Amendment No. 2 to
SEC File No.70-9565
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-1
APPLICATION
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 addresses
of principal executive offices)
GPU, INC.
(Name of top registered holding company parent of applicants)
T. G. Howson, Douglas E. Davidson, Esq.
Vice President and Treasurer Berlack, Israels & Liberman LLP
S. L. Guibord, Secretary 120 West 45th Street
GPU Service, Inc. New York, New York 10036
300 Madison Avenue
Morristown, New Jersey 07960
D. C. Brauer
Vice President
GPU Service, Inc.
300 Madison Avenue
Morristown, New Jersey 07960
(Names and addresses of agents for service)
<PAGE>
GPU hereby amends its Application on Form U-1, docketed in SEC File No.
70-9565, as follows:
1. By filing the following exhibits and financial statements:
(a) Exhibits:
G - Financial Data Schedules
(b) Financial Statements:
1-A - GPU and Subsidiary Companies
Consolidated Balance Sheets, actual
and pro forma, as at September 30,
1999, and Consolidated Statement of
Income and Retained Earnings, actual
and pro forma, for the twelve months
ended September 30, 1999; pro forma
journal entries.
1-B - GPU (Corporate) Balance Sheets,
actual and pro forma, as at
September 30, 1999 and Statements of
Income and Retained Earnings, actual
and pro forma, for the twelve months
ended September 30, 1999; pro forma
journal entries.
<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 THEIR BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
GPU, INC.
By: /s/ T. G. Howson
T. G. Howson,
Vice President and Treasurer
Date: December 28, 1999
- 2 -
EXHIBITS TO BE FILED BY EDGAR
Exhibits
(a) Exhibits:
G - Financial Data Schedules
(b) Financial Statements:
1-A - GPU and Subsidiary Companies
Consolidated Balance Sheets, actual
and pro forma, as at September 30,
1999, and Consolidated Statement of
Income and Retained Earnings, actual
and pro forma, for the twelve months
ended September 30, 1999; pro forma
journal entries.
1-B - GPU (Corporate) Balance Sheets,
actual and pro forma, as at
September 30, 1999 and Statements of
Income and Retained Earnings, actual
and pro forma, for the twelve months
ended September 30, 1999; pro forma
journal entries.
<TABLE>
Financial Statements
Item 6(b) 1-A
Page 1 of 29
GPU, Inc. and Subsidiaries
Consolidated Balance Sheets
Actual (unaudited) and Pro Forma (unaudited)
September 30, 1999
------------------
<CAPTION>
(In Thousands)
ASSETS Actual Adjustments Pro Forma
------ ----------- ---------
<S> <C> <C> <C>
Utility Plant:
Utility plant in service 13,688,229 - 13,688,229
Accumulated depreciation (5,484,955) - (5,484,955)
---------- ---- ----------
Net utility plant in service 8,203,274 - 8,203,274
Construction work in progress 164,373 - 164,373
Other, net 98,481 - 98,481
------ ---- ------
Net utility plant 8,466,128 - 8,466,128
--------- ---- ---------
Other Property and Investments:
Equity investments 88,697 - 88,697
Goodwill, net 2,781,270 - 2,781,270
Nuclear decommissioning trusts, at market 757,237 - 757,237
Nuclear fuel disposal trust, at market 118,132 - 118,132
Other, net 513,625 5,000 518,625
------- ----- -------
Total other property and investments 4,258,961 5,000 4,263,961
--------- ----- ---------
Current Assets:
Cash and temporary cash investments 241,309 (5,000) 236,309
Special deposits 42,956 - 42,956
Accounts receivable:
Customers, net 381,868 - 381,868
Other 292,484 - 292,484
Unbilled revenues 133,377 - 133,377
Materials and supplies, at average cost or less:
Construction and maintenance 149,909 - 149,909
Fuel 26,072 - 26,072
Investments held for sale 47,818 - 47,818
Deferred income taxes 24,560 - 24,560
Prepayments 218,057 - 218,057
------- -------
Total current assets 1,558,410 (5,000) 1,553,410
--------- ------ ---------
Deferred Debits and Other Assets:
Regulatory assets, net 5,537,251 - 5,537,251
Deferred income taxes 2,333,768 - 2,333,768
Other 510,670 - 510,670
------- ---- -------
Total deferred debits and other assets 8,381,689 - 8,381,689
--------- ---- ---------
Total Assets $22,665,188 $ - $22,665,188
=========== ======== ===========
<PAGE>
Financial Statements
Item 6(b) 1-A
Page 2 of 29
GPU, Inc. and Subsidiaries
Consolidated Balance Sheets
Actual (unaudited) and Pro Forma (unaudited)
September 30, 1999
------------------
(In Thousands)
LIABILITIES AND CAPITALIZATION Actual Adjustments Pro Forma
------ ----------- ---------
<S> <C> <C> <C>
Capitalization:
Common stock $ 331,958 $ - $ 331,958
Capital surplus 1,031,063 - 1,031,063
Retained earnings 2,482,862 - 2,482,862
Accumulated other comprehensive income/(loss) (13,220) - (13,220)
------- -------
Total 3,832,663 - 3,832,663
Reacquired common stock, at cost (232,549) - (232,549)
-------- --------
Total common stockholders' equity 3,600,114 - 3,600,114
Cumulative preferred stock:
With mandatory redemption 81,500 - 81,500
Without mandatory redemption 37,741 - 37,741
Subsidiary-obligated mandatorily redeemable
preferred securities 225,000 - 225,000
Trust preferred securities 200,000 - 200,000
Long-term debt 6,876,126 - 6,876,126
--------- ---------
Total capitalization 11,020,481 - 11,020,481
---------- ----------
Current Liabilities:
Securities due within one year 381,809 - 381,809
Notes payable 823,500 - 823,500
Obligations under capital leases 125,936 - 125,936
Accounts payable 506,387 - 506,387
Taxes accrued 385,321 - 385,321
Interest accrued 92,070 - 92,070
Deferred energy credits 47,741 - 47,741
Other 637,395 - 637,395
------- -------
Total current liabilities 3,000,159 - 3,000,159
--------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 3,556,621 - 3,556,621
Unamortized investment tax credits 96,772 - 96,772
Three Mile Island Unit 2 future costs 493,551 - 493,551
Purchase power contract loss liability 3,392,798 - 3,392,798
Other 1,104,806 - 1,104,806
--------- ---------
Total deferred credits and other liabilities 8,644,548 - 8,644,548
--------- ---------
Total Liabilities and Capitalization $22,665,188 $ - $22,665,188
=========== ======== ===========
</TABLE>
<PAGE>
<TABLE>
Financial Statements
Item 6(b) 1-A
Page 3 of 29
GPU, Inc. and Subsidiaries
Consolidated Statements of Income and Retained Earnings
Actual (unaudited) and Pro Forma (unaudited)
For The Twelve Months Ended September 30, 1999
----------------------------------------------
<CAPTION>
(In Thousands)
Actual Adjustments Pro Forma
------ ----------- ---------
<S> <C> <C> <C>
Operating Revenues $4,407,506 $ - $4,407,506
---------- ------- ----------
Operating Expenses:
Fuel 345,727 - 345,727
Power purchased and interchanged 1,224,812 - 1,224,812
Deferral of energy and capacity costs, net (29,677) - (29,677)
Other operation and maintenance 1,157,345 - 1,157,345
Depreciation and amortization 515,380 - 515,380
Taxes, other than income taxes 191,416 - 191,416
------- -------
Total operating expenses 3,405,003 - 3,405,003
--------- ---------
Operating Income 1,002,503 - 1,002,503
--------- ---------
Other Income and Deductions:
Allowance for other funds used during construction 396 - 396
Equity in undistributed earnings
of affiliates, net 108,500 - 108,500
Other income, net 81,272 - 81,272
------ ------
Total other income and deductions 190,168 - 190,168
------- -------
Income Before Interest Charges and
Preferred Dividends 1,192,671 - 1,192,671
--------- ---------
Interest Charges and Preferred Dividends:
Long-term debt 363,921 - 363,921
Trust preferred securities 4,673 - 4,673
Subsidiary-obligated mandatorily
redeemable preferred securities 26,974 - 26,974
Other interest 27,046 - 27,046
Allowance for borrowed funds used
during construction (3,787) - (3,787)
Preferred stock dividends of subsidiaries, inclusive
of $1,268 loss on reacquisition 11,355 - 11,355
------ ------ ------
Total interest charges and preferred dividends 430,182 - 430,182
------- -------
Income Before Income Taxes and Minority Interest 762,489 - 762,489
Income taxes 290,978 - 290,978
Minority interest net income 2,510 - 2,510
----- -----
Net Income $ 469,001 $ - $ 469,001
========== ======= ==========
Retained Earnings:
Balance at beginning of period $2,278,770 $ - $2,278,770
Net income 469,001 - 469,001
Cash dividends declared on common stock (264,924) - (264,924)
Other adjustments, net 15 - 15
----- -----
Balance at end of period $2,482,862 $ - $2,482,862
========== ======= ==========
</TABLE>
<PAGE>
Financial Statements
Item 6(b) 1-A
Page 4 of 29
GPU, Inc. and Subsidiaries
Pro Forma Journal Entries
(In Thousands)
(1)
Other investment - EnerTech Partnership $5,000
Cash and temporary cash investments $5,000
To reflect the proposed investment by GPU, Inc. (through a new, wholly-owned
subsidiary to be formed, "Newco"), from time to time, of up to $5 million in the
EnerTech Partnership, which is being formed to make investments in companies
engaged in utility-like services industries.
Note: The proposed declaration and payment of common stock dividends by Met-Ed
and Penelec out of their capital and unearned surplus (SEC File No.
70-9593) does not have an impact on GPU's consolidated financial
statements since such dividends would be between the parent and its
subsidiary companies.
<PAGE>
<TABLE>
Financial Statements
Item 6(b) 1-B
Page 5 of 29
GPU, Inc.
Balance Sheets
Actual (unaudited) and Pro Forma (unaudited)
September 30, 1999
<CAPTION>
(In Thousands)
ASSETS Actual Adjustments Pro Forma
<S> <C> <C> <C>
Investments:
Investment in subsidiaries $ 3,769,165 $(1,033,900) $ 2,735,265
Other investments 6,440 - 6,440
----- -----
Total investments 3,775,605 (1,033,900) 2,741,705
--------- ---------- ---------
Current Assets:
Cash and temporary cash investments 213 (5,000) (4,787)
Accounts receivable, net 10,870 - 10,870
Dividends receivable - 1,038,900 1,038,900
Prepayments 284 - 284
--- ---
Total current assets 11,367 1,033,900 1,045,267
------ --------- ---------
Deferred debits and other assets 209 - 209
--- ---
Total Assets $ 3,787,181 $ - $ 3,787,181
=========== ======== ===========
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 6 of 29
GPU, Inc.
Balance Sheets
Actual (unaudited) and Pro Forma (unaudited)
September 30, 1999
------------------
(In Thousands)
LIABILITIES AND CAPITALIZATION Actual Adjustments Pro Forma
------ ----------- ---------
<S> <C> <C> <C>
Stockholders' Equity:
Common stock $ 331,958 $ - $ 331,958
Capital surplus 1,031,063 - 1,031,063
Retained earnings 2,482,862 - 2,482,862
Accumulated other comprehensive income/(loss) (13,220) - (13,220)
------- -------
Total 3,832,663 - 3,832,663
Reacquired common stock, at cost (232,549) - (232,549)
-------- --------
Total common stockholders' equity 3,600,114 - 3,600,114
--------- ---------
Current Liabilities:
Notes payable 181,000 - 181,000
Accounts payable 51 - 51
Other 3,926 - 3,926
----- -----
Total current liabilities 184,977 - 184,977
------- -------
Deferred credits and other liabilities 2,090 - 2,090
----- -----
Total Liabilities and Capitalization $ 3,787,181 $ - $ 3,787,181
=========== ======== ===========
</TABLE>
<PAGE>
<TABLE>
Financial Statements
Item 6(b) 1-B
Page 7 of 29
GPU, Inc.
Statements of Income and Retained Earnings
Actual (unaudited) and Pro Forma (unaudited)
For The Twelve Months Ended September 30, 1999
----------------------------------------------
<CAPTION>
(In Thousands)
Actual Adjustments Pro Forma
------ ----------- ---------
Income:
<S> <C> <C> <C>
Equity in earnings of subsidiaries $ 482,028 $ - $ 482,028
---------- ------- ----------
Operating Expenses:
Other operation and maintenance 9,016 - 9,016
----- -----
Total operating expenses 9,016 - 9,016
----- -----
Operating Income 473,012 - 473,012
------- -------
Other Income and Deductions:
Other income, net 346 - 346
--- ---
Total other income and deductions 346 - 346
--- ---
Income Before Interest Charges 473,358 - 473,358
------- -------
Interest Charges:
Other interest 4,357 - 4,357
----- -----
Total interest charges 4,357 - 4,357
----- -----
Income Before Income Taxes 469,001 - 469,001
Income Taxes - - -
Net Income $ 469,001 $ - $ 469,001
---------- ------- ----------
Retained Earnings:
Balance at beginning of period $2,278,770 $ - $2,278,770
Net income 469,001
469,001 -
Cash dividends declared on common stock (264,924) - (264,924)
Other adjustments, net 15 - 15
-- --
Balance at end of period $2,482,862 $ - $2,482,862
========== ======= ==========
</TABLE>
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 8 of 29
GPU, Inc.
Pro Forma Journal Entries
(In Thousands)
(1)
Investment in subsidiaries - "Newco" $ 5,000
Cash and temporary cash investments $ 5,000
To reflect the proposed investment by GPU, Inc., from time to time, of up to $5
million in the EnerTech Partnership (such investment would be made through a
new, wholly-owned subsidiary to be formed, "Newco"), which is being formed to
make investments in companies engaged in utility-like services industries.
(2)
Common stock dividends receivable $1,038,900
Investment in subsidiaries - Met-Ed $668,900
Investment in subsidiaries - Penelec $370,000
To reflect the proposed receipt of common stock dividends to be declared and
paid by Met-Ed and Penelec out of their capital and unearned surplus from time
to time through December 31, 2002 (SEC File No. 70-9593).
<PAGE>
Financial Statements
Item 6(b)
Page 9 of 29
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GPU, Inc. owns all the outstanding common stock of three domestic electric
utilities -- Jersey Central Power & Light Company (JCP&L), Metropolitan Edison
Company (Met-Ed) and Pennsylvania Electric Company (Penelec). The customer
service, transmission and distribution operations of these electric utilities
are conducting business under the name GPU Energy. JCP&L, Met-Ed and Penelec
considered together are referred to as the "GPU Energy companies." The
generation operations of the GPU Energy companies are conducted by GPU
Generation, Inc. (Genco) and GPU Nuclear, Inc. (GPUN). GPU Capital, Inc. and GPU
Electric, Inc. and their subsidiaries, own, operate and fund the acquisition of
electric and gas transmission and distribution systems in foreign countries, and
are referred to as "GPU Electric." GPU International, Inc. and GPU Power, Inc.
and their subsidiaries, develop, own and operate generation facilities in the
United States and foreign countries and are referred to as the "GPUI Group."
Other subsidiaries of GPU, Inc. include GPU Advanced Resources, Inc. (GPU AR),
which is involved in retail energy sales; GPU Telcom Services, Inc. (GPU
Telcom), which is engaged in telecommunications-related businesses; and GPU
Service, Inc. (GPUS), which provides legal, accounting, financial and other
services to the GPU companies. All of these companies considered together are
referred to as "GPU."
1. COMMITMENTS AND CONTINGENCIES
COMPETITION AND THE CHANGING REGULATORY ENVIRONMENT
Generation Asset Divestiture:
In 1997, GPU announced its intention to begin a process to sell, through a
competitive bid process, up to all of the fossil-fuel and hydroelectric
facilities owned by the GPU Energy companies. GPU subsequently announced that it
would consider selling the Three Mile Island Unit 1 nuclear generating facility
(TMI-1) and the Oyster Creek nuclear generating station (Oyster Creek). In March
and July of 1999, GPU completed the sales of its interests in the Homer City and
Seneca Pumped Storage Stations, respectively. For additional information on the
completed sales, see Note 2, Accounting for Extraordinary and Non-recurring
items.
In October 1998, the GPU Energy companies agreed to sell TMI-1 to AmerGen
Energy Company, LLC (AmerGen), for approximately $100 million. Of the $100
million, $23 million will be paid at closing and $77 million, which is for the
nuclear fuel in the reactor, will be paid in five equal annual installments
beginning one year after closing. The sale is subject to various conditions,
including the receipt of satisfactory federal and state regulatory approvals.
There can be no assurance as to the outcome of these matters. Highlights of the
agreements are presented in the Competitive Environment and Rate Matters section
of Management's Discussion and Analysis.
Also in October 1998, the GPU Energy companies agreed to sell to Sithe
Energies (Sithe) all their remaining fossil-fuel and hydroelectric generating
facilities, other than JCP&L's 50% interest in the Yards Creek Pumped Storage
<PAGE>
Financial Statements
Item 6(b)
Page 10 of 29
Facility (Yards Creek) for a total purchase price of approximately $1.7 billion
(JCP&L $442 million; Met-Ed $677 million; Penelec $561 million). The sales to
Sithe are expected to be completed in the fourth quarter of 1999.
In October 1999, JCP&L agreed to sell Oyster Creek to AmerGen for
approximately $10 million and reimbursement of the cost (estimated at about $88
million) of the next scheduled refueling outage. This transaction is subject to
the receipt of various federal and state regulatory approvals. Highlights of the
agreements are presented in the Competitive Environment and Rate Matters section
of Management's Discussion and Analysis.
JCP&L and Public Service Electric & Gas Company (PSE&G) each hold a 50%
undivided ownership interest in Yards Creek. In December 1998, JCP&L filed a
petition with the New Jersey Board of Public Utilities (NJBPU) seeking a
declaratory order that PSE&G's right of first refusal to purchase JCP&L's
ownership interest at its current book value under a 1964 agreement between the
companies is void and unenforceable. Management believes that the fair market
value of JCP&L's ownership interest in Yards Creek is substantially in excess of
its September 30, 1999 book value of $22 million. There can be no assurance of
the outcome of this matter.
Stranded Costs and Regulatory Restructuring Orders:
With the current market price of electricity being below the cost of some
utility-owned generation and power purchase commitments, and the ability of
customers to choose their energy suppliers, certain costs, which generally would
be recoverable in a regulated environment, may not be recoverable in a
competitive environment. These costs are generally referred to as stranded
costs.
In June and October 1998, the Pennsylvania Public Utility Commission
(PaPUC) issued Restructuring Orders to Met-Ed and Penelec. The amended PaPUC
Restructuring Orders provides for Met-Ed and Penelec's recovery of a substantial
portion of what otherwise would have become stranded costs, and provided for a
Phase II proceeding following the completion of their generation divestitures to
make a final determination of the extent of that stranded cost recovery. An
appeal by one intervenor in the restructuring proceedings is pending before the
Pennsylvania Supreme Court. There can be no assurance as to the outcome of these
matters.
In April 1999, JCP&L entered into a settlement agreement with several
parties to its stranded cost and rate unbundling proceedings, pending before the
NJBPU. In May 1999, the NJBPU issued a Summary Order (Summary Order), which
approved the settlement with certain modifications. Among other things, the
Summary Order provides for full recovery of JCP&L's stranded costs, and requires
a separate review and approval of JCP&L's pending sales of its interest in its
non-nuclear generation assets and in TMI-1. In October 1999, the NJBPU approved
the sales of JCP&L's non-nuclear generating assets. There can be no assurance as
to the outcome of the TMI-1 review. The Summary Order did not address the
pending sale of Oyster Creek, because at the time the
<PAGE>
Financial Statements
Item 6(b)
Page 11 of 29
Summary Order was issued, it was uncertain whether the plant would be sold or
retired early. For details of the Summary Order, see Competitive Environment and
Rate Matters section of Management's Discussion and Analysis. As a result of the
NJBPU's actions, in the second quarter of 1999, JCP&L recorded a reduction in
operating revenues of $115 million reflecting JCP&L's obligation to make refunds
to customers. JCP&L anticipates that the NJBPU will issue a Final Order in the
fourth quarter of 1999. For additional information, see Note 2, Accounting for
Extraordinary and Non-recurring Items.
Under the NJBPU and the PaPUC restructuring orders, the GPU Energy
companies are required to provide generation service to customers who do not
choose an alternate supplier. As noted above, the GPU Energy companies have
agreed to sell substantially all of their generation assets. Consequently, there
will be increased market risks associated with providing generation service
since the GPU Energy companies will have to supply energy almost entirely from
contracted and open market purchases. Under the Summary Order, JCP&L is
permitted to recover reasonable and prudently incurred costs associated with
providing basic generation service and to defer the portion of these costs that
cannot be recovered currently. The PaPUC's Restructuring Orders, however,
generally do not allow Met-Ed and Penelec to recover their costs, including
their energy costs in excess of established rate caps. An inability of the GPU
Energy companies to supply electricity to customers who do not choose an
alternate supplier at a cost recoverable under their capped rates, would have an
adverse effect, which may be material, on GPU's results of operations.
Highlights of generation service obligations are presented in the Competitive
Environment and Rate Matters section of Management's Discussion and Analysis.
Generation Agreements:
The emerging competitive generation market has created uncertainty
regarding the forecasting of the GPU Energy companies' energy supply needs,
which has caused the GPU Energy companies to seek shorter-term agreements
offering more flexibility. The GPU Energy companies' supply plan focuses on
short- to intermediate-term commitments (one month to three years) covering
times of expected high energy price volatility (that is, peak demand periods)
and reliance on spot market purchases during other periods.
Pursuant to the mandates of the federal Public Utility Regulatory Policies
Act and state regulatory directives, the GPU Energy companies have been required
to enter into power purchase agreements with nonutility generators (NUGs) for
the purchase of energy and capacity which have remaining terms of up to 21
years. The rates under virtually all of the GPU Energy companies' NUG agreements
are substantially in excess of current and projected prices from alternative
sources. The projected cost of energy from new generation supply sources has
also decreased due to improvements in power plant technologies and lower
forecasted fuel prices. The following table shows actual payments from 1997
through September 30, 1999, and estimated payments thereafter through 2004.
<PAGE>
Financial Statements
Item 6(b)
Page 12 of 29
Payments Under NUG Agreements
(in millions)
Total JCP&L Met-Ed Penelec
----- ----- ------ -------
1997 759 384 172 203
1998 788 403 174 211
1999 780 392 171 217
2000 794 405 157 232
2001 778 410 154 214
2002 799 422 158 219
2003 802 413 163 226
2004 808 407 168 233
The NJBPU Summary Order and PaPUC Restructuring Orders provide the GPU
Energy companies assurance of full recovery of their NUG costs (including
above-market NUG costs and certain buyout costs). Accordingly, the GPU Energy
companies have recorded, on a present value basis, a liability for above-market
NUG costs of $3.3 billion (JCP&L $1.6 billion; Met-Ed $0.7 billion; Penelec $1
billion) on the Consolidated Balance Sheets which is fully offset by Regulatory
assets, net. In addition, JCP&L recorded a liability of $70 million for
above-market utility purchase power agreements with a corresponding offset to
Regulatory assets, net, since there is also assurance of full recovery of these
costs. The GPU Energy companies are continuing efforts to reduce the
above-market costs of these agreements and will, where beneficial, attempt to
renegotiate the prices of the agreements, offer contract buyouts and attempt to
convert must-run agreements to dispatchable agreements. There can be no
assurance as to the extent to which these efforts will be successful.
In 1997, the NJBPU approved a Stipulation of Final Settlement which, among
other things, provides for the recovery of costs associated with the buyout of
the Freehold Cogeneration project (Freehold buyout). The Stipulation of Final
Settlement provides for recovery through the levelized energy adjustment clause
of: (1) buyout costs up to $130 million, and (2) 50% of any costs from $130
million to $140 million, over a seven-year period for the termination of the
Freehold power purchase agreement. The NJBPU approved the cost recovery on an
interim basis subject to refund, pending further review by the NJBPU. The
NJBPU's Summary Order provides for the continued recovery of the Freehold buyout
in the market transition charge, but has not altered the interim nature of such
recovery. There can be no assurance as to the outcome of this matter.
ACCOUNTING MATTERS
JCP&L, in the second quarter of 1999, and Met-Ed and Penelec in 1998,
discontinued the application of Statement of Financial Accounting Standards No.
71 (FAS 71), "Accounting for the Effects of Certain Types of Regulation," and
adopted the provisions of Statement of Financial Accounting Standards No. 101
(FAS 101), "Regulated Enterprises - Accounting for the Discontinuation of
Application of FASB Statement No. 71, and Emerging Issues Task Force Issue
<PAGE>
Financial Statements
Item 6(b)
Page 13 of 29
97-4 (EITF Issue 97-4), Deregulation of the Pricing of Electricity - Issues
Related to the Application of FASB Statement No. 71 "Accounting for the Effects
of Certain Types of Regulation" and No. 101 "Regulated Enterprises - Accounting
for the Discontinuation of Application of FASB Statement No. 71," with respect
to their electric generation operations. The transmission and distribution
portion of the GPU Energy companies' operations continue to be subject to the
provisions of FAS 71.
Regulatory assets, net as reflected in the September 30, 1999 Consolidated
Balance Sheets in accordance with the provisions of FAS 71 and EITF Issue 97-4
were as follows:
GPU, Inc. and Subsidiary Companies (in thousands)
- ---------------------------------- September 30,
1999
----
Market transition charge (MTC) / basic
generation service (NJ) $2,457,120
Competitive transition charge (CTC) (PA) 947,587
Reserve for generation divestiture 769,835
Power purchase contract loss not in CTC (PA) 369,290
Costs recoverable through distribution rates (NJ) 298,546
Income taxes recoverable through future rates, net 267,370
Net divestiture proceeds recoverable
through MTC (NJ) 170,427
Three Mile Island Unit 2 (TMI-2)
decommissioning costs 100,828
Societal benefits charge (NJ) 88,003
Other postretirement benefits 25,822
Nonutility generation contract buyout costs -
Unamortized property losses (NJ) -
Net investment in TMI-2 (NJ) -
Environmental remediation (NJ) -
Other, net 42,423
---------
Total regulatory assets, net $5,537,251
==========
<PAGE>
Financial Statements
Item 6(b)
Page 14 of 29
JCP&L (in thousands)
- ----- September 30,
1999
----
Market transition charge (MTC) / basic
generation service $2,457,120
Costs recoverable through distribution rates 298,546
Net divestiture proceeds recoverable through MTC 170,427
Societal benefits charge 88,003
Reserve for generation divestiture -
Income taxes recoverable through future rates, net -
Nonutility generation contract buyout costs -
Unamortized property losses -
Net investment in TMI-2 -
Environmental remediation -
Other, net -
---------
Total regulatory assets, net $3,014,096
==========
Met-Ed (in thousands)
- ------ September 30,
1999
----
Competitive transition charge $ 645,072
Reserve for generation divestiture 444,177
Power purchase contract loss not in CTC 271,270
Income taxes recoverable through future rates, net 113,190
TMI-2 decommissioning costs 66,255
Other, net 26,550
---------
Total regulatory assets, net $1,566,514
==========
Penelec (in thousands)
- ------- September 30,
1999
----
Reserve for generation divestiture $ 325,658
Competitive transition charge 302,515
Income taxes recoverable through future rates, net 154,180
Power purchase contract loss not in CTC 98,020
Other, net 76,268
---------
Total regulatory assets, net $ 956,641
=========
In accordance with the 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," impairment tests performed by the GPU
Energy companies on the net book values of their generation facilities
determined that the net investments in TMI-1 and Oyster Creek were impaired. As
of September 30, 1999, this resulted in write-downs of $530 million and $676
million, respectively, to reflect TMI-1 and Oyster Creek's fair market values.
The majority of the TMI-1 write-down was recorded in 1998 while the Oyster Creek
write-down was recorded in the second and third quarters of 1999. Of the amount
written down for TMI-1, however, $520 million was reestablished as
<PAGE>
Financial Statements
Item 6(b)
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a regulatory asset because management believes it is probable of recovery in the
restructuring process, and $10 million (the Federal Energy Regulatory Commission
jurisdictional portion) was charged to expense as an extraordinary item in 1998.
The total impairment amount of Oyster Creek has been reestablished as a
regulatory asset since the Summary Order provides for its recovery in the
restructuring process.
Statement of Financial Accounting Standards No. 133 (FAS 133), "Accounting
for Derivative Instruments and Hedging Activities," establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. FAS 133
requires that companies recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
GPU will be required to include its derivative transactions on its balance sheet
at fair value, and recognize the subsequent changes in fair value as either
gains or losses in earnings or report them as a component of other comprehensive
income, depending upon the intended use and designation of the derivative as a
hedge. FAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. GPU will adopt FAS 133 in the first quarter of 2001 and is
in the process of evaluating the impact of this statement.
NUCLEAR FACILITIES
Investments:
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. GPU has agreed to sell
TMI-1 and Oyster Creek to AmerGen. Highlights of the agreements are presented in
the Competitive Environment and Rate Matters section of Management's Discussion
and Analysis. JCP&L's net investment in TMI-2 at September 30, 1999 and December
31, 1998 was $62 million and $66 million, respectively. JCP&L is collecting
revenues for TMI-2 on a basis which provides for the recovery of its remaining
investment in the plant by 2008. Met-Ed and Penelec's remaining investments in
TMI-2 were written off in 1998 after receiving the PaPUC's Restructuring Orders.
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. 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
<PAGE>
Financial Statements
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scheduled or premature), the carrying costs of that investment and retirement
costs, is not assured.
If the GPU Energy companies do not complete the pending sales of their
nuclear facilities, in addition to the above, they may experience added costs
and reduced output at these facilities because of the prevailing design criteria
at the time of construction and the age of the plants' systems and equipment.
TMI-2:
As a result of the 1979 TMI-2 accident, individual claims for alleged
personal injury (including claims for punitive damages), which are material in
amount, were asserted against GPU, Inc. and the GPU Energy companies.
Approximately 2,100 of such claims were filed in the United States District
Court for the Middle District of Pennsylvania. Some of the claims also seek
recovery for injuries from alleged emissions of radioactivity before and after
the accident.
At the time of the TMI-2 accident, as provided for in the Price-Anderson
Act, the GPU Energy companies had (a) primary financial protection in the form
of insurance policies with groups of insurance companies providing an aggregate
of $140 million of primary coverage, (b) secondary financial protection in the
form of private liability insurance under an industry retrospective rating plan
providing for up to an aggregate of $335 million in premium charges under such
plan, and (c) an indemnity agreement with the Nuclear Regulatory Commission
(NRC) for up to $85 million, bringing their total financial protection up to an
aggregate of $560 million. Under the secondary level, the GPU Energy companies
are subject to a retrospective premium charge of up to $5 million per reactor,
or a total of $15 million.
In 1995, the U.S. Court of Appeals for the Third Circuit ruled that the
Price-Anderson Act provides coverage under its primary and secondary levels for
punitive as well as compensatory damages, but that punitive damages could not be
recovered against the Federal Government under the third level of financial
protection. In so doing, the Court of Appeals referred to the "finite fund" (the
$560 million of financial protection under the Price-Anderson Act) to which
plaintiffs must resort to get compensatory as well as punitive damages.
The Court of Appeals also ruled that the standard of care owed by the
defendants to a plaintiff was determined by the specific level of radiation
which was released into the environment, as measured at the site boundary,
rather than as measured at the specific site where the plaintiff was located at
the time of the accident (as the defendants proposed). The Court of Appeals also
held that each plaintiff still must demonstrate exposure to radiation released
during the TMI-2 accident and that such exposure had resulted in injuries. In
1996, the U.S. Supreme Court denied petitions filed by GPU, Inc. and the GPU
Energy companies to review the Court of Appeals' rulings.
<PAGE>
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In 1996, the District Court granted a motion for summary judgment filed by
GPU, Inc. and the GPU Energy companies, and dismissed the ten initial "test
cases," which had been selected for a test case trial as well as all of the
remaining 2,100 pending claims. The Court ruled that there was no evidence which
created a genuine issue of material fact warranting submission of plaintiffs'
claims to a jury. The plaintiffs appealed the District Court's ruling to the
Court of Appeals for the Third Circuit. On November 2, 1999, the Third Circuit
affirmed the District Court's dismissal of the ten "test cases," but set aside
the dismissal of the additional pending claims, remanding them to the District
Court for further proceedings. In remanding these claims, the Third Circuit held
that the District Court had erred in extending its summary judgment decision to
the other plaintiffs and imposing on these plaintiffs the District Court's
finding that radiation exposures below 10 rems were too speculative to establish
a causal link to cancer. The Court of Appeals stated that the non-test case
plaintiffs should be permitted to present their own individual evidence that
exposure to radiation from the accident caused their cancers.
GPU, Inc. and the GPU Energy companies believe that the Third Circuit has
misinterpreted the record before the District Court, as it applies to the
non-test case plaintiffs, and are considering asking the Third Circuit for
reconsideration or rehearing of its decision. There can be no assurance as to
the outcome of this litigation.
GPU, Inc. and the GPU Energy companies believe that any liability to which
they might be subject by reason of the TMI-2 accident will not exceed their
financial protection under the Price-Anderson Act.
NUCLEAR PLANT RETIREMENT COSTS
Retirement costs for nuclear plants include decommissioning the
radiological portions of the plants and the cost of removal of nonradiological
structures and materials. The disposal of spent nuclear fuel is covered
separately by contracts with the U.S. Department of Energy (DOE).
In 1995, a consultant to GPUN performed site-specific studies of TMI-1,
TMI-2 and Oyster Creek (updated in 1998), that considered various
decommissioning methods and estimated the cost of decommissioning the
radiological portions and the cost of removal of the nonradiological portions of
each plant, using the prompt removal/dismantlement method. GPUN management has
reviewed the methodology and assumptions used in these studies, is in agreement
with them, and believes the results are reasonable. Under NRC regulations, the
GPU Energy companies intend to complete the funding for Oyster Creek and TMI-1
retirement costs 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. The NRC may require an acceleration of the decommissioning funding for
Oyster Creek if the pending sale is not completed and the plant is retired
early. The retirement cost estimates under the 1995 site-specific studies,
assuming decommissioning at the end of the plants' license terms, are as follows
(in 1999 dollars):
Financial Statements
Item 6(b)
Page 18 of 29
(in millions)
Oyster
TMI-1 TMI-2 Creek
Radiological decommissioning $358 $435 $591
Nonradiological cost of removal 88 34* 32
--- --- ---
Total $446 $469 $623
=== === ===
* Net of $12.6 million spent as of September 30, 1999.
Each of the GPU Energy companies is responsible for retirement costs in
proportion to its respective ownership percentage. The ultimate cost of retiring
the GPU Energy companies' nuclear facilities may be different from the cost
estimates contained in these site-specific studies. Also, the cost estimates
contained in these site specific studies are significantly greater than the
decommissioning funding targets established by the NRC.
The 1995 Oyster Creek site-specific study was updated in 1998 in response
to the previously announced potential early closure of the plant in the year
2000. An early shutdown would increase the retirement costs shown above to $632
million ($600 million for radiological decommissioning and $32 million for
nonradiological cost of removal). Both estimates include substantial spending
for an on-site dry storage facility for spent nuclear fuel and significant costs
for storing the fuel until the DOE complies with the Nuclear Waste Policy Act of
1982. See OTHER COMMITMENTS AND CONTINGENCIES section for further information.
The agreements to sell TMI-1 to AmerGen provide, among other things, that
upon financial closing, the GPU Energy companies will transfer up to $320
million in decommissioning trust funds to AmerGen, which will assume all TMI-1
decommissioning liabilities.
The agreements to sell Oyster Creek to AmerGen provide, among other
things, that upon financial closing, JCP&L will transfer up to $430 million in
decommissioning trust funds to AmerGen, which will assume all liability for
decommissioning Oyster Creek.
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.
The NJBPU has granted JCP&L annual revenues for TMI-1 and Oyster Creek
retirement costs of $5.2 million and $22.5 million, respectively, based on the
1995 site-specific studies. The recovery of Oyster Creek retirement cost
escalates to $34.4 million in August 2000 if the plant were to be retired in
2000.
<PAGE>
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In the Restructuring Orders, the PaPUC granted Met-Ed and Penelec recovery
of TMI-1 decommissioning costs of $103.4 million and $67.8 million,
respectively, as part of the Competitive Transition Charge (CTC). These amounts,
which are computed on a present value basis, are based on the 1995 site-specific
study and will be adjusted in Phase II of Met-Ed and Penelec's restructuring
proceedings, once the net proceeds from the generation asset divestiture are
determined.
In the event the GPU Energy companies do not complete the pending sales of
their nuclear plants, 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.
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, 1999 are as follows:
(in millions)
GPU JCP&L Met-Ed Penelec
--- ----- ------ -------
September 30, 1999 $494 $124 $246 $124
These amounts are based upon the 1995 site-specific study estimates (in 1999 and
1998 dollars, respectively) discussed above and an estimate for remaining
incremental monitored storage costs of $28 million (JCP&L $7 million; Met-Ed $14
million; Penelec $7 million) as of September 30, 1999 and $29 million (JCP&L $7
million; Met-Ed $15 million; Penelec $7 million) as of December 31, 1998, as a
result of TMI-2's entering long-term monitored storage in 1993. The GPU Energy
companies are incurring annual incremental monitored storage costs of
approximately $1.8 million (JCP&L $450 thousand; Met-Ed $900 thousand; Penelec
$450 thousand).
Offsetting the $494 million liability at September 30, 1999 is $252
million (JCP&L $16 million; Met-Ed $152 million; Penelec $84 million) which
management believes is probable of recovery from customers and included in
Regulatory assets, net on the Consolidated Balance Sheets, and $288 million
(JCP&L $112 million; Met-Ed $130 million; Penelec $46 million) in trust funds
for TMI-2 and included in Nuclear decommissioning trusts, at market on the
Consolidated Balance Sheets. Earnings on trust fund deposits are included in
amounts shown on the Consolidated Balance Sheets under Regulatory assets, net.
TMI-2 decommissioning costs charged to depreciation expense for the nine months
ended September 30, 1999 amounted to $3.7 million (JCP&L $1.7 million; Met-Ed
$1.4 million; Penelec $0.6 million).
The NJBPU has granted JCP&L revenues for TMI-2 retirement costs based on
the 1995 site-specific estimates. In addition, JCP&L is recovering its share of
TMI-2 incremental monitored storage costs. The PaPUC Restructuring Orders
granted Met-Ed and Penelec recovery of TMI-2 decommissioning costs as part of
the CTC, but also allowed Met-Ed and Penelec to defer as a regulatory asset
those amounts that are above the level provided for in the CTC.
<PAGE>
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At September 30, 1999, the accident-related portion of TMI-2 radiological
decommissioning costs is considered to be $77 million (JCP&L $19 million; Met-Ed
$39 million; Penelec $19 million), which is the difference between the 1995
TMI-1 and TMI-2 site-specific study estimates (in 1999 dollars). In connection
with rate case resolutions at the time, JCP&L, Met-Ed and Penelec have made
contributions to irrevocable external trusts relating to their shares of the
accident-related portions of the decommissioning liability in the amounts of $15
million, $40 million and $20 million, respectively. These contributions were not
recoverable from customers and have been expensed. The GPU Energy companies will
not pursue recovery from customers for any amounts contributed in excess of the
$77 million accident-related portion referred to above.
JCP&L intends to seek recovery for any increases in TMI-2 retirement
costs, and Met-Ed and Penelec intend to seek recovery for any increases in the
nonaccident-related portion of such costs, but recognize that recovery cannot be
assured.
INSURANCE
GPU has insurance (subject to retentions and deductibles) for its
operations and facilities including coverage for property damage, liability to
employees and third parties, and loss of use and occupancy (primarily
incremental replacement power costs). There is no assurance that GPU will
maintain all existing insurance coverages. Losses or liabilities that are not
completely insured, unless allowed to be recovered through ratemaking, could
have a material adverse effect on the financial position of GPU.
The decontamination liability, premature decommissioning and property
damage insurance coverage for the TMI station and for Oyster Creek totals $2.7
billion per site. In accordance with NRC regulations, these insurance policies
generally require that proceeds first be used for stabilization of the reactors
and then to pay for decontamination and debris removal expenses. Any remaining
amounts available under the policies may then be used for repair and restoration
costs and decommissioning costs. Consequently, there can be no assurance that in
the event of a nuclear incident, property damage insurance proceeds would be
available for the repair and restoration of that station.
The Price-Anderson Act limits GPU's liability to third parties for a
nuclear incident at one of its sites to approximately $9.7 billion. Coverage for
the first $200 million of such liability is provided by private insurance. The
remaining coverage, or secondary financial protection, is provided by
retrospective premiums payable by all nuclear reactor owners. Under secondary
financial protection, a nuclear incident at any licensed nuclear power reactor
in the country, including those owned by the GPU Energy companies, could result
in assessments of up to $88 million per incident for each of the GPU Energy
companies' two operating reactors, subject to an annual maximum payment of $10
million per incident per reactor. In addition to the retrospective premiums
payable under the Price-Anderson Act, the GPU Energy companies are
<PAGE>
Financial Statements
Item 6(b)
Page 21 of 29
also subject to retrospective premium assessments of up to $26.0 million (JCP&L
$16.3 million; Met-Ed $6.5 million; Penelec $3.2 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 12-week waiting period at $1.8
million and $2.6 million per week for 52 weeks for Oyster Creek and TMI-1,
respectively, decreasing to 80% of such amounts for the next 110 weeks.
ENVIRONMENTAL MATTERS
As a result of existing and proposed legislation and regulations, and
ongoing legal proceedings dealing with environmental matters, including but not
limited to acid rain, water quality, ambient air quality, global warming,
electromagnetic fields, and storage and disposal of hazardous and/or toxic
wastes, GPU may be required to incur substantial additional costs to construct
new equipment, modify or replace existing and proposed equipment, remediate,
decommission or cleanup waste disposal and other sites currently or formerly
used by it, including formerly owned manufactured gas plants (MGP), coal mine
refuse piles and generation facilities.
In 1997 and 1998 the U.S. Environmental Protection Agency (EPA) adopted
new, more stringent rules on ozone and particulate matter. Several groups have
filed suit in the U.S. Court of Appeals to overturn these new air quality
standards on the grounds that, among other things, they are based on inadequate
scientific evidence. The GPU Energy companies are unable to determine what
additional costs, if any, will be incurred if the EPA rules are upheld.
Moreover, the timing and amounts of expenditures under Titles I and IV of the
federal Clean Air Act Amendments of 1990 will be dependent upon the timing of
the sales of the related generating facilities.
GPU has been formally notified by the EPA and state environmental
authorities that it is among the potentially responsible parties (PRPs) who may
be jointly and severally liable to pay for the costs associated with the
investigation and remediation at hazardous and/or toxic waste sites (in some
cases, more than one company is named for a given site):
JCP&L MET-ED PENELEC GPUN GPU, INC. TOTAL
----- ------ ------- ---- --------- -----
8 4 2 1 1 13
In addition, certain of the GPU companies have been requested to participate in
the remediation or supply information to the EPA and state environmental
authorities on several other sites for which they have not been formally named
as PRPs, although the EPA and state authorities may nevertheless consider them
as PRPs. Certain of the GPU companies have also been named in lawsuits
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,
<PAGE>
Financial Statements
Item 6(b)
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(b) the remedial action plan chosen and (c) the extent of site contamination and
the portion attributed to the GPU companies involved.
In 1997, the EPA filed a complaint against GPU, Inc. in the United States
District Court for the District of Delaware for enforcement of its unilateral
order issued against GPU, Inc. to clean up the former Dover Gas Light Company
(Dover) manufactured gas production site in Dover, Delaware. Dover was part of
the AGECO/AGECORP group of companies from 1929 until 1942 and GPU, Inc. emerged
from the AGECO/AGECORP reorganization proceedings. All of the common stock of
Dover was sold in 1942 by a member of the AGECO/AGECORP group to an unaffiliated
entity, and was subsequently acquired by Chesapeake Utilities Corporation
(Chesapeake). According to the complaint, the EPA is seeking up to $0.5 million
in past costs, $4.2 million for the cleanup of the Dover site and approximately
$19 million in penalties. GPU, Inc. has responded to the EPA complaint stating
that such claims should be dismissed because, among other things, they are
barred by the operation of the Final Decree entered by the United States
District Court for the Southern District of New York at the conclusion of the
1946 reorganization proceedings of AGECO/AGECORP. Chesapeake has also sued GPU,
Inc. for a contribution to the cleanup of the Dover site. The United States
District Court for the District of Delaware has refused to dismiss the
complaints and discovery is proceeding. There can be no assurance as to the
outcome of these proceedings.
Pursuant to federal environmental monitoring requirements, Penelec has
reported to the Pennsylvania Department of Environmental Protection (PaDEP) that
contaminants from coal mine refuse piles were identified in storm water run-off
at Penelec's Seward station property. Penelec signed a modified Consent Order,
which became effective December 1996, and a third Amendment in December 1998,
that establish a schedule for submitting a plan for long-term remediation, based
on future operating scenarios. Penelec currently estimates that the remediation
of the Seward station property will range from $12 million to $20 million and
has a recorded liability of $12 million at September 30, 1999. These cost
estimates are subject to uncertainties based on continuing discussions with the
PaDEP as to the method of remediation, the extent of remediation required and
available cleanup technologies. Penelec expects recovery of these remediation
costs in Phase II of its restructuring proceeding and has recorded a
corresponding regulatory asset of approximately $12 million at September 30,
1999.
In 1997, the GPU Energy companies filed with the PaDEP applications for
re-permitting seven (JCP&L - one; Met-Ed - three; Penelec - three) operating ash
disposal sites, including projected site closure procedures and related cost
estimates. The cost estimates for the closure of these sites range from
approximately $17 million to $22 million, and a liability of $17 million (JCP&L
$1 million; Met-Ed $4 million; Penelec $12 million) is reflected on the
Consolidated Balance Sheets at September 30, 1999. Met-Ed and Penelec expect to
be granted recovery of these costs in Phase II of their restructuring
proceedings. As a result, a regulatory asset of $17 million (JCP&L $1 million;
Met-Ed $4 million; Penelec $12 million) is reflected on the Consolidated Balance
Sheets at September 30, 1999. There can be no assurance as to the outcome of
these proceedings.
<PAGE>
Financial Statements
Item 6(b)
Page 23 of 29
JCP&L has entered into agreements with the New Jersey Department of
Environmental Protection for the investigation and remediation of 17 formerly
owned manufactured gas plant (MGP) sites. JCP&L has also entered into various
cost-sharing agreements with other utilities for most of the sites. As of
September 30, 1999, JCP&L has spent approximately $34 million in connection with
the cleanup of these sites. In addition, JCP&L has recorded an estimated
environmental liability of $53 million relating to expected future costs of
these sites (as well as two other properties). This estimated liability is based
upon ongoing site investigations and remediation efforts, which generally
involve capping the sites and pumping and treatment of ground water. Moreover,
the cost to clean up these sites could be materially in excess of $53 million
due to significant uncertainties, including changes in acceptable remediation
methods and technologies. In addition, federal and state law provides for
payment by responsible parties for damage to natural resources.
In 1997, JCP&L's request to establish a Remediation Adjustment Clause for
the recovery of MGP remediation costs was approved by the NJBPU. At September
30, 1999, JCP&L had recorded on its Consolidated Balance Sheet a regulatory
asset of $44 million. JCP&L is continuing to pursue reimbursement from its
insurance carriers for remediation costs already spent and for future estimated
costs. In 1994, JCP&L commenced litigation in the New Jersey Superior Court
against several of its insurance carriers, relative to these MGP sites and has
settled with all but one of those insurance companies.
OTHER COMMITMENTS AND CONTINGENCIES
Class Action Litigation:
In July 1999, New Jersey experienced a severe heat wave that resulted in
major power outages and temporary service interruptions including JCP&L's
service territory. As a result, the NJBPU has initiated an investigation into
the reliability of the transmission and distribution systems of all New Jersey
utilities and their response to power outages. In addition, two lawsuits were
filed in New Jersey Superior Court (Court) against GPU, Inc., JCP&L and certain
of their affiliates seeking class action certification for all individuals
including customers, businesses and employees, who incurred financial losses,
including both compensatory and punitive damages. In October 1999, the GPU
defendants' motion to dismiss the complaints was denied and the two proceedings
were consolidated and certified as class actions. The GPU defendants have filed
a motion for leave to appeal the Court's decision. GPU has notified its
insurance carriers who have reserved their rights to contest coverage under
GPU's insurance policies for losses which GPU may incur. There can be no
assurance as to the outcome of these matters.
As a result of the fire and explosion in September 1998, at the Longford
natural gas plant in Victoria, Australia, three class actions have been brought
in Australian Federal Court against Esso Australia Limited and its affiliate
(Esso), the owner and operator of the plant, for losses suffered due to the lack
of natural gas supply and related damages. Plaintiffs claim that Esso was
negligent in designing, maintaining and operating the Longford plant and also
assert claims under various Australian fair trade practices laws.
<PAGE>
Financial Statements
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Esso has joined as additional defendants the State of Victoria (State) and
various State-owned entities which operated the Victorian gas industry prior to
its privatization, including Transmission Pipelines Australia (TPA) and its
subsidiary Transmission Pipelines (Assets) Australia (TPAA). GPU, Inc. acquired
the assets of TPA (renamed GPU GasNet) and TPAA from the State of Victoria in
June 1999. Esso has named GPU GasNet as an additional defendant. Under the
acquisition agreement with the State, GPU GasNet has indemnified TPA against
third party claims. Esso is seeking contribution and indemnity from the third
party defendants for any damages for which Esso may be found liable. In
addition, Esso has asserted several separate claims against the State and the
former State-owned entities for damages, and contends that GPU GasNet assumed
TPA's liabilities as part of the State's privatization process.
GPU GasNet has filed an answer denying liability and has moved to dismiss
portions of Esso's claims. GPU GasNet has also notified its insurance carriers
of this action. The insurers have reserved their rights to deny coverage. There
can be no assurance as to the outcome of this matter.
GPU, Inc. Investments and Guarantees:
GPU, Inc. has made significant investments in foreign businesses and
facilities through its subsidiaries, GPU Electric and the GPUI Group. At
September 30, 1999, GPU, Inc.'s investment in GPU Electric and the GPUI Group
was $711 million and $240 million, respectively. As of that date, GPU, Inc. has
also guaranteed up to an additional $1.39 billion and $43.4 million (including
$22.1 million of guarantees related to domestic operations) of GPU Electric and
GPUI Group obligations, respectively. Although management attempts to mitigate
the risks of investing in certain foreign countries by, among other things,
securing political risk insurance, GPU faces additional risks inherent to
operating in such locations, including foreign currency fluctuations.
As a result of GPU's purchase from Cinergy Corp. (Cinergy) of the 50%
interest in Midlands Electricity plc (Midlands), which GPU did not own,
effective in the third quarter of 1999, GPU began accounting for its Midlands
investment as a consolidated entity. As a result of this change in accounting,
GPU's equity investments as of September 30, 1999 are no longer presented in the
Combined Notes to Consolidated Financial Statements since these investments are
considered immaterial to GPU's results of operations or financial condition.
GPU Electric
The Office of Gas and Electricity Markets in the United Kingdom has
proposed base rate reductions of 22 to 27 percent for Midlands beginning in
April 2000. A final decision on the reductions is expected in the fourth quarter
of 1999. There can be no assurance as to the outcome of this matter.
<PAGE>
Financial Statements
Item 6(b)
Page 25 of 29
Midlands has a 40% ownership interest in a 586 MW power project in Pakistan
(the Uch Power Project) which was originally scheduled to begin commercial
operation in late 1998, but testing and commercial operation have been delayed.
On June 30, 1999, the Project lenders issued a notice of default to the
project sponsors (including Midlands) for failure to obtain permanent financing
and repay the construction debt by the original loan due date. In November 1999,
the Project sponsors reached an agreement with the Project lenders under which
the construction loan terms will be extended, principal and interest payments
will be deferred and the Project sponsors have agreed to fund completion of the
plant through their remaining equity contribution commitments. Midlands' current
investment in the Uch Power Project is approximately $75 million, and its share
of the completion costs could represent an additional $12 million investment.
Testing and commercial operations of the plant is now anticipated for the
beginning of 2000. As part of GPU's purchase of Cinergy's 50% ownership interest
in Midlands, Cinergy has agreed to fund up to an aggregate of $20 million of the
required capital contributions and/or certain future "cash losses" which GPU
could incur on the Uch Power Project. (For further information on the Midlands'
purchase, See Note 3, Acquisitions.) There can be no assurance as to the outcome
of this matter.
Other:
GPU's capital programs, for which substantial commitments have been
incurred and which extend over several years, contemplate expenditures of $453
million (JCP&L $183 million; Met-Ed $97 million; Penelec $98 million; Other $75
million) during 1999.
The GPU Energy companies have entered into long-term contracts with
nonaffiliated mining companies for the purchase of coal for certain generating
stations in which they have ownership interests (JCP&L - 16.67% ownership
interest in Keystone; and Met-Ed - 16.45% ownership interest in Conemaugh). The
GPU Energy companies' share of the cost of coal purchased under these agreements
is expected to aggregate $135 million (JCP&L $27 million; Met-Ed $57 million;
Penelec $51 million) for 1999. These contracts will be assumed by Sithe, upon
the closings of the sales of the GPU Energy companies' fossil generation
facilities.
JCP&L has entered into agreements with other utilities to purchase
capacity and energy for various periods through 2004. Payments pursuant to these
agreements are estimated to be $114 million in 1999, $91 million in 2000, $99
million in 2001, $109 million in 2002, and $113 million in 2003 and $48 million
in 2004.
GPU AR has entered into contracts to supply electricity to retail
customers through December 31, 2000 and estimates that it will spend
approximately $21 million to purchase energy and capacity related to these
contracts. GPU AR has firm purchase commitments which obligate it to pay
<PAGE>
Financial Statements
Item 6(b)
Page 26 of 29
approximately $11 million for energy and capacity and has the option to purchase
additional amounts under various agreements. GPU, Inc. has guaranteed up to $19
million if GPU AR fails to meet its contractual payment obligations.
In accordance with the Nuclear Waste Policy Act of 1982 (NWPA), the GPU
Energy companies have entered into contracts with, and have been paying fees to,
the DOE for the future disposal of spent nuclear fuel in a repository or interim
storage facility. Following its purchase of TMI-1 and Oyster Creek, AmerGen will
assume all liability for disposal costs related to spent fuel generated after
such sales. In 1996, the DOE notified the GPU Energy companies and other
standard contract holders that it will be unable to begin acceptance of spent
nuclear fuel for disposal by 1998, as mandated by the NWPA. The DOE requested
recommendations from contract holders for handling the delay. The DOE's
inability to accept spent nuclear fuel could have a material impact on GPU's
results of operations, as additional costs may be incurred to build and maintain
interim on-site storage at Oyster Creek. TMI-1 has sufficient on-site storage
capacity to accommodate spent nuclear fuel through the end of its licensed life.
In June 1997, a consortium of electric utilities, including GPUN, filed a
license application with the NRC seeking permission to build an interim
above-ground disposal facility for spent nuclear fuel in northwestern Utah.
There can be no assurance as to the outcome of these matters.
GPU, Inc. and consolidated affiliates have approximately 13,000 employees
worldwide, of which nearly 8,100 are employed in the U.S and approximately 3,900
are employed primarily in the United Kingdom. The majority of the U.S. workforce
is employed by the GPU Energy companies, of which approximately 4,300 are
represented by unions for collective bargaining purposes. Met-Ed and Penelec's
collective bargaining agreements with the International Brotherhood of
Electrical Workers (IBEW) expire on April 30, 2000 and May 14, 2002,
respectively. JCP&L's collective bargaining agreement with the IBEW expired on
October 31, 1999 and a new agreement is currently under negotiation. There can
be no assurance as to the outcome of these negotiations. Penelec's collective
bargaining agreement with the Utility Workers Union of America expires on June
30, 2001.
During the normal course of the operation of its businesses, in addition
to the matters described above, GPU is from time to time involved in disputes,
claims and, in some cases, as a defendant in litigation in which compensatory
and punitive damages are sought by the public, customers, contractors, vendors
and other suppliers of equipment and services and by employees alleging unlawful
employment practices. While management does not expect that the outcome of these
matters will have a material effect on GPU's financial position or results of
operations, there can be no assurance that this will continue to be the case.
<PAGE>
Financial Statements
Item 6(b)
Page 27 of 29
2. ACCOUNTING FOR EXTRAORDINARY AND NON-RECURRING ITEMS
JCP&L Restructuring Write-off:
In May 1999, the NJBPU issued a Summary Order regarding JCP&L's
unbundling, stranded cost and restructuring filings. Accordingly, JCP&L
discontinued the application of FAS 71 and has adopted the provisions of FAS 101
and EITF 97-4 with respect to its electric generation operations, effective with
the second quarter of 1999. The transmission and distribution portion of the GPU
Energy companies' operations continue to be subject to the provisions of FAS 71.
For the quarter ended June 30, 1999, JCP&L recorded a reduction in
operating revenues of $115 million relating to the Summary Order which resulted
in an after-tax charge to earnings of $68 million, or $0.54 per share. This
reduction reflects JCP&L's obligation to refund to customers 5% from rates in
effect as of April 30, 1997 for service rendered on and after August 1, 2002
through July 31, 2003.
Since JCP&L is no longer subject to FAS 71 for the generation portion of
its business, GPU performed an impairment test on Oyster Creek in accordance
with FAS 121. This test determined that JCP&L's net investment in Oyster Creek,
including plant, nuclear fuel and materials and supplies inventories, was
impaired. This investment was written down by a total of $676 million (pre-tax)
in the second and third quarters of 1999 to reflect its fair market value. This
impairment, which was recorded as an extraordinary deduction, was reversed and
reestablished as a regulatory asset since the Summary Order provides for rate
recovery.
Generation Asset Divestiture:
In 1997, GPU announced its intention to begin a process to sell, through a
competitive bid process, up to all of the fossil-fuel and hydroelectric
facilities owned by the GPU Energy companies.
In March 1999, Penelec sold its 50% interest in the Homer City Station to a
subsidiary of Edison Mission Energy for approximately $900 million. As a result,
Penelec recorded an after-tax gain of $27.8 million in the first quarter of 1999
for the portion of the gain related to wholesale operations and deferred as a
regulatory liability the remaining gain of $596.7 million pending Phase II of
the Pennsylvania restructuring proceeding.
In July 1999, Penelec sold its 20% interest in the Seneca Pumped Storage
Hydroelectric Generating Station to The Cleveland Electric Illuminating Company
for $43 million. The sale resulted in the recording of an after-tax gain of $0.9
million in the third quarter of 1999 for the portion of the gain related to
wholesale operations and the deferral of the remaining gain of $30.2 million as
a regulatory liability pending Phase II of the Pennsylvania restructuring
proceeding.
<PAGE>
Financial Statements
Item 6(b)
Page 28 of 29
For information on the GPU Energy companies' pending generation asset
sales, see Note 1, Commitments and Contingencies.
3. ACQUISITIONS
GPU Electric
Empresa Distribuidora Electrica Regional, S.A.
In March 1999, GPU Electric acquired Empresa Distribuidora Electrica
Regional, S.A. (Emdersa) for US $375 million. The fair value of the assets
acquired totaled approximately $253.4 million and the amount of liabilities
assumed totaled approximately $146.7 million. Emdersa owns three electric
distribution companies that serve three provinces in northwest Argentina. The
acquisition was financed through the issuance of commercial paper by GPU
Capital, guaranteed by GPU, Inc. and a $50 million contribution from GPU, Inc.
The acquisition has been accounted for under the purchase method of accounting.
The total acquisition cost exceeded the estimated value of net assets by $268
million. This excess is considered goodwill and is being amortized on a
straight-line basis over 40 years.
Transmission Pipelines Australia (TPA)
In June 1999, GPU Electric acquired TPA, a natural gas transmission
business, from the State of Victoria, Australia for A$1.025 billion
(approximately US $675 million). TPA has been renamed GPU GasNet. The fair value
of the assets acquired totaled approximately US $586 million and the amount of
liabilities assumed totaled approximately US $103 million.
The acquisition was financed through: (1) an A$750 million (approximately
US $495 million) senior credit facility, which is non-recourse to GPU, Inc.; and
(2) an equity contribution from GPU Capital of A$275 million (approximately US
$180 million) provided through the issuance of commercial paper guaranteed by
GPU, Inc.
The acquisition has been accounted for under the purchase method. The
total acquisition cost exceeded the estimated value of net assets acquired by
$188.6 million. This excess is considered goodwill and is being amortized on a
straight-line basis over 40 years.
Midlands Electricity plc
In July 1999, GPU Electric acquired Cinergy's 50% ownership interest in
Avon Energy Partners Holdings (Avon), which owns Midlands, for (pound)452.5
million (approximately US $714 million). GPU and Cinergy had jointly formed Avon
in 1996 to acquire Midlands. The fair value of the assets acquired by Avon
totaled approximately US $4.2 billion and the liabilities totaled approximately
US $3 billion.
<PAGE>
Financial Statements
Item 6(b)
Page 29 of 29
GPU Electric financed the acquisition primarily through a combination of
equity and debt. The equity was funded from: (1) a US $250 million contribution
from GPU, Inc., and (2) the issuance of US $50 million of commercial paper by
GPU Capital, which is guaranteed by GPU, Inc. The debt has been provided through
a two-year (pound)245 million (approximately US $382 million) credit agreement
entered into by EI UK Holdings, of which GPU, Inc. has guaranteed approximately
US $100 million.
As a result of GPU's purchase of Cinergy's 50% ownership in Midlands,
effective in the third quarter of 1999, GPU began accounting for Midlands as a
consolidated entity, rather than under the equity method of accounting as was
previously the practice. Consequently, Goodwill, net on the Consolidated Balance
Sheet increased by approximately $1.7 billion in the third quarter of 1999. Of
this amount, $1.6 billion relates to the previous 1996 acquisition of Midlands
by GPU and Cinergy and $121 million represents goodwill as a result of GPU's
purchase of Cinergy's 50% share of Midlands. The goodwill is being amortized on
a straight-line basis over 40 years.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<F3> PREFERRED SECURITIES OF $225,000 AND TRUST PREFERRED
<F3> SECURITIES OF $200,000.
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