, actual and pro forma, as at September 30,
1998, and Consolidated Statements of Income and
Retained Earnings, actual and pro forma, for the
twelve months ended September 30, 1998; pro forma
journal entries.
3 - Not Applicable.
4 - None, except as set forth in the Notes to
Financial Statements.
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS.
----------------------------------------
The proceeds from the issuance and sale of the Commercial Paper as
proposed herein will be used by GPU to finance its businesses. As such, the
issuance of an order by your Commission with respect thereto is not a major
federal action significantly affecting the quality of the human environment.
No Federal agency has prepared or is preparing an environmental
impact statement with respect to the proposed transactions which are the subject
hereof. Reference is made to Item 4 hereto regarding regulatory approvals with
respect to the proposed transactions.
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<PAGE>
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE PUBLIC UTILITY HOLDING COMPANY
ACT OF 1935, THE UNDERSIGNED COMPANY HAS DULY CAUSED THIS STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
GPU, INC.
By: /s/ T. G. Howson
----------------------------
T.G. Howson
Vice President and Treasurer
Date: December 6, 1998
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EXHIBITS TO BE FILED BY EDGAR.
------------------------------
G - Proposed Form of Public Notice
H - GPU Actual and Pro Forma Capitalization ratios.
1-A - GPU (Corporate) Balance Sheets, actual and pro forma, as
at September 30, 1998, and Statements of Income and
Retained Earnings, actual and pro forma, for the twelve
months ended September 30, 1998; pro forma journal
entries.
1-B - GPU and Subsidiary Companies Consolidated Balance
Sheets, actual and pro forma, as at September 30, 1998,
and Consolidated Statements of Income and Retained
Earnings, actual and pro forma, for the twelve months
ended September 30, 1998; pro forma journal entries.
4 - None, except as set forth in the Notes to Financial
Statements.
EXHIBIT G
SECURITIES AND EXCHANGE COMMISSION
(RELEASE NO. 35-----------; 70-----)
GPU, INC.
GPU, Inc. ("GPU"), 300 Madison Avenue, Morristown, New Jersey, a
registered holding company, has filed a Declaration pursuant to Sections 6(a)
and 7 of the Public Utility Holding Company Act of 1935 and Rules 53 and 54
thereunder.
GPU proposes to issue and sell from time to time through December
31, 2003, commercial paper ("Commercial Paper") in the aggregate amount of up to
$100 million outstanding at any time. The Commercial Paper would be issued
either in the form of book-entry unsecured promissory notes evidenced by a
master note or in certificated form, and will be issued in minimum denominations
of $100,000 with integral increments of $1,000 in excess thereof. The notes will
have maturities of up to 270 days and would not be prepayable prior to
maturity.(1) GPU proposes to issue and sell the Commercial Paper in one of two
ways, as follows:
GPU may utilize one or more commercial paper placement agents
through whom it would sell the Commercial Paper directly to one or more
institutional investors. The placement agent would arrange for the sale of
Commercial Paper and would be compensated for its services at such rates as GPU
and such placement agent may agree from time to time. GPU will offer and sell
the Commercial Paper in such a manner as to not constitute a public offering
under the Securities Act of 1933.
The Commercial Paper may also be sold directly to one or more
commercial paper dealers at a discount rate prevailing at the date of issuance
for commercial paper of comparable quality and of the particular maturity sold
by other issuers of commercial paper. No fee or commission would be payable by
GPU in connection with such issuance and sale of Commercial Paper. The
Commercial Paper will be reoffered by the purchasing dealer or dealers to
institutional investors at a discount of not more than 1/8 of 1% per annum less
than the
- --------
(1) GPU is also authorized in SEC File No. 70-7926 to borrow up to $250
million of bank loans and other short-term borrowings. As of September 30,
1998, GPU had approximately $70,100,000 million in aggregate principal
amount of short-term borrowings outstanding. The amount of Commercial
Paper outstanding under the authorization sought herein and of short-term
debt under the authorization granted in SEC File No.
70-7926, will not exceed $250 million.
<PAGE>
prevailing discount rate to GPU. The commercial paper dealers will reoffer such
Commercial Paper in such a manner as to not constitute a public offering under
the Securities Act of 1933.
The Commercial Paper will bear interest at a rate (after giving
effect to any fee) not exceeding 125% of the base rate for commercial borrowings
offered by The Chase Manhattan Bank in effect from time to time. However, the
effective interest cost of the Commercial Paper is based on the supply of, and
demand for, that and similar commercial paper at the time of sale. Specifically,
on occasion short-term money markets have become very volatile during brief
periods, and the interest costs of commercial paper have during such periods
exceeded bank base rates. Because such volatile market conditions usually exist
for brief periods, it is not anticipated that any sale of Commercial Paper with
interest costs in excess of bank base rates would have a significant marginal
impact on the annual interest cost to GPU. Therefore, while it is not
anticipated that the effective annual cost of borrowing through Commercial Paper
will exceed 125% of the annual base rate from The Chase Manhattan Bank, in order
to obtain maximum flexibility during the periods described above, Commercial
Paper may be issued with a maturity of not more than 90 days with an effective
cost in excess of 125% of the base rate for commercial borrowings offered by The
Chase Manhattan Bank.
The net proceeds from the issuance of the Commercial Paper would be
used by GPU for general corporate purposes, including to acquire exempt
wholesale generators and foreign utility companies.
The Declaration and any amendments thereto are available for public
inspection through the Commission's Office of Public Reference. Interested
persons wishing to comment or request a hearing should submit their views in
writing by -----, 1999 to the Secretary, Securities and Exchange Commission,
Washington, D.C. 20549, and serve a copy on the applicant at the address
specified above. Proof of service (by affidavit, or in case of an attorney at
law, by certificate) should be filed with the request. Any request for a hearing
shall identify specifically the issues of fact or law that are disputed. A
person who so requests will be notified of any hearing, if ordered, and will
receive a copy of any notice or order issued in this matter. After said date,
the Declaration, as it may be amended, may be permitted to become effective.
Item 6(a) H
CAPITALIZATION AND CAPITALIZATION RATIOS
----------------------------------------
(IN THOUSANDS)
The actual and pro forma capitalization of GPU, Inc. and Subsidiary
Companies at September 30, 1998 is as follows:
Actual Pro Forma (3)
----------------- ------------------
Amount % Amount %
---------- ---- ----------- ----
Long-term debt(1) $4,476,167 51.0 $4,476,167 48.2
Notes payable 298,393 3.4 398,393 4.3
Preferred stock (2) 155,478 1.8 155,478 1.7
Subsidiary-obligated
mandatorily redeemable
preferred securities 330,000 3.8 780,000 8.4
Common equity 3,499,009 40.0 3,471,620 37.4
--------- ----- --------- -----
$8,759,047 100.0 $9,281,658 100.0
========= ===== ========= =====
(1) Includes securities due within one year of $262,110.
(2) Includes securities due within one year of $2,500.
(3) The pro forma capitalization excludes approximately $750 million of
GPU's proportionate share of non-recourse debt used to finance the
acquisition of exempt wholesale generators and foreign utility
companies, as defined under the Public Utility Holding Company Act of
1935, which debt is not consolidated for financial reporting purposes.
After giving effect to the non-recourse debt, the pro forma percentages
would be as follows: Long-term debt 52.1%; Notes payable 4.0%;
Preferred stock 1.5%; Subsidiary-obligated mandatorily redeemable
preferred securities 7.8%; and Common equity 34.6%.
<TABLE>
Financial Statements
Item 6(b) 1-A
Page 1 of 36
GPU, Inc.
BALANCE SHEETS
ACTUAL AND PRO FORMA
AT September 30, 1998
---------------------
(IN THOUSANDS)
<CAPTION>
Adjustments
Actual (see page 3) Pro Forma
------ ------------ ---------
ASSETS
Investments:
<S> <C> <C> <C>
Investment in subsidiaries $ 3 565 639 $ (21 091) $ 3 544 548
Other investments 6 083 - 6 083
----------- --------- ---------
Total investments 3 571 722 (21 091) 3 550 631
----------- --------- ---------
Current Assets:
Cash and temporary cash investments - 100 000 100 000
Accounts receivable, net 3 313 - 3 313
Prepayments 179 - 179
---------- --------- ----------
Total current assets 3 492 100 000 103 492
---------- --------- ----------
Deferred Debits and Other Assets:
Other 179 - 179
---------- --------- ----------
Total deferred debits and other assets 179 - 179
---------- --------- ----------
Total Assets $ 3 575 393 $ 78 909 $ 3 654 302
========== ========= ==========
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock $ 331 958 $ - $ 331 958
Capital surplus 1 010 373 - 1 010 373
Retained earnings 2 278 770 (27 389) 2 251 381
Accumulated other comprehensive
income/(loss) (43 743) - (43 743)
---------- --------- ----------
Total 3 577 358 (27 389) 3 549 969
Less, reacquired common stock, at cost 78 349 - 78 349
---------- --------- ----------
Total common stockholders' equity 3 499 009 (27 389) 3 471 620
Current Liabilities:
Notes payable 70 100 100 000 170 100
Accounts payable 127 - 127
Taxes accrued (1) (3 392) (3 393)
Interest accrued 73 9 690 9 763
Other 4 686 - 4 686
---------- --------- ----------
Total current liabilities 74 985 106 298 181 283
---------- --------- ----------
Deferred Credits and Other Liabilities:
Other 1 399 - 1 399
---------- --------- ----------
Total deferred credits and
other liabilities 1 399 - 1 399
---------- --------- ----------
Total Liabilities and Capitalization $ 3 575 393 $ 78 909 $ 3 654 302
========== ========= ==========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Financial Statements
Item 6(b) 1-A
Page 2 of 36
GPU, Inc.
STATEMENTS OF INCOME AND RETAINED EARNINGS
ACTUAL AND PRO FORMA
FOR THE TWELVE MONTHS ENDED September 30, 1998
----------------------------------------------
(IN THOUSANDS)
<CAPTION>
Adjustments
Actual (see page 3) Pro Forma
------ ------------ ---------
Income:
<S> <C> <C> <C>
Equity in earnings of subsidiaries $ 381 624 $(21 091) $ 360 533
--------- ------- ---------
Expenses, Taxes and Interest:
General expenses 742 - 742
Other operation and maintenance 4 744 - 4 744
Taxes, other than income taxes 151 - 151
Income taxes - (3 392) (3 392)
Other interest 6 424 9 690 16 114
---------- ------- ----------
Total expenses, taxes, and interest 12 061 6 298 18 359
---------- ------- ----------
Net Income $ 369 563 $(27 389) $ 342 174
========= ======= =========
Retained Earnings:
Balance at beginning of period $2 175 587 $ - $2 175 587
Add - Net income 369 563 (27 389) 342 174
Deduct - Cash dividends on common stock 252 565 - 252 565
Other adjustments 13 815 - 13 815
--------- -------- ---------
Balance at end of period $2 278 770 $(27 389) $2 251 381
========= ======= =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
Financial Statements
Item 6(b) 1-A
Page 3 of 36
GPU, Inc.
PRO FORMA ADJUSTMENTS
AT September 30, 1998
---------------------
(IN THOUSANDS)
(1)
Cash and temporary cash investments $100 000
Notes payable $100 000
To record the maximum liability associated
with the proposed issuance by GPU,
Inc. of $100 million of commercial paper
through December 31, 2003.
(2)
Other interest $ 9 690
Interest accrued $ 9 690
To record the maximum interest
related to the proposed issuance of commercial
paper at an assumed rate of 9.69%.
(3)
Taxes accrued $ 3 392
Income taxes $ 3 392
To reflect the income tax benefit
associated with the interest payments related
to the proposed issuance of GPU, Inc. commercial paper.
(4)
Equity in earnings of subsidiaries $ 21 091
Investment in subsidiaries $ 21 091
To reflect the anticipated net income
effect from (1) the proposed issuance of
$450 million of mandatorily redeemable
preferred securities from time to time
through December 31, 2000 (SEC File No. 70-9329,
SEC File No. 70-9327 and SEC
File No. 70-9399) and (2) the potential
incremental nuclear fuel to be leased
for TMI-1 and Oyster Creek (SEC File No.
70-7862).
<PAGE>
<TABLE>
Financial Statements
Item 6(b) 1-B
Page 4 of 36
GPU, Inc. and Subsidiary Companies
CONSOLIDATED BALANCE SHEETS
ACTUAL AND PRO FORMA
AT September 30, 1998
---------------------
(IN THOUSANDS)
<CAPTION>
Adjustments
Actual (see pages 7-10) Pro Forma
------ ---------------- ---------
ASSETS
Utility Plant:
<S> <C> <C> <C>
In Service, at original cost $10 832 810 $ - $10 832 810
Less, accumulated depreciation 4 341 080 - 4 341 080
---------- -------- ----------
Net utility plant in service 6 491 730 - 6 491 730
Construction work in progress 175 499 - 175 499
Other, net 148 298 61 193 209 491
---------- -------- ----------
Net utility plant 6 815 527 61 193 6 876 720
---------- -------- ----------
Other Property and Investments:
GPUI Group equity investments 648 304 - 648 304
Goodwill, net 523 756 - 523 756
Nuclear decommissioning trusts, at
market 635 689 - 635 689
Nuclear fuel disposal trust, at market 115 423 - 115 423
Other, net 216 033 - 216 033
---------- -------- ----------
Total other property and investments 2 139 205 - 2 139 205
---------- -------- ----------
Current Assets:
Cash and temporary cash investments 248 276 507 271 755 547
Special deposits 47 247 - 47 247
Accounts receivable:
Customers, net 335 921 - 335 921
Other 113 992 - 113 992
Unbilled revenues 130 387 - 130 387
Materials and supplies, at average cost or less:
Construction and maintenance 158 767 - 158 767
Fuel 34 949 - 34 949
Investments held for sale 22 098 22 098
Deferred income taxes 74 164 - 74 164
Prepayments 116 216 - 116 216
---------- -------- ----------
Total current assets 1 282 017 507 271 1 789 288
---------- -------- ----------
Deferred Debits and Other Assets:
Competitive transition charge 989 815 - 989 815
Other regulatory assets, net 2 900 585 - 2 900 585
Deferred income taxes 1 979 072 1 979 072
Other 191 176 6 245 197 421
---------- -------- ---------- ----------
Total deferred debits and other assets 6 060 648 6 245 6 066 893
---------- -------- ----------
Total Assets $16 297 397 $ 574 709 $16 872 106
========== ======== ==========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Financial Statements
Item 6(b) 1-B
Page 5 of 36
GPU, Inc. and Subsidiary Companies
CONSOLIDATED BALANCE SHEETS
ACTUAL AND PRO FORMA
AT September 30, 1998
---------------------
(IN THOUSANDS)
<CAPTION>
Adjustments
Actual (see pages 7-10) Pro Forma
------ ---------------- ---------
LIABILITIES AND CAPITALIZATION
Capitalization:
<S> <C> <C> <C>
Common stock $ 331 958 $ - $ 331 958
Capital surplus 1 010 373 - 1 010 373
Retained Earnings 2 278 770 (27 389) 2 251 381
Accumulated other comprehensive income/(loss) (43 743) - (43 743)
---------- --------- ----------
Total 3 577 358 (27 389) 3 549 969
Less, reacquired common stock, at cost 78 349 - 78 349
---------- --------- ----------
Total common stockholders' equity 3 499 009 (27 389) 3 471 620
Cumulative preferred stock:
With mandatory redemption 86 500 - 86 500
Without mandatory redemption 66 478 - 66 478
Subsidiary-obligated mandatorily redeemable
preferred securities 330 000 450 000 780 000
Long-term debt 4 214 057 - 4 214 057
---------- --------- ----------
Total capitalization 8 196 044 422 611 8 618 655
---------- --------- ----------
Current Liabilities:
Securities due within one year 264 610 - 264 610
Notes payable 298 393 100 000 398 393
Obligations under capital leases 129 440 61 193 190 633
Accounts payable 415 321 - 415 321
Taxes accrued 104 078 (18 785) 85 293
Interest accrued 71 343 9 690 81 033
Deferred energy credits 7 771 - 7 771
Other 285 721 - 285 721
---------- --------- ---------
Total current liabilities 1 576 677 152 098 1 728 775
---------- --------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 2 964 223 - 2 964 223
Unamortized investment tax credits 115 960 - 115 960
Three Mile Island Unit 2 future costs 464 304 - 464 304
Nonutility generation contract loss liability 1 810 350 - 1 810 350
Other 1 169 839 - 1 169 839
---------- --------- ----------
Total deferred credits and other liabilities 6 524 676 - 6 524 676
---------- --------- ----------
Total Liabilities and Capitalization $16 297 397 $ 574 709 $16 872 106
========== ========= ==========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Financial Statements
Item 6(b) 1-B
Page 6 of 36
GPU, Inc. and Subsidiary Companies
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
ACTUAL AND PRO FORMA
For the twelve months ended September 30, 1998
----------------------------------------------
(IN THOUSANDS)
<CAPTION>
Adjustments
Actual (see pages 7-10) Pro Forma
------ ---------------- ---------
<S> <C> <C> <C>
Operating Revenues $4 259 419 $ - $4 259 419
--------- ------- ---------
Operating Expenses:
Fuel 428 344 3 672 432 016
Power purchased and interchanged 1 133 943 - 1 133 943
Deferral of energy and capacity costs, net (24 501) - (24 501)
Other operation and maintenance 1 080 876 56 1 080 932
Depreciation and amortization 502 064 - 502 064
Taxes, other than income taxes 257 101 - 257 101
--------- ------- ---------
Total operating expenses 3 377 827 3 728 3 381 555
--------- ------- ---------
Operating Income Before Income Taxes 881 592 (3 728) 877 864
Income taxes 204 550 (18 785) 185 765
--------- ------- ---------
Operating income 677 042 15 057 692 099
--------- ------- ---------
Other Income and Deductions:
Allowance for other funds used during
construction (123) - (123)
Equity in undistributed earnings/(losses)
of affiliates, net 101 777 - 101 777
Other income, net 48 490 - 48 490
Income taxes (43 654) - (43 654)
--------- ------- ---------
Total other income and deductions 106 490 - 106 490
--------- ------- ---------
Income Before Interest Charges and
Preferred Dividends 783 532 15 057 798 589
--------- ------- ---------
Interest Charges and Preferred Dividends:
Long-term debt 316 346 - 316 346
Subsidiary-obligated mandatorily redeemable
preferred securities 28 888 32 626 61 514
Other interest 35 181 9 820 45 001
Allowance for borrowed funds used during
construction (5 509) - (5 509)
Preferred Stock dividends of subsidiaries 11 549 - 11 549
--------- ------- ---------
Total interest charges and preferred
dividends 386 455 42 446 428 901
--------- ------- ---------
Minority interest net income 1 759 - 1 759
--------- ------- ---------
Income before Extraordinary Item 395 318 (27 389) 367 929
Extraordinary item (net of income taxes of
$16,300) (25 755) - (25 755)
--------- ------- ---------
Net Income $ 369 563 $(27 389) $ 342 174
========= ======= =========
Retained Earnings:
Balance at beginning of period $2 175 587 $ - $2 175 587
Add - Net income 369 563 (27 389) 342 174
Deduct-Cash dividends declared on common stock 252 565 - 252 565
Other adjustments, net 13 815 - 13 815
--------- ------- ---------
Balance at end of period $2 278 770 $(27 389) $2 251 381
========= ======= =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 7 of 36
GPU, Inc. and Subsidiary Companies
PRO FORMA ADJUSTMENTS
AT September 30, 1998
---------------------
(IN THOUSANDS)
(1)
Cash and temporary cash investments $100 000
Notes payable $100 000
To record the maximum liability associated
with the proposed issuance by GPU,
Inc. of $100 million of commercial paper
through December 31, 2003.
(2)
Other interest $ 9 690
Interest accrued $ 9 690
To record the maximum interest related
to the proposed issuance of commercial
paper at an assumed rate of 9.69%.
(3)
Cash and temporary cash investments $450 000
Subsidiary-obligated mandatorily
redeemable preferred securities (B/S) $450 000
To reflect the proposed issuance of
$450 million of mandatorily redeemable
preferred securities from time to time
through December 31, 2000. The preferred
securities are to be unconditionally
guaranteed by Metropolitan Electric
Company, Pennsylvania Electric Company,
and Jersey Central Power & Light Company
(SEC File No. 70-9329, SEC File No. 70-9327,
and SEC File No. 70-9399).
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 8 of 36
GPU, Inc. and Subsidiary Companies
PRO FORMA ADJUSTMENTS
AT September 30, 1998
(IN THOUSANDS)
(4)
Other deferred debits $ 6 375
Cash and temporary cash investments $ 6 375
To reflect the underwriters compensation
offering expenses paid in connection
with the issuance of mandatorily redeemable
preferred securities (SEC File
No.70-9329, SEC File No 70-9327,
and SEC File No.70-9399).
(5)
Other interest 130
Other deferred debits $ 130
To reflect the annual amortization of
the deferred underwriters compensation
and offering expenses related to the
issuance of mandatorily redeemable
preferred securities which are being
amortized over 49 years. (SEC File No.
70-9329, SEC File No. 70-9327, and SEC
File No. 70-9399).
(6)
Subsidiary-obligated mandatorily redeemable
preferred securities (I/S) $32 626
Cash and temporary cash investments $32 626
To reflect the annual interest paid on
the mandatorily redeemable preferred
securities at an assumed rate of 7.25%
(SEC File No. 70-9329, SEC File No.
70-9327, and SEC File No. 70-9399).
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 9 of 36
GPU, Inc. and Subsidiary Companies
PRO FORMA ADJUSTMENTS
AT September 30, 1998
(IN THOUSANDS)
(7)
Other utility plant, net $61 193
Obligation under capital leases $61 193
To reflect the potential incremental nuclear fuel
to be leased for TMI-1 and Oyster Creek (proposed
$190,000 limit less $128,807 of nuclear fuel
subject to lease at March 31, 1998.) (SEC File No.
70-7862)
(8)
Fuel expense $ 3 672
Cash and temporary cash investments $ 3 672
To record incremental rent expense on the proposed
nuclear fuel lease at an annual rate of 6.0% (SEC
File No. 70-8762).
(9)
Other operation and maintenance $ 56
Cash and temporary cash investments $ 56
To record annual fees associated with the proposed
nuclear fuel lease (SEC File No. 70-7862).
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 10 of 36
GPU, Inc. and Subsidiary Companies
PRO FORMA ADJUSTMENTS
AT September 30, 1998
---------------------
(IN THOUSANDS)
(10)
Taxes accrued $18 785
Income taxes $18 785
To reflect the net decrease in the provision for
Federal and State income taxes attributable to
interest payments on the proposed issuance of
mandatorily redeemable preferred securities by
Metropolitan Electric Company (SEC File No.
70-9329), Pennsylvania Electric Company (SEC File
No. 70-9327), and Jersey Central Power & Light
Company (SEC File No. 70-9399); to record the
decrease in income taxes associated with the
proposed nuclear fuel lease (SEC File No.
70-7862); and to reflect the income tax benefit
associated with interest payments related to the
proposed issuance of GPU, Inc. commercial paper.
<PAGE>
Financial Statements
Item 6(b) 4
Page 11 of 36
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. 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
<PAGE>
Financial Statements
Item 6(b) 4
Page 12 of 36
verifiable stranded costs incurred when a wholesale customer purchases power
from another supplier using the utility's transmission system. In addition,
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
<PAGE>
Financial Statements
Item 6(b) 4
Page 13 of 36
reduction; the unbundling of customer bills; the recovery of stranded costs and
the ability to securitize stranded costs.
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
<PAGE>
Financial Statements
Item 6(b) 4
Page 14 of 36
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.
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.
<PAGE>
Financial Statements
Item 6(b) 4
Page 15 of 36
As a result of these developments, the rates under virtually all of the GPU
Energy companies' NUG agreements for facilities currently in operation are
substantially in excess of current and projected prices from alternative
sources.
The 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.
<PAGE>
Financial Statements
Item 6(b) 4
Page 16 of 36
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 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 Consolidated
Balance Sheets in accordance with the provisions of FAS 71, were as follows:
GPU, Inc. and Subsidiary Companies (in thousands)
- ---------------------------------- September 30,
1998
-------------
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
Income taxes refundable through future rates (54,519)
Net investment in TMI-2 68,009
TMI-2 decommissioning costs 131,737
Nonutility generation contract buyout costs 131,458
Unamortized property losses 83,385
Other postretirement benefits 74,601
Environmental remediation 44,447
N.J. unit tax 34,929
Unamortized loss on reacquired debt 33,234
Load and demand-side management programs 16,445
N.J. low-level radwaste disposal 25,685
DOE enrichment facility decommissioning 29,542
Nuclear fuel disposal fee 21,467
Storm damage 31,255
Deferred nonutility generation costs
not in current rates (16,067)
Future nonutility generation costs not in CTC 375,820
Public utility realty taxes (PURTA) 6,881
Other regulatory liabilities (20,235)
Other regulatory assets 10,283
---------
Total other regulatory assets, net $2,900,585
==========
<PAGE>
Financial Statements
Item 6(b) 4
Page 17 of 36
JCP&L (in thousands)
September 30,
1998
--------------
Other regulatory assets, net:
Reserve for generation divestiture $ 132,749
Income taxes recoverable through future rates 134,028
Income taxes refundable through future rates (35,964)
Net investment in TMI-2 68,009
TMI-2 decommissioning costs 29,474
Nonutility generation contract buyout costs 126,458
Unamortized property losses 83,346
Other postretirement benefits 47,317
Environmental remediation 44,447
N.J. unit tax 34,929
Unamortized loss on reacquired debt 26,655
Load and demand-side management programs 16,445
N.J. low-level radwaste disposal 25,685
DOE enrichment facility decommissioning 18,502
Nuclear fuel disposal fee 21,197
Storm damage 31,255
Other regulatory liabilities (19,311)
Other regulatory assets 7,748
---------
Total other regulatory assets, net $ 792,969
=========
Met-Ed (in thousands)
September 30,
1998
Competitive transition charge per PaPUC Order $ 657,655
=========
Other regulatory assets, net:
Transmission & Distribution related:
Income taxes recoverable through future rates $ 111,303
Income taxes refundable through future rates (11,081)
Nonutility generation contract buyout costs 5,000
Other postretirement benefits 27,284
Unamortized loss on reacquired debt 2,011
DOE enrichment facility decommissioning 7,498
Other regulatory liabilities (924)
Other regulatory assets 232
---------
Subtotal $ 141,323
---------
Generation related:
Unamortized property losses 39
Unamortized loss on reacquired debt 1,131
Nuclear fuel disposal fee 151
Other regulatory assets 321
---------
Subtotal $ 1,642
---------
<PAGE>
Financial Statements
Item 6(b) 4
Page 18 of 36
(in thousands)
September 30,
1998
------------
Other:
Phase II reserve for generation divestiture $ 423,003
TMI-2 decommissioning costs 71,103
Deferred nonutility generation costs
not in current rates (7,746)
Future nonutility generation costs not in CTC 276,660
Public utility realty taxes (PURTA) 3,130
Other regulatory assets 725
---------
Subtotal $ 766,875
---------
Total other regulatory assets, net $ 909,840
=========
Penelec (in thousands)
September 30,
1998
Competitive transition charge per PaPUC Order $ 332,160
=========
Other regulatory assets, net:
Transmission & Distribution related:
Income taxes recoverable through future rates $ 133,774
Income taxes refundable through future rates (7,475)
Unamortized loss on reacquired debt 2,200
DOE enrichment facility decommissioning 3,542
---------
Subtotal $ 132,041
---------
Generation related:
Unamortized loss on reacquired debt 1,237
Nuclear fuel disposal fee 119
Other regulatory assets 343
---------
Subtotal $ 1,699
---------
Other:
Phase II reserve for generation divestiture $ 937,372
TMI-2 decommissioning costs 31,160
Deferred nonutility generation costs
not in current rates (8,321)
Future nonutility generation costs not in CTC 99,160
Public utility realty taxes (PURTA) 3,751
Other regulatory assets 914
---------
Subtotal $1,064,036
----------
Total other regulatory assets, net $1,197,776
==========
<PAGE>
Financial Statements
Item 6(b) 4
Page 19 of 36
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.
<PAGE>
Financial Statements
Item 6(b) 4
Page 20 of 36
N.J. unit tax: Represents certain state taxes, with interest, for which JCP&L
received NJBPU approval in 1993 to recover over a ten-year period.
Unamortized loss on reacquired debt: Represents premiums and expenses incurred
in the early redemption of long-term debt. In accordance with FERC regulations,
reacquired debt costs are amortized over the remaining original life of the
retired debt.
Load and demand-side management (DSM) programs: Consists of load management
costs and other DSM program expenditures that are currently being recovered,
with interest, through JCP&L's retail base rates and demand-side factor. Also
includes provisions for lost revenues between base rate cases and performance
incentives.
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
<PAGE>
Financial Statements
Item 6(b) 4
Page 21 of 36
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, 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,
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
=== ===
<PAGE>
Financial Statements
Item 6(b) 4
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JCP&L's net investment in TMI-2 at September 30, 1998 was $68 million.
JCP&L is collecting revenues for TMI-2 on a basis which provides for the
recovery of its remaining investment in the plant by 2008. In June 1998, Met-Ed
and Penelec received 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.
<PAGE>
Financial Statements
Item 6(b) 4
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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
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.
<PAGE>
Financial Statements
Item 6(b) 4
Page 24 of 36
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 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.
<PAGE>
Financial Statements
Item 6(b) 4
Page 25 of 36
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.
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
<PAGE>
Financial Statements
Item 6(b) 4
Page 26 of 36
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 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 are as follows:
(in millions)
GPU JCP&L Met-Ed Penelec
--- ----- ------ -------
September 30, 1998 $464 $116 $232 $116
<PAGE>
Financial Statements
Item 6(b) 4
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These amounts are based upon the 1995 site-specific study estimates (in
1998 dollars) 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, 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
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.
<PAGE>
Financial Statements
Item 6(b) 4
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INSURANCE
---------
GPU has insurance (subject to retentions and deductibles) for its
operations and facilities including coverage for property damage, liability to
employees and third parties, and loss of use and occupancy (primarily
incremental replacement power costs). There is no assurance that GPU will
maintain all existing insurance coverages. Losses or liabilities that are not
completely insured, unless allowed to be recovered through ratemaking, could
have a material adverse effect on the financial position of GPU.
The decontamination liability, premature decommissioning and property
damage insurance coverage for the TMI station and for Oyster Creek totals $2.7
billion per site. In accordance with NRC regulations, these insurance policies
generally require that proceeds first be used for stabilization of the reactors
and then to pay for decontamination and debris removal expenses. Any remaining
amounts available under the policies may then be used for repair and restoration
costs and decommissioning costs. Consequently, there can be no assurance that in
the event of a nuclear incident, property damage insurance proceeds would be
available for the repair and restoration of that station.
The Price-Anderson Act limits GPU's liability to third parties for a
nuclear incident at one of its sites to approximately $9.9 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,
<PAGE>
Financial Statements
Item 6(b) 4
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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 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
<PAGE>
Financial Statements
Item 6(b) 4
Page 30 of 36
environmental authorities on several other sites for which they have not been
formally named as PRPs, although the EPA and state authorities may nevertheless
consider them as PRPs. Certain of the GPU companies have also been named in
lawsuits requesting damages (which are material in amount) for hazardous and/or
toxic substances allegedly released into the environment. The ultimate cost of
remediation will depend upon changing circumstances as site investigations
continue, including (a) the existing technology required for site cleanup, (b)
the remedial action plan chosen and (c) the extent of site contamination and the
portion attributed to the GPU companies involved.
In 1997, the EPA filed a complaint against GPU, Inc. in the United States
District Court for the District of Delaware for enforcement of its unilateral
order issued against GPU, Inc. to clean up the former Dover Gas Light Company
(Dover) manufactured gas production site in Dover, Delaware. Dover was part of
the AGECO/AGECORP group of companies from 1929 until 1942 and GPU, Inc. emerged
from the AGECO/AGECORP reorganization proceedings. All of the common stock of
Dover was sold in 1942 by a member of the AGECO/AGECORP group to an unaffiliated
entity, and was subsequently acquired by Chesapeake Utilities Corporation.
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 regulatory asset 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
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the NJBPU in July 1997. Met-Ed and Penelec expect recovery of these costs in
Phase II of their restructuring proceedings. As a result, a regulatory asset of
$17 million 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.
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
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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.
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
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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 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,
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Item 6(b) 4
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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 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
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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:
(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
======= ======= =======
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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.
<PAGE>
