UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
-------------
OR
---- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ----------------- to -------------
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address and Telephone Number Identification No.
----------- ----------------------------------- ------------------
1-6047 GPU, Inc. 13-5516989
(a Pennsylvania corporation)
300 Madison Avenue
Morristown, New Jersey 07962-1911
Telephone (973) 401-8200
1-3141 Jersey Central Power & Light Company 21-0485010
(a New Jersey corporation)
2800 Pottsville Pike
Reading, Pennsylvania 19640-0001
Telephone (610) 929-3601
1-446 Metropolitan Edison Company 23-0870160
(a Pennsylvania corporation)
2800 Pottsville Pike
Reading, Pennsylvania 19640-0001
Telephone (610) 929-3601
1-3522 Pennsylvania Electric Company 25-0718085
(a Pennsylvania corporation)
2800 Pottsville Pike
Reading, Pennsylvania 19640-0001
Telephone (610) 929-3601
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
The number of shares outstanding of each of the registrant's classes of
voting stock, as of July 31, 2000, was as follows:
Shares
Registrant Title Outstanding
---------- ----- -----------
GPU, Inc. Common Stock, $2.50 par value 121,285,419
Jersey Central Power & Light Company Common Stock, $10 par value 15,371,270
Metropolitan Edison Company Common Stock, no par value 859,500
Pennsylvania Electric Company Common Stock, $20 par value 5,290,596
<PAGE>
GPU, Inc. and Subsidiary Companies
Quarterly Report on Form 10-Q
June 30, 2000
Table of Contents
Page
PART I - Financial Information
Combined Management's Discussion and Analysis
of Financial Condition and Results of
Operations 1
Consolidated Financial Statements:
GPU, Inc.
Balance Sheets 24
Statements of Income 26
Statements of Cash Flows 27
Jersey Central Power & Light Company
Balance Sheets 28
Statements of Income 30
Statements of Cash Flows 31
Metropolitan Edison Company
Balance Sheets 32
Statements of Income 34
Statements of Cash Flows 35
Pennsylvania Electric Company
Balance Sheets 36
Statements of Income 38
Statements of Cash Flows 39
Combined Notes to Consolidated Financial Statements 40
PART II - Other Information 62
Signatures 63
The financial statements (not examined by independent accountants) reflect
all adjustments (which consist of only normal recurring accruals), which are in
the opinion of management, necessary for a fair statement of the results for the
interim periods presented.
This combined Quarterly Report on Form 10-Q is separately filed by GPU,
Inc., Jersey Central Power & Light Company, Metropolitan Edison Company and
Pennsylvania Electric Company. Information contained herein relating to any
individual registrant is filed by such registrant on its own behalf. None of
these registrants make any representations as to information relating to the
other registrants. This combined Form 10-Q supplements and updates the 1999
Annual Report on Form 10-K, filed by the individual registrants with the
Securities and Exchange Commission and should be read in conjunction therewith.
This Form 10-Q contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Statements made
that are not historical facts are forward-looking and, accordingly, involve
estimates, forecasts, risks and uncertainties that could cause actual results or
outcomes to differ materially from those expressed in the forward-looking
statements. Although such forward-looking statements have been based on
reasonable assumptions, there is no assurance that the expected results will be
achieved. Some of the factors that could cause actual results to differ
materially include, but are not limited to: the effects of regulatory decisions;
changes in law and other governmental actions and initiatives; the impact of
deregulation and increased competition in the industry; industry restructuring;
expected outcomes of legal proceedings; the completion of generation asset
divestiture; energy prices and availability; and uncertainties involved with
foreign operations including political risks and foreign currency fluctuations.
<PAGE>
GPU, Inc. and Subsidiary Companies
COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GPU, Inc. owns all the outstanding common stock of three domestic electric
utilities -- Jersey Central Power & Light Company (JCP&L), Metropolitan Edison
Company (Met-Ed) and Pennsylvania Electric Company (Penelec). The customer
service function, transmission and distribution operations and the operations of
the remaining non-nuclear generating facilities 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 nuclear
generation operations of GPU Energy are conducted by GPU Nuclear, Inc. (GPUN).
GPU Capital, Inc. and GPU Electric, Inc. and their subsidiaries own, operate and
fund the acquisition of electric distribution and gas transmission 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 (US) 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; MYR Group Inc. (MYR), which is a utility
infrastructure construction services company; and GPU Service, Inc. (GPUS),
which provides legal, accounting, financial and other services to the GPU
companies. All of these companies considered together are referred to as "GPU."
GPU RESULTS OF OPERATIONS
EARNINGS PER SHARE CONTRIBUTION:
Three Months Ended Six Months Ended
(on a diluted basis) June 30, June 30,
--------------------- ---------------
2000 1999 Change 2000 1999 Change
---- ---- ------- ---- ---- ------
Operations:
GPU Energy companies * $ 0.45 $ 0.79 $(0.34) $ 1.24 $ 1.73 $(0.49)
GPU Electric 0.27 0.10 0.17 0.56 0.39 0.17
GPUI Group -- (0.02) 0.02 0.03 0.02 0.01
GPU AR -- -- -- 0.01 0.01 --
MYR 0.01 -- 0.01 0.01 -- 0.01
GPU, Inc. (Corporate) (0.04) (0.03) (0.01) (0.08) (0.04) (0.04)
----- ----- ----- ----- ----- -----
Total operations 0.69 0.84 (0.15) 1.77 2.11 (0.34)
Non-recurring items:
GPU Energy companies -- (0.54) 0.54 -- (0.32) 0.32
GPU Electric (2.43) 0.08 (2.51) (2.43) 0.08 (2.51)
----- ----- ----- ----- ----- -----
Total $(1.74) $ 0.38 $(2.12) $(0.66) $ 1.87 $(2.53)
===== ===== ===== ===== ===== =====
* Includes GPU Telcom
GPU's second quarter 2000 net income before non-recurring items was $84
million, or $0.69 per share, against income before non-recurring items of $106
million, or $0.84 per share in the second quarter of 1999. The lower 2000 second
quarter income before non-recurring items was primarily due to the impact of
electric utility restructuring in New Jersey and Pennsylvania, which has
included GPU's sale of its generation facilities, higher energy costs in
Pennsylvania, and lower electric delivery rates charged to customers in New
Jersey. Partially offsetting the decrease was higher GPU Electric
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earnings primarily due to the acquisition of the remaining 50% of Midlands
Electricity plc (conducting business under the name GPU Power UK) in July 1999.
After taking into account the 2000 and 1999 non-recurring items, GPU
recorded a net loss of $211 million, or $1.74 per share, in the second quarter
2000, compared with income of $47 million, or $0.38 per share, for same quarter
in 1999. The 2000 quarterly results included a non-recurring loss of $295
million after-tax, or $2.43 per share, for the sale of GPU's Australian electric
transmission company, GPU PowerNet. The 1999 comparable period included a
non-recurring charge of $68 million after-tax, or $0.54 per share, resulting
from the New Jersey Board of Public Utilities' (NJBPU) restructuring order
(Summary Order) issued to JCP&L, and a gain on the sale of the GPU Power UK
supply business of $9 million after-tax, or $0.08 per share.
For the six months ended June 30, 2000, income before non-recurring items
was $215 million, or $1.77 per share, against $269 million, or $2.11 per share
for the first half of 1999. The same factors affecting the comparable quarterly
results also affected the year to date comparison.
Including non-recurring items, GPU recorded a net loss for the first six
months of 2000 of $80 million, or $0.66 per share, against net income of $238
million, or $1.87 per share, in the first half of 1999. The 2000 net loss was
after the non-recurring charge of $295 million, or $2.43 per share, described
above. Net income for the first half of 1999 was after the non-recurring items
noted above for the second quarter 1999, as well as a gain of $28 million
after-tax, or $0.22 per share, for the portion of the gain on the sale of
Penelec's interest in the Homer City Generating Station related to wholesale
operations.
OPERATING REVENUES:
Operating revenues for the second quarter 2000 increased $387.7 million to
$1.3 billion, as compared to the second quarter 1999. For the six months ended
June 30, 2000, operating revenues increased $495.4 million to $2.5 billion, as
compared to the same period last year. The components of the changes are as
follows:
2000 vs. 1999 (in millions)
--------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
GPU Energy companies:
Kilowatt-hour (KWH) revenues $ (95.2) $(287.8)
Energy and restructuring-related
Revenues (NJ) 115.4 179.6
Competitive transition charge
(CTC) revenues (PA) (1.7) 11.6
Obligation to refund revenues (NJ) 115.0 115.0
GPU Telcom revenues 0.8 0.7
Other revenues (0.5) (1.7)
------ ------
Total GPU Energy companies 133.8 17.4
GPU Electric 162.1 372.7
GPUI Group (1.8) 4.8
GPU AR (4.5) 2.4
MYR 98.1 98.1
------ ------
Total increase $ 387.7 $ 495.4
====== ======
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GPU Energy companies
Kilowatt-hour revenues
The decrease for the three and six months ended June 30, 2000 was
primarily due to lower generation-related revenues of approximately $136 million
year to date as a result of more Pennsylvania and New Jersey customers choosing
another electric energy supplier, and lower rates charged to customers in New
Jersey resulting in a decrease in revenues of approximately $47 million year to
date. Also contributing to the decrease is the fact that certain JCP&L revenues
related to stranded cost recovery are now included under energy and
restructuring-related revenues, effective August 1, 1999.
Energy and restructuring-related revenues (JCP&L)
-------------------------------------------------
Changes in energy and restructuring-related revenues do not affect
earnings as they are offset by corresponding changes in expense. The increase
for the three and six months ended June 30, 2000 was primarily due to the
inclusion of revenues, effective August 1, 1999, for the recovery of stranded
costs due to restructuring in New Jersey. In 1999, JCP&L changed its estimate
for unbilled revenue, which resulted in the recording of additional revenues,
partially offsetting the increase in the six-month period.
Competitive transition charge (CTC) revenues (Met-Ed and Penelec)
-----------------------------------------------------------------
CTC revenues represent Pennsylvania stranded cost recoveries permitted by
the Pennsylvania Public Utility Commission (PaPUC) in accordance with Met-Ed and
Penelec's final Restructuring Orders effective January 1, 1999. Changes in CTC
revenues generally do not affect earnings as they are offset by corresponding
changes in expense.
Obligation to refund revenues (JCP&L)
The increase for the three and six month periods was due to the absence
this year of a reduction in operating revenues of $115 million as a result of
the NJBPU's Summary Order issued to JCP&L in 1999. The Summary Order requires
JCP&L to refund customers 5% from rates in effect as of April 30, 1997.
GPU Electric
The increase in revenues for the three and six months ended June 30, 2000
was primarily due to the inclusion of revenues from: GPU Power UK, approximately
$325 million year to date; Empresa Distribuidora Electrica Regional, S.A.
(Emdersa) (acquired in March 1999), approximately $33 million year to date; and
GPU GasNet (acquired in June 1999), approximately $21 million year to date,
partially offset by a reduction in revenues at GPU PowerNet.
GPUI Group
The increase for the six months ended June 30, 2000 was due in part to
higher energy and capacity revenues at Empresa Guaracachi S.A. (EGSA) as a
result of new generating units that began operations in June 1999.
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GPU AR
The decrease for the three months ended June 30, 2000 was due to GPU AR
having fewer customers to supply electricity to compared to the same quarter
last year.
MYR
The increase for the three and six months ended June 30, 2000 was due to
the inclusion of revenues from MYR since its acquisition by GPU, Inc. in the
second quarter 2000.
OPERATING INCOME:
Operating income for the second quarter 2000 decreased $274 million to an
operating loss of $142 million, as compared to the second quarter 1999. For the
six months ended June 30, 2000, operating income decreased $232.3 million to
$198.3 million, as compared to the same period last year. The components of the
changes are as follows:
2000 vs. 1999 (in millions)
--------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
GPU Energy companies $ 32.6 $ (24.4)
GPU Electric (316.9) (214.4)
GPUI Group 6.2 4.2
GPU AR (0.7) (0.8)
MYR 3.9 3.9
GPU, Inc. 0.9 (0.8)
------ ------
Total decrease $(274.0) $(232.3)
====== ======
GPU Energy companies
The decrease was due to lower revenues as discussed above (see Operating
Revenues section for additional information) and higher energy costs for Met-Ed
and Penelec due to the purchase of more energy since the sale of GPU Energy's
generating assets. Partially offsetting this decrease was lower operation and
maintenance (O&M) expenses primarily due to the sale of GPU Energy's generating
assets in 1999, lower depreciation expense due to the sale of generating assets
and the effect of the impairment write-down of the Oyster Creek (Oyster Creek)
nuclear generating station, which was also recorded in 1999.
GPU Electric
The decrease for the three and six months ended June 30, 2000 was due to
the pre-tax loss of $372 million recorded in the second quarter 2000 on the sale
of GPU PowerNet. Partially offsetting the decrease, for both periods, was
increased operating income at GPU Power UK due primarily to the acquisition of
the remaining 50% ownership in 1999, and the inclusion of Emdersa and GPU
GasNet. Prior to its purchase of the remaining 50%, GPU accounted for its
investment in GPU Power UK under the equity method and included its share of GPU
Power UK's income in other income on the Consolidated Statements of Income.
4
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Partially offsetting the decrease was a credit to income in the second
quarter of 2000 of $15.9 million pre-tax resulting from a reduction in the
estimated liability of certain long-term purchase obligations under natural gas
supply contracts of GPU Power UK. These contracts were at fixed prices in excess
of the market price of gas, and a liability was established for the estimated
loss under such contracts, however, as a result of increasing gas prices during
the second quarter of 2000, GPU Power UK was able to enter into matching forward
sale contracts for the majority of the gas purchases. In addition, in the second
quarter 2000 a pre-tax gain of $4.5 million was realized on closed out forward
exchange contracts that were entered into by GPU Electric to lock in the
then-current A$/US$ exchange rate on the projected remittance of Australian
dollar proceeds arising from the expected sale of GPU PowerNet and GPU GasNet.
GPUI Group
The increase for the three and six months ended June 30, 2000 was due to
the absence of an impairment loss of $6.5 million recorded in 1999 against GPU
International's investment in the Lake cogeneration project.
MYR
The increase for the three and six months ended June 30, 2000 was due to
the inclusion of MYR since its acquisition by GPU, Inc. in the second quarter
2000.
OTHER INCOME AND DEDUCTIONS:
Other income and deductions for the second quarter 2000 decreased $9.1
million to $33.4 million, as compared to the second quarter 1999. For the six
months ended June 30, 2000, other income and deductions decreased $88.4 million
to $56.5 million, as compared to the same period last year. The components of
the changes are as follows:
2000 vs. 1999 (in millions)
--------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
GPU Energy companies $ (4.1) $ (38.6)
GPU Electric (3.5) (46.9)
GPUI Group (1.9) (3.4)
GPU AR 0.2 0.3
MYR 0.2 0.2
GPU, Inc. -- --
------ ------
Total decrease $ (9.1) $ (88.4)
====== ======
GPU Energy companies
The decrease for the six months ended June 30, 2000 was primarily due to
the absence in 2000 of the gain of $38.3 million pre-tax on the sale of
Penelec's Homer City Station.
GPU Electric
The decrease for the six months ended June 30, 2000 was due primarily to
the consolidation of GPU Power UK since the acquisition of the remaining
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50% ownership in 1999. Prior to that, the GPU Power UK investment was accounted
for under the equity method and GPU's share of GPU Power UK's income was
included in other income on the Consolidated Statements of Income.
INTEREST CHARGES AND PREFERRED DIVIDENDS:
Interest charges and preferred dividends for the second quarter 2000
increased $44.1 million to $141.8 million, as compared to the second quarter
1999. For the six months ended June 2000, interest charges and preferred
dividends increased $93.8 million to $284.8 million, as compared to the same
period last year. The components of the changes are as follows:
2000 vs. 1999 (in millions)
--------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
GPU Energy companies $ (2.9) $ (11.7)
GPU Electric 41.5 98.2
GPUI Group 0.6 0.9
MYR 2.4 2.4
GPU, Inc. 2.5 4.0
------ ------
Total increase $ 44.1 $ 93.8
====== ======
GPU Energy companies
The decrease for the six months ended June 30, 2000 was primarily due to
the following: in 1999, Met-Ed and Penelec redeemed all their company-obligated
mandatorily redeemable preferred securities and cumulative preferred stock and
Penelec redeemed $600 million of first mortgage bonds (FMBs); and in 2000, JCP&L
and Met-Ed redeemed $40 million and $50 million, respectively, of FMBs.
Partially offsetting these decreases were increased interest expense associated
with Penelec's issuance of $350 million of senior notes in 1999 and $50 million
of senior notes in April 2000; and the issuance of $100 million each of trust
preferred securities by Met-Ed and Penelec, in 1999.
GPU Electric
The increase for the three and six months ended June 30, 2000 was
primarily due to higher debt levels from the 1999 acquisitions of GPU Power UK
(the remaining 50%), Emdersa and GPU GasNet, which resulted in additional
interest expense of approximately $103 million year to date, partially offset by
lower interest expense at GPU PowerNet.
GPU, Inc.
The increase for the three and six month periods was due to higher average
short-debt levels in 2000.
JCP&L RESULTS OF OPERATIONS
JCP&L's earnings for the second quarter 2000 were $42.8 million compared to
a second quarter 1999 loss of $8.2 million. Excluding a non-recurring charge of
$68 million, which resulted from the NJBPU's Summary Order for
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JCP&L, earnings for the quarter ended June 30, 1999 would have been $59.8
million. The decline in earnings on this basis was primarily due to lower
revenues, resulting from lower rates charged to customers as a result of the New
Jersey restructuring. Partially offsetting the decrease was lower depreciation
expense due to the effect of the sale of generating assets and the impairment
write-down of Oyster Creek, which was recorded in 1999.
For the six months ended June 30, 2000, JCP&L's earnings were $85.9
million, compared to $43 million for the same period in 1999. Excluding the
non-recurring charge discussed above, earnings for 1999 would have been $111.1
million. The decrease in earnings on this basis was due to lower revenues, as a
result of lower rates charged to customers under New Jersey rate restructuring.
Partially offsetting the decrease was lower depreciation expense due to the
effect of the sale of generating assets and the impairment write-down of Oyster
Creek, which was recorded in 1999, and a reduction in O&M expenses.
OPERATING REVENUES:
Operating revenues for the second quarter 2000 increased $99.2 million to,
$490.2 million, as compared to the second quarter 1999. For the six months ended
June 30, 2000, earnings increased $35 million, to $942.9 million, compared to
the same period last year. The components of the changes are as follows:
2000 vs. 1999 (in millions)
--------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
KWH revenues $(131.0) $(256.4)
Energy and restructuring-related
revenues 115.4 179.6
Obligation to refund revenues
to customers per NJBPU Order 115.0 115.0
Other revenues (0.2) (3.2)
------ ------
Increase in revenues $ 99.2 $ 35.0
====== ======
KWH revenues
The decline for the three and six month periods was primarily due to the
fact that certain revenues related to stranded cost recovery are now included
under energy and restructuring-related revenues, effective August 1, 1999. The
decrease was also due in part to lower rates charged to customers in New Jersey,
resulting in a decrease of revenues of approximately $47 million year to date,
and the effect of New Jersey customers choosing another electric energy
supplier, resulting in a decrease of revenues of approximately $54 million year
to date.
Energy and restructuring-related revenues
The increase for both periods was primarily due to the inclusion of
revenues, effective August 1, 1999, for the recovery of stranded costs due to
restructuring in New Jersey. In the first quarter of 1999, JCP&L changed its
estimate for unbilled revenue, which resulted in the recording of additional
revenues during that quarter, partially offsetting the increase in the six-
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month period. Changes in energy and restructuring-related revenues do not
affect earnings as they are offset by corresponding changes in expense.
Obligation to refund revenues to customers per NJBPU Order
----------------------------------------------------------
The increase in the three and six month periods resulted from the NJBPU's
Summary Order for JCP&L, which obligated JCP&L to refund to customers (from 1999
revenues) 5% of April 30, 1997 rates for service rendered from August 1, 2002
through July 31, 2003. This occurred during the second quarter of 1999.
Other revenues
The decrease for both periods was primarily due to lower revenue taxes,
which did not have an impact on earnings.
OPERATING INCOME:
Operating income for the second quarter 2000 increased $88.3 million to
$99.6 million, as compared to the second quarter 1999. The increase was due
primarily to higher revenues, as discussed above. In addition, there was a
decrease in depreciation expense, due to the effect of the sale of generating
assets and the impairment write-down of Oyster Creek in 1999.
For the six months ended June 30, 2000, operating income increased $71.1
million, to $195.5 million, versus the same period last year. The increase was
due primarily to higher revenues, as discussed above. In addition, there was a
decrease in depreciation expense, due to the effect of the sale of generating
assets and the impairment write-down of Oyster Creek in 1999, and a decrease in
O&M costs.
OTHER INCOME AND DEDUCTIONS:
Other income and deductions for the second quarter 2000 decreased $5.7
million, to a loss of $1.2 million, versus the first quarter 1999. For the six
months ended June 30, 2000, there was a decline of $3.2 million, to $4.4
million, compared to the same period last year. The decrease in both periods was
the result of the discount on the receivable from AmerGen Energy Company LLC
(AmerGen) relating to Oyster Creek outage costs.
MET-ED RESULTS OF OPERATIONS
Met-Ed's earnings for the second quarter 2000 were $8.7 million, compared
to second quarter 1999 earnings of $19.1 million. The decline in earnings was
primarily due to higher energy costs resulting from Met-Ed's need to purchase
its energy requirements on the open market, as a result of the sale of its
generating assets in 1999. Partially offsetting these higher costs were lower
O&M and depreciation costs, mainly due to the sale of generating assets.
For the six months ended June 30, 2000, earnings were $35.2 million,
compared to earnings of $51.4 million for the same period last year. The
decrease in earnings was attributed primarily to higher energy purchase costs,
which were offset by reductions in O&M expenses and depreciation costs. In
addition, Met-Ed experienced a decline in revenues as a result of Pennsylvania
rate restructuring.
8
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OPERATING REVENUES:
Operating revenues of $197.8 million for the second quarter 2000 were
essentially the same as the second quarter 1999. Operating revenues for the
six-month period ended June 30, 2000 decreased $26.3 million, to $400.9 million,
as compared to same period in 1999. The components of the changes are as
follows:
2000 vs. 1999 (in millions)
--------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
KWH revenues $ (1.0) $ (37.7)
CTC revenues 0.3 9.7
Other revenues 0.5 1.7
------ ------
Decrease in revenues $ (0.2) $ (26.3)
====== ======
KWH revenues
The decrease in the six-month period was primarily due to lower
generation-related revenues of approximately $39 million as a result of more
Pennsylvania customers choosing another electric energy supplier.
CTC revenues
CTC revenues represent Pennsylvania stranded cost recoveries permitted by
the PaPUC in accordance with Met-Ed's final Restructuring Order effective
January 1, 1999. Changes in CTC revenues generally do not affect earnings as
they are offset by corresponding changes in expense.
OPERATING INCOME:
Operating income for the second quarter 2000 decreased $25.4 million, to
$19.2 million, as compared to the second quarter 1999. The decrease was
attributed to higher energy costs, as a result of increased energy purchases due
to the sale of Met-Ed's generating assets. The decrease in operating income was
partially offset by a decrease in O&M expenses and depreciation expense, mainly
due to the sale of generating assets.
Operating income for the six months ended June 30, 2000 decreased $46.3
million, to $74.5 million, as compared to the six months ended June 30, 1999.
The decrease was attributed to lower revenues, as discussed above, as well as
higher energy purchase costs. This decrease was offset by a reduction in O&M
expenses and depreciation expense.
OTHER INCOME AND DEDUCTIONS:
Other income and deductions for the second quarter 2000 increased $6.3
million, to $8.2 million, as compared to the second quarter 1999. For the six
months ended June 30, 2000, other income and deductions increased $8 million, to
$11 million, versus the same period last year. The change in both periods was
due primarily to an increase in interest and dividend income.
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INTEREST CHARGES AND PREFERRED DIVIDENDS:
Interest charges and preferred dividends for the second quarter 2000
decreased $1.4 million to $13.7 million, versus the second quarter 1999.
Interest charges and preferred dividends for the six months ended June 30, 2000
decreased $2.5 million to $27.8 million, as compared to the same period in 1999.
The decrease for both periods was primarily due to the redemption of all
Met-Ed's company-obligated mandatorily redeemable preferred securities and
cumulative preferred stock in 1999 (the redemption of preferred stock resulted
in a loss of $0.5 million); and the retirement of $50 million of FMBs in the
second quarter 2000. Partially offsetting the decrease was increased interest
expense associated with the issuance of $100 million of trust preferred
securities in 1999.
PENELEC RESULTS OF OPERATIONS
Penelec's earnings for the second quarter 2000 were $4.5 million, compared
to second quarter 1999 earnings of $19.9 million. The decline in earnings was
primarily due to higher energy costs resulting from Penelec's need to purchase
its energy requirements on the open market, since the sale of its generating
assets in 1999. Partially offsetting the higher energy costs were lower O&M
expense and depreciation costs mainly due to the sale of generating assets. In
addition, income tax expense was lower in the second quarter 2000, versus the
same quarter last year, due in part to an adjustment made to tax expense in the
second quarter 1999 related to the deregulation of generating assets in
Pennsylvania.
For the six months ended June 30, 2000, earnings were $31.5 million,
compared to earnings of $84.6 million for the same period last year. Excluding
the net gain of $27.8 million after-tax for the portion of the sale of Penelec's
Homer City Station related to wholesale operations, earnings for the six months
ended June 30, 1999 would have been $56.8 million. The decrease in earnings on
this basis was primarily due to higher energy purchase costs, which were offset
by reductions in O&M expenses and depreciation expense. In addition, the company
experienced a decrease in revenues as a result of Pennsylvania rate
restructuring.
OPERATING REVENUES:
Operating revenues for the second quarter 2000 increased $1.6 million, to
$206.8 million, compared to the first quarter 1999. For the six months ended
June 30, 2000, revenues decreased $24.5 million, to $426.9 million, compared to
the same period last year. The components of the changes are as follows:
2000 vs. 1999 (in millions)
--------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
KWH revenues $ 5.3 $ (24.4)
CTC revenues (2.0) 1.9
Other revenues (1.7) (2.0)
------ ------
Increase/(Decrease) in revenues $ 1.6 $ (24.5)
====== ======
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KWH revenues
The increase in the quarter was due to increases in KWH sales to
residential and industrial customers, offset by lower generation-related
revenues of approximately $3 million as result of more Pennsylvania customers
choosing another electric energy supplier. The decrease for the six-month period
was primarily due to lower generation-related revenues of approximately $43
million as a result of more Pennsylvania customers choosing another electric
energy supplier. This decrease was partially offset by higher sales to other
utilities.
CTC revenues
CTC revenues represent Pennsylvania stranded cost recoveries permitted by
the PaPUC in accordance with Penelec's Restructuring Order effective January 1,
1999. Changes in CTC revenues generally do not affect earnings as they are
offset by corresponding changes in expense.
OPERATING INCOME:
Operating income for the second quarter 2000 decreased $30.3 million, to
$14.7 million, as compared to the second quarter 1999. The decrease was
attributed primarily to higher energy costs, due to the purchase of more energy
as a result of the sale of Penelec's generating assets. The decrease was
partially offset by lower O&M and depreciation expenses, mainly due to the sale
of generating assets.
Operating income for the six months ended June 30, 2000 decreased $49.3
million, to $68.3 million, as compared to the six months ended June 30, 1999.
The decrease was attributed to lower revenues, as discussed above, as well as
higher energy purchase costs. This decrease was offset by a reduction in O&M
expenses and depreciation expense.
OTHER INCOME AND DEDUCTIONS:
Other income and deductions for the second quarter 2000 decreased $3.3
million, to $3.9 million, as compared to the second quarter 1999, due primarily
to a reduction in interest income.
Other income and deductions for the six months ended June 30, 2000
decreased $41.4 million, to $4.7 million, versus the same period last year. The
decrease was due to the absence, in 2000, of a pre-tax gain of $38.3 million,
which resulted from the sale of Penelec's Homer City Station.
INTEREST CHARGES AND PREFERRED DIVIDENDS:
Interest charges and preferred dividends for the second quarter 2000
increased $1.3 million, to $11.1 million, due primarily to an increase in
interest expense on notes payable and commercial paper.
Interest charges and preferred dividends for the first half of 2000
decreased $6.4 million, to $20.2 million, as compared to the first half of 1999.
The decrease was primarily due to the redemption of all Penelec's
company-obligated mandatorily redeemable preferred securities and cumulative
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preferred stock (the redemption of preferred stock resulted in a loss of $0.7
million), and the redemption of $600 million of FMBs in 1999. Partially
offsetting these decreases were increased interest expense associated with the
issuance of $350 million of senior notes in 1999; and the issuance of $100
million of trust preferred securities, also in 1999.
INVESTMENTS IN FUCOs AND EWGs
GPU, Inc. has Securities and Exchange Commission (SEC) authorization to
finance investments in foreign utility companies (FUCOs) and exempt wholesale
generators (EWGs) up to an aggregate amount equal to 100% of GPU's average
consolidated retained earnings, or approximately $2.4 billion as of June 30,
2000. At June 30, 2000, GPU, Inc. has remaining authorization to finance
approximately $614 million of additional investments in FUCOs and EWGs. GPU,
Inc.'s investments in FUCOs and EWGs are made through GPU Electric and the GPUI
Group.
GPU ELECTRIC
GPU Electric owns electric distribution and gas transmission businesses in
England, Australia and Argentina. In June 2000, GPU Electric sold its electric
transmission business in Australia. As a result of the sale, GPU recorded a
pre-tax loss in the quarter ended June 30, 2000 of $372 million, ($295 million
after-tax, or $2.43 per share), including a $94 million foreign currency loss.
Through its ownership in GPU Power UK, GPU Electric also has investments in
operating generating facilities located in foreign countries totaling 4,216
megawatts (MW) (of which GPU Electric's equity interest represents 1,134 MW) of
capacity. At June 30, 2000, GPU, Inc.'s aggregate investment in GPU Electric was
$569 million. GPU, Inc. has also guaranteed up to an additional $998 million of
outstanding GPU Electric obligations.
GPUI GROUP
The GPUI Group has ownership interests in six operating cogeneration
plants in the US totaling 1,014 MW (of which the GPUI Group's equity interest
represents 496 MW) of capacity and four operating generating facilities located
in foreign countries totaling 1,229 MW (of which the GPUI Group's equity
interest represents 424 MW) of capacity. At June 30, 2000, GPU, Inc.'s aggregate
investment in the GPUI Group was $251.8 million. GPU, Inc. has also guaranteed
up to an additional $30 million of GPUI Group obligations.
GPU, Inc. has concluded that continuation of this business is not
consistent with its overall business strategy and that proposals are being
sought for the sale of the GPUI Group's generating plants.
MYR
In April 2000, following the receipt of SEC approval, GPU, Inc. completed
its acquisition of MYR for approximately $217.5 million. For additional
information, see Note 2, Acquisitions and Dispositions.
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LIQUIDITY AND CAPITAL RESOURCES
Capital Expenditures and Investments
GPU Energy companies
The GPU Energy companies' capital spending for the six months ended June
30, 2000 was $160 million (JCP&L $68 million; Met-Ed $23 million; Penelec $30
million; Other $39 million), and was used primarily to expand and improve
existing transmission and distribution (T&D) facilities and for new customer
connections. For 2000, capital expenditures are estimated to be $349 million
(JCP&L $178 million; Met-Ed $57 million; Penelec $82 million; Other $32
million), which management estimates a substantial portion will be satisfied
through internally generated funds.
GPU Electric
GPU Electric's capital spending for the six months ended June 30, 2000 was
$101.4 million, and was used primarily to fund on-going network capital
replacement schedules, network improvements and new connections in GPU Power UK
and Emdersa's facilities. For 2000, capital expenditures are estimated to be
$201 million which will be satisfied through both internally generated funds and
external financings.
GPUI Group
For 2000, the GPUI Group's capital spending is estimated to be $2 million,
which will be satisfied through internally generated funds. In addition, in 2000
the GPUI Group made an additional investment of $4 million in Ballard Generation
System, Inc., representing its final investment commitment.
Financing
GPU, Inc.
In January 1999, the GPU, Inc. Board of Directors authorized the
repurchase of up to $350 million of GPU, Inc. common stock. Through June 30,
2000, 7.2 million shares of common stock, or approximately 6% of the outstanding
shares, have been repurchased under the program, at an average price of $34.28
per share. In addition, GPU, Inc. entered into a forward share repurchase
agreement with Salomon Smith Barney (SSB) on March 8, 2000. Upon expiration of
the agreement, GPU, Inc. has the option to purchase additional shares acquired
by SSB at the forward price or net settle for cash or shares at the difference
between the forward price and the then market price. As of June 30, 2000, SSB
has purchased 1.9 million shares of GPU, Inc. common stock for $49.5 million
under the terms of this agreement.
GPU has various credit facilities in place, the most significant of which
are discussed below. These credit facilities generally provide GPU with bank
loans at negotiated market rates.
GPU, Inc. and the GPU Energy companies have available $465 million of
short-term borrowing facilities, which include a $250 million revolving credit
agreement and various bank lines of credit. In addition, GPU, Inc., JCP&L,
Met-Ed and Penelec can issue commercial paper in amounts of up to
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$100 million, $150 million, $75 million and $100 million, respectively. GPU,
Inc. has regulatory authority to have outstanding at any one time a total of
$250 million of short-term debt under these programs. JCP&L, Met-Ed and Penelec
are limited by their charters or SEC authorization to $258 million, $150 million
and $150 million, respectively, of short-term debt outstanding at any one time.
GPU, Inc. also has SEC approval to issue and sell up to $300 million of
unsecured debentures through 2001.
In April 2000, GPU, Inc. completed its acquisition of MYR, which was
partially financed through the issuance of GPU, Inc. short-term debt.
GPU Energy companies
Met-Ed and Penelec currently have regulatory approval to issue senior
notes and preferred securities through December 31, 2000 in aggregate amounts of
$150 million and $157 million, respectively, of which up to $25 million for each
company may consist of preferred securities. JCP&L has regulatory approval to
issue senior notes in the aggregate amount of $300 million through December 31,
2000 and has filed with NJBPU to extend this authorization through 2002. Met-Ed
and JCP&L intend to issue secured senior notes (collateralized by first mortgage
bonds (FMBs) issued to the senior note trustee) until such time as more than 80%
of the outstanding FMBs are held by the senior note trustee. At that time, the
FMBs will be cancelled and the outstanding senior notes will become unsecured
obligations. Penelec's senior notes are unsecured.
Current plans call for the GPU Energy companies to issue senior notes
during the next three years to fund the redemption of maturing senior
securities, refinance outstanding senior securities and finance construction
activities. The senior note indentures prohibit (subject to certain exceptions)
the GPU Energy companies from issuing any debt which is senior to the senior
notes.
JCP&L and Met-Ed's FMB bond indentures include provisions that limit the
amount of FMBs the companies may issue. JCP&L and Met-Ed's interest coverage
ratios are currently in excess of their FMB indenture restrictions. JCP&L's
certificate of incorporation includes provisions that limit the amount of
preferred stock it may issue. JCP&L's preferred dividend coverage ratio is
currently in excess of these charter restrictions.
In August 1999, JCP&L filed a petition with the NJBPU requesting
authorization to issue transition bonds to securitize the recovery of bondable
stranded costs attributable to the projected net investment in the Oyster Creek
Nuclear Generating Station (Oyster Creek) at September 1, 2000. The petition
also requests that the NJBPU order provide for the imposition and collection of
a usage-based non-bypassable transition bond charge (TBC) and for the transfer
of the bondable transition property relating to the TBC to another entity. JCP&L
has amended its petition to include securitization of the up-front
decommissioning payment it has agreed to make under the Oyster Creek sale
agreement. For further information, see Recent Regulatory Actions.
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In April 2000, Penelec issued two tranches totaling $50 million of
variable rate senior notes. These senior notes were converted to fixed rate
obligations through interest rate swap agreements. The $25 million 2-year
tranche and the $25 million 2.5-year tranche were swapped into fixed interest
rates of 7.12% and 7.185%, respectively. In August 2000, Penelec issued two
tranches totaling $68 million of fixed rate senior notes. The $33 million 5-year
tranche and $35 million 10-year tranche have interest rates of 7.5% and 7.77%,
respectively.
In May and June 2000, Met-Ed redeemed a total of $50 million of maturing
FMBs. JCP&L redeemed $5 million and $16.7 million stated value cumulative
preferred stock pursuant to mandatory and optional sinking fund provisions in
June and July 2000, respectively.
Based on June 30, 2000 financial statements, Met-Ed and Penelec had
retained earnings available to pay common stock dividends of $20.3 million and
$25.6 million, respectively, net of amounts restricted under the companies'
respective FMB indentures. In addition, Met-Ed and Penelec had capital surplus
of $400 million and $285 million, respectively, which would also be available to
pay common dividends, to the extent authorized by the SEC and as may be
permitted under their respective FMB indentures. Met-Ed and Penelec have
requested SEC approval to utilize amounts now accounted for as capital surplus
to declare and pay common dividends, from time to time through December 31,
2001, so long as their common equity ratios and GPU, Inc.'s common equity ratio
are not less than 30% of total capitalization. At June 30, 2000, the common
equity ratios of Met-Ed, Penelec and GPU, Inc. were 41.3%, 39.1% and 31.4%,
respectively.
GPU Electric
On June 30, 2000, GPU, Inc. completed the sale of GPU PowerNet to
Singapore Power International (SPI) for A$2.1 billion (approximately US $1.26
billion). As part of the sales price, SPI assumed liability for A$230 million
(US $137.8 million) of medium term notes. GPU, Inc. applied the net proceeds
from the sale as follows: A$1,288 million (US $772 million) was used to repay
outstanding debt; and A$579 million (US $347 million) was placed in a trust
(which amount is included in Special deposits on the Consolidated Balance
Sheets) to provide for the repayment of the remaining medium term notes (A$174
million/US $104 million) and outstanding commercial paper (A$405 million/US $243
million) at maturity. As a result of the sale, GPU recorded a pre-tax loss in
the quarter ended June 30, 2000 of $372 million, ($295 million after-tax, or
$2.43 per share), including a $94 million foreign currency loss. GPU, Inc. is
still considering the possible sale of GPU GasNet, which it purchased in 1999
for approximately US $675 million.
On June 2, 2000, repayment of approximately $218 million of maturing GPU
GasNet bank debt was extended to September 2, 2000. GPU GasNet may further
extend this loan to October 2, 2000. GPU GasNet is in the process of
establishing a commercial paper program and a medium term note program to
refinance this debt. GPU, Inc. has agreed to guarantee this loan, under certain
conditions, if it is not repaid by August 25, 2000.
GPU Capital has a $1 billion 364-day senior revolving credit agreement
expiring in December 2000 supporting the issuance of commercial paper for its $1
billion commercial paper program established to fund GPU Electric acquisitions.
GPU, Inc. has guaranteed GPU Capital's obligations under this program. At June
30, 2000, $916 million was outstanding under the commercial paper program, of
which $701 million is included in long-term debt on the
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Consolidated Balance Sheets since it is management's intent to reissue this
amount of the commercial paper on a long-term basis.
GPU Australia Holdings, Inc. has $270 million (reducing to $180 million in
November 2000) available under its senior revolving credit facility which
matures in November 2001. This bank credit facility and other GPU, Inc. credit
facilities serve as credit support for GPU Australia Holdings' $350 million
commercial paper program. GPU, Inc. has guaranteed GPU Australia Holdings'
obligations under this program. Approximately $150 million of commercial paper
was outstanding as of June 30, 2000.
GPU Power UK maintains a British pound 150 million (approximately US $227
million) bilateral revolving credit facility with six banks for working capital
purposes, which matures at various dates through June 2005. At June 30, 2000, no
borrowings were outstanding under this facility.
GPUI Group
GPU International, Inc. has a revolving credit agreement providing for
borrowings and/or letters of credit through December 2000 of up to $30 million
outstanding at any one time. GPU, Inc. has guaranteed GPU International's
obligations under this agreement. At June 30, 2000, no borrowings or letters of
credit were outstanding under this facility.
COMPETITIVE ENVIRONMENT AND RATE MATTERS
GPU Business Plan
The GPU Energy companies expect they will continue to serve customers in
markets where there will be capped rates for varying periods and their ability
to seek rate increases will be limited. In addition, inflation could adversely
affect GPU since these increased costs may not be recoverable in an environment
where there are capped rates. Since the GPU Energy companies have essentially
exited the generation business, they will have to supply energy to customers who
do not choose an alternate supplier largely from contracted and open market
purchases. While management has identified and addressed market risks associated
with these purchases through implementation of an energy risk management
program, there can be no assurance that the GPU Energy companies will be able to
fully recover the costs to supply electricity to customers who do not choose an
alternate supplier.
In October 1999, GPU initiated a program to enhance shareholder returns
through planned cost reductions of $100 million ($55 million in 2000 and $45
million in 2001 and beyond) by increasing operating efficiency and by making
investments of $40 million to $50 million to improve the reliability of its
domestic utility operations. As of June 30, 2000, the planned cost reductions in
2000 for GPU Energy are generally progressing according to plan, and GPU Power
UK is ahead of plan with its cost reductions. The GPU Energy companies are
targeting reductions of $30 million in 2000 and an additional $40 million in
2001 and beyond. Cost reductions will be achieved by using new tools from its
enterprise resource planning system to eliminate significant amounts of
operational overhead expense and by improving the productivity of all its
operations. GPU Power UK plans cost reductions of US $25 million in 2000 and US
$5 million in 2001. These cost reductions will be achieved by eliminating
activities not provided for in its new regulated rate level, which was effective
in the Spring of 2000, and by realizing productivity benefits from its new
systems and organization. Furthermore, the sale of GPU PowerNet advances GPU's
plan to raise funds from its current investment portfolio by reducing its
ownership in non-core and under-performing assets.
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In March 2000, GPU, Inc. announced its participation in America's Fiber
Network LLC (AFN), of which GPU, Inc. anticipates owning 25%. AFN is a high-
speed fiber optics company with a network of more than 7,000 route miles, or
140,000 fiber miles, connecting major markets in the eastern US to secondary
markets with a growing need for broadband access. GPU, Inc. anticipates
investing approximately $40 million (of which $1.9 million has been invested as
of June 30, 2000) in AFN through GPU Telcom, which includes existing and new
fiber routes and electronic equipment.
In April 2000, GPU, Inc. announced the formation of Telergy Mid-Atlantic
(TMA), a joint venture between GPU Telcom and Telergy, Inc. TMA combines
established telecommunications services and marketing expertise with utilities'
existing fiber networks and natural positioning in retail markets. TMA's initial
target markets are New Jersey and Pennsylvania, with future expansions planned
for contiguous regions currently served by the network of GPU Telcom. TMA plans
to offer telecommunications service and ultimately electricity, marketing them
jointly to businesses, hospitals and educational institutions, among others. As
of June 30, 2000, GPU, Inc. has invested $20 million in Telergy, Inc. through
GPU Telcom.
The GPU Energy Companies' Supply Plan
As a result of the NJBPU and the PaPUC's Restructuring Orders, the GPU
Energy companies are required to provide generation service to customers who do
not choose an alternate supplier. (For additional information, see the Provider
of Last Resort and Basic Generation Service Provider sections below.) Given that
the GPU Energy companies have essentially divested their generation business,
there will be increased market risks associated with providing generation
service since the GPU Energy companies will have to supply energy to
non-shopping customers from contracted and open market purchases. Under its
order, JCP&L is permitted to recover reasonably and prudently incurred costs
associated with providing basic generation service. The PaPUC's Restructuring
Orders, however, generally do not allow Met-Ed and Penelec to recover their
energy costs in excess of established rate caps, which are in effect for varying
periods. While management has implemented an energy risk management program,
there can be no assurance that the GPU Energy companies will be able to fully
recover the costs to supply electricity to customers who do not choose an
alternate supplier.
Following the sales in 1999 of substantially all their electric generating
facilities, the GPU Energy companies have 285 MW of capacity and related energy
remaining to meet customer needs and an additional 619 MW of nuclear generation
from Oyster Creek, the sale of which is pending (see Generation Asset
Divestiture in this section). The GPU Energy companies also have contracts with
non-utility generation (NUG) facilities totaling 1,610 MW (JCP&L 926 MW; Met-Ed
273 MW; Penelec 411 MW) and the GPU Energy companies have agreements with other
utilities to provide for up to 1,700 MW (JCP&L 1,418 MW; Met-Ed 267 MW; Penelec
15 MW) of capacity and related energy. The GPU Energy companies have agreed to
purchase all of the capacity and energy from the Three Mile Island Unit 1
(TMI-1) nuclear generating station (which they sold to AmerGen Energy Company
LLC (AmerGen) in 1999) through December 31, 2001 and from Oyster Creek
(following its sale) through March 31, 2003. In addition, the GPU Energy
companies have the right to call the capacity of the Homer City Station (in
which Penelec sold its 50% interest to a subsidiary of Edison Mission Energy in
1999) (942 MW) through May 31, 2001 and the capacity of the generating stations
sold to Sithe Energies (4,117 MW) through May 31, 2002. The GPU Energy
companies' remaining capacity and energy needs will be met by short- to
intermediate-term commitments (one month to three years) during times of
expected high energy price volatility and reliance on spot market purchases
during other periods.
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Provider of Last Resort
Under the PaPUC Restructuring Orders, Met-Ed and Penelec customers have
been permitted to shop for their generation supplier since January 1, 1999. The
PaPUC has approved a competitive bid process to assign provider of last resort
(PLR) service for 20% of Met-Ed and Penelec's retail customers on June 1, 2000,
40% on June 1, 2001, 60% on June 1, 2002 and 80% on June 1, 2003, to licensed
generation suppliers referred to as Competitive Default Service (CDS). Any
retail customers assigned to CDS may return to Met-Ed and Penelec as the default
PLR at no additional charge. Met-Ed and Penelec may meet any remaining PLR
obligation at rates not less than the lowest rate charged by the winning CDS
provider, but no higher than Met-Ed and Penelec's rate cap.
In February 2000, GPU Energy announced that it had not received any bids
in response to its offer to auction CDS service for up to 20% of its retail
customers and, as a result, it would be increasing its forward purchasing of
electric power to accommodate these customers for whom it will now continue to
be the default supplier. At the PaPUC's direction, Met-Ed and Penelec initiated
a collaborative process in June 2000 with all interested parties from the 1998
Restructuring Orders, including the PaPUC, to address the companies' PLR risks.
Despite Met-Ed and Penelec's efforts, this process was concluded without
resolution of the issues surrounding the companies' PLR risk. Met-Ed and Penelec
are currently considering options that include filing for rate relief under a
provision of the 1998 Restructuring Orders. The provision permits Met-Ed and
Penelec to file a petition request with the PaPUC seeking PLR rates exceeding
existing rate cap levels if no CDS bids are received at or below the generation
rate cap. There can be no assurance as to the outcome of this matter.
Met-Ed and Penelec estimate that the failed CDS bid will require them to
supply 550 MW of electric power more than they had planned. In addition,
customers requiring approximately 600 MW of power have returned to Met-Ed and
Penelec from their alternate suppliers this summer. These additional energy
requirements, coupled with higher than anticipated energy prices are expected to
result in GPU's Pennsylvania supply business recording a loss in 2000 of between
approximately $0.20 to $0.25 per share. For the six months ended June 30, 2000,
the Pennsylvania supply business has contributed approximately $0.04 per share
to GPU's earnings.
Met-Ed and Penelec have developed incentive programs for shopping
customers in order to reduce their PLR exposure. Met-Ed and Penelec are also
negotiating with large commercial and industrial customers to encourage shopping
on a long-term basis and have been working with generation suppliers who are
returning customers to Met-Ed and Penelec, under PLR rates, to find alternative
power supply for these customers. There can be no assurance that these or other
efforts to mitigate Met-Ed's and Penelec's PLR risk will be successful.
Basic Generation Service Provider
JCP&L is required to provide basic generation services (BGS) to retail
customers who choose to remain with JCP&L as generation customers for a
three-year period ending July 31, 2002. Thereafter, BGS service will be bid out
at the pre-established BGS rates. JCP&L's BGS rates are pre-determined for the
period through July 31, 2003. The specific details of the BGS
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bidding process will be the subject of a future NJBPU proceeding. Any payment
received or required by JCP&L resulting from the bidding process will be
deferred for future refund or recovery.
GPU Energy Supply Market Risk
With the divestiture of essentially all their generating plants, the GPU
Energy companies are in a net short position (load in excess of supply).
Consequently, the GPU Energy companies must manage their purchase and sale of
installed capacity and ancillary services to minimize business risk associated
with their reliability obligation in the PJM Interconnection, LLC (PJM).
Supply/risk management transactions will be made based on the objective of
decreasing both price and volume uncertainty. The GPU Energy companies will
enter into supply/hedging market instruments for hedging purposes only.
Market Risk - Electricity
The GPU Energy companies are generally at risk of rising prices for
electricity and electricity-related commodities. These risks may differ during
some months of the year. To manage these risks, the GPU Energy companies employ
a portfolio approach primarily consisting of two party forward purchases and
options, but may also include New York Mercantile Exchange (NYMEX) PJM
electricity futures and similar instruments, as they become widely available.
This portfolio includes transactions of various durations ranging from one hour
to greater than one year.
The GPU Energy companies' electricity market risks can be price-related,
volume-related or cost-related as follows:
- Price-related risk refers to the price exposure associated with having to
purchase amounts of electricity, installed capacity, and ancillary
services for load requirements from the PJM interchange spot market. To
the extent the GPU Energy companies must rely on the PJM pool to satisfy
load requirements, financial exposure exists for the difference between
the PJM energy and installed capacity spot market prices and the rates
paid by customers.
- Volume-related risk refers to the uncertainty associated with the amount
of load the GPU Energy companies are required to serve. Deregulation of
the electric utility industry has resulted in the ability of their
customers to purchase energy from other electric suppliers. This customer
shopping, combined with weather changes, which affects customer energy
usage, can affect the GPU Energy companies' position.
- Cost recovery-related risk refers to the financial risk associated with
the potential prudency audits of the NJBPU that are part of JCP&L's
deferred energy and capacity cost recovery mechanism (Market Transition
Charge). Cost recovery-related risk also refers to the prudency risk
associated with future NUG cost recovery under the Restructuring Orders
approved by the PaPUC and the NJBPU which require continued mitigation of
above market NUG costs.
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Market Risk - Natural Gas
As part of their NUG cost mitigation program, the GPU Energy companies
manage the natural gas requirements of certain NUGs that produce and sell energy
to JCP&L under long-term contracts. Prudently incurred costs associated with
natural gas commodity and transportation for these NUGs are included in JCP&L's
BGS rates and Market Transition Charge.
The GPU Energy companies employ a portfolio approach consisting of two
party forward purchases and NYMEX natural gas futures contracts. The GPU Energy
companies' natural gas market risks can be price-related, volume-related or cost
recovery-related as follows:
- Price-related risk refers to the price exposure associated with having to
purchase volumes of natural gas for New Jersey NUG requirements from the
spot market.
- Volume-related risk refers to the uncertainty associated with the amount
of natural gas required for the dispatchable NUGs.
- Cost recovery-related risk refers to the financial risk associated with
the potential prudency audits of the NJBPU that are part of JCP&L's BGS
rates and Market Transition Charge.
Generation Asset Divestiture
In 1999, the GPU Energy companies completed the sales of TMI-1 and
substantially all their fossil-fuel and hydroelectric generating stations.
In October 1999, JCP&L agreed to sell Oyster Creek to AmerGen, a joint
venture of PECO Energy and British Energy, for $10 million. GPU expects the
transaction to be completed in August 2000. As part of the terms of the
transaction, AmerGen will assume full responsibility for decommissioning the
plant. JCP&L will transfer $430 million of decommissioning trust funds and is
funding the station's outage cost, including the fuel reload, for the next
refueling outage scheduled for the Fall of 2000. AmerGen will repay these outage
costs (estimated at $88 million) to JCP&L in nine equal annual installments
without interest, beginning one year after the closing.
Recent Regulatory Actions
New Jersey Restructuring
In May 1999, the NJBPU issued a Summary Order with respect to JCP&L's rate
unbundling, stranded cost and restructuring filings. The Summary Order provides
for, among other things, customer choice of electric generation supplier
beginning August 1, 1999, rate reductions for all consumers and full recovery of
stranded costs. New Jersey utilities began accepting customer selection of
suppliers in October 1999. The Summary Order did not address the sale of Oyster
Creek, because at the time the Summary Order was issued, it was uncertain
whether the plant would be sold or retired early. JCP&L is awaiting a more
detailed order from the NJBPU.
In August 1999, JCP&L filed a petition with the NJBPU requesting
authorization to issue transition bonds to securitize the recovery of bondable
stranded costs attributable to the projected net investment in
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Oyster Creek at September 1, 2000 (for additional information, see Financing
section of Liquidity and Capital Resources).
During 1999, the NJBPU issued final electric restructuring and
generation-related securitization orders to Public Service Electric and Gas
Company (PSE&G), a non-affiliated utility. Several parties appealed these orders
on a variety of grounds, including the use of deferred accounting associated
with above market NUG costs and the Societal Benefit Charge, which includes
recovery of nuclear decommissioning costs. In April 2000, the Appellate Division
of the New Jersey Superior Court affirmed the orders. The Appellate Division's
decision has been appealed to the New Jersey Supreme Court which is not expected
to issue a decision before January 2001. While JCP&L's Summary Order has not
been appealed, JCP&L is unable to determine the impact, if any, the appeals to
PSE&G's orders will have on its restructuring order and petition for
securitization or its use of deferred accounting.
Pennsylvania Restructuring
In 1996, Pennsylvania adopted comprehensive legislation (Customer Choice
Act) which provides for the restructuring of that state's electric utility
industry. In October 1998, the PaPUC issued amended Restructuring Orders,
approving Settlement Agreements entered into by Met-Ed and Penelec, which, among
other things, provide customer choice of electric generation supplier beginning
January 1, 1999, a 1-year (1999) reduction in retail distribution rates for all
consumers and recovery of a substantial portion of what otherwise would have
become stranded costs, subject to the results of the generation divestitures. A
final determination of stranded cost recovery will be provided for in a Phase II
proceeding, which began in early 2000.
In 1999, Penelec deposited a portion of the proceeds from its generation
asset sale into a NUG Trust, which has a balance at June 30, 2000 of $222
million. To the extent Penelec incurs above-market NUG costs in excess of the
CTC revenues allocated for such costs, Penelec may withdraw amounts from the
trust.
Federal Regulation
In November 1997, the Federal Energy Regulatory Commission (FERC) issued
an order to the PJM Power Pool which, among other things, directed the GPU
Energy companies to implement a single-system transmission rate, effective April
1, 1998. The implementation of the single-system rate has not affected total
transmission revenues; however, it has increased the pricing for transmission
service in Met-Ed and Penelec's service territories and reduced the pricing for
transmission service in JCP&L's service territory.
The GPU Energy companies have requested the FERC to reconsider its ruling
requiring a single-system transmission rate. The Restructuring Orders for Met-Ed
and Penelec provide for a transmission and distribution rate cap exception to
recover the increase in the transmission rate from Met-Ed and Penelec's retail
customers in the event the FERC denies the request for reconsideration of the
single-system transmission rate. The FERC's ruling may also have an effect on
JCP&L's distribution rates. There can be no assurance as to the outcome of this
matter.
21
<PAGE>
Several bills have been introduced in Congress providing for a
comprehensive restructuring of the electric utility industry. These bills
proposed, among other things, retail choice for all utility customers, the
opportunity for utilities to recover their prudently incurred stranded costs in
varying degrees, and repeal of both the Public Utility Regulatory Policies Act
(PURPA) and the Public Utility Holding Company Act of 1935 (PUHCA).
Pending Complaint before the FERC
On June 30, 2000, Allegheny Electric Cooperative (AEC), a wholesale
customer, filed a complaint with the FERC against Penelec claiming, among other
things, that Penelec should not be permitted to charge AEC increased purchased
power costs which Penelec has incurred following Penelec's divestiture of its
generation plants.
Penelec has filed an answer to the complaint which, among other things,
renews a previous offer to release AEC from its supplemental power contract with
Penelec and shop for its generation needs. There can be no assurance as to the
outcome of this matter.
Nonutility Generation Agreements
Pursuant to the mandates of PURPA and state regulatory directives, the GPU
Energy companies have been required to enter into power purchase agreements with
NUGs for the purchase of energy and capacity for terms of up to 20 years.
The NJBPU Summary Order provides JCP&L assurance of full recovery of its
NUG costs (including above-market NUG costs and certain buyout costs), whereas
the PaPUC Restructuring Orders provide Met-Ed and Penelec assurance of full
recovery of their above-market NUG costs and certain NUG buyout costs. The GPU
Energy companies have recorded, on a present value basis, a total liability of
$3.1 billion (JCP&L $1.5 billion; Met-Ed $0.7 billion; Penelec $0.9 billion) on
the Consolidated Balance Sheets for above-market NUG costs. These amounts are
offset by corresponding regulatory assets. The GPU Energy companies are
continuing efforts to reduce the above-market costs of these agreements. There
can be no assurance as to the extent to which these efforts will be successful.
ACCOUNTING MATTERS
Statement of Financial Accounting Standards No. 71 (FAS 71), "Accounting
for the Effects of Certain Types of Regulation," applies to regulated utilities
that have the ability to recover their costs through rates established by
regulators and charged to customers. In June 1997, the Financial Accounting
Standards Board's (FASB) Emerging Issues Task Force (EITF) (Issue 97-4)
concluded that utilities are no longer subject to FAS 71, for the relevant
portion of their business, when they know details of their individual transition
plans to a competitive electric generation marketplace. The EITF also concluded
that utilities can continue to carry previously recorded regulated assets, as
well as any newly established regulated assets (including those related to
generation), on their balance sheets if regulators have assured a regulated cash
flow stream to recover the cost of these assets.
22
<PAGE>
On May 24, 1999, the NJBPU issued a Summary Order regarding JCP&L's
unbundling, stranded cost and restructuring filings which essentially
deregulated the electric generation portion of JCP&L's business. Accordingly, in
the second quarter of 1999, JCP&L discontinued the application of FAS 71 and
adopted the provisions of Statement of Financial Accounting Standards No. 101
(FAS 101), "Regulated Enterprises - Accounting for the Discontinuation of
Application of FASB Statement No. 71" and EITF Issue 97-4 with respect to its
electric generation operations. In 1998, Met-Ed and Penelec, in conjunction with
receiving their Restructuring Orders, discontinued the application of FAS 71 and
adopted the provisions of FAS 101 and EITF 97-4 for their generation operations.
The transmission and distribution portion of the GPU Energy companies'
operations continue to be subject to the provisions of FAS 71.
In accordance with Statement of Financial Accounting Standards No. 121
(FAS 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," impairment tests performed by the GPU
Energy companies on the net book values of their remaining generation facilities
determined that the net investment in Oyster Creek was impaired. As of June 30,
2000, this resulted in write-downs of $579 million to reflect Oyster Creek's
fair market value. 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 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by FAS 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133" and FAS 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - An Amendment of FASB
Statement No. 133" (collectively, FAS 133), establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. In general, FAS 133
requires that companies recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
FAS 133 (as amended) excludes from its scope certain contracts that qualify as
normal purchases and sales. To qualify for this exclusion, it must be probable
that the contract will result in physical delivery.
GPU's use of derivative instruments is intended to manage the risks of
commodity price, interest rate and foreign currency fluctuations and may include
such transactions as electricity and natural gas forwards and futures contracts,
foreign currency swaps, interest rate swaps and options. GPU does not intend to
hold or issue derivative instruments for trading purposes. To the extent that
GPU's energy-related contracts fall within the scope of FAS 133, GPU will be
required to include them 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 their intended
use and designation as a hedge. GPU will adopt this statement effective January
1, 2001 and is currently in the process of evaluating the impact of its
implementation.
23
<PAGE>
<TABLE>
<CAPTION>
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
In Thousands
-----------------------------
June 30, December 31,
2000 1999
------------ ------------
(Unaudited)
ASSETS
Utility Plant:
<S> <C> <C>
Transmission, distribution and general plant $ 9,928,129 $11,240,218
Generation plant 535,514 526,228
---------- ----------
Utility plant in service 10,463,643 11,766,446
Accumulated depreciation (3,962,894) (3,929,963)
---------- ----------
Net utility plant in service 6,500,749 7,836,483
Construction work in progress 210,101 170,317
Other, net 16,575 18,128
---------- ----------
Net utility plant 6,727,425 8,024,928
---------- ----------
Other Property and Investments:
Equity investments 215,184 207,029
Goodwill, net 2,227,483 2,615,301
Nuclear decommissioning trusts, at market (Note 1) 669,796 636,284
Nuclear fuel disposal trust, at market 120,609 119,293
Other, net 543,220 716,142
---------- ----------
Total other property and investments 3,776,292 4,294,049
---------- ----------
Current Assets:
Cash and temporary cash investments 634,439 471,548
Marketable securities 28,479 26,946
Special deposits 386,910 42,687
Accounts receivable:
Customers, net 541,689 445,745
Other 233,243 185,968
Unbilled revenues 178,509 152,263
Cost and estimated earnings in excess of
billings on uncompleted contracts 21,141 -
Materials and supplies, at average cost or less:
Construction and maintenance 76,896 100,807
Fuel 459 448
Deferred income taxes 260,947 72,249
Prepayments 156,234 141,352
---------- ----------
Total current assets 2,518,946 1,640,013
---------- ----------
Deferred Debits and Other Assets:
Regulatory assets, net (Note 1) 4,639,953 4,716,246
Deferred income taxes 2,294,588 2,528,393
Other 501,687 494,203
---------- ----------
Total deferred debits and other assets 7,436,228 7,738,842
---------- ----------
Total Assets $20,458,891 $21,697,832
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
24
<PAGE>
<TABLE>
<CAPTION>
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
In Thousands
-----------------------------
June 30, December 31,
2000 1999
------------ ------------
(Unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
<S> <C> <C>
Common stock $ 331,958 $ 331,958
Capital surplus 1,014,032 1,011,721
Retained earnings 2,280,561 2,426,350
Accumulated other comprehensive income/(loss) (Note 5) (35,165) (6,341)
---------- ----------
Total 3,591,386 3,763,688
Reacquired common stock, at cost (315,000) (298,735)
---------- ----------
Total common stockholders' equity 3,276,386 3,464,953
Cumulative preferred stock:
With mandatory redemption 51,500 73,167
Without mandatory redemption 12,649 12,649
Subsidiary-obligated mandatorily redeemable
preferred securities 125,000 125,000
Trust preferred securities 200,000 200,000
Long-term debt 4,894,739 5,631,394
---------- ----------
Total capitalization 8,560,274 9,507,163
---------- ----------
Current Liabilities:
Securities due within one year 588,626 581,147
Notes payable 1,297,733 1,391,071
Bank overdraft 236,536 224,585
Obligations under capital leases 39,548 48,165
Accounts payable 673,229 468,825
Billings in excess of cost and estimated
earnings on uncompleted contracts 19,484 -
Taxes accrued 161,981 309,509
Interest accrued 68,547 76,246
Other 619,370 732,110
---------- ----------
Total current liabilities 3,705,054 3,831,658
---------- ----------
Deferred Credits and Other Liabilities:
Deferred income taxes 3,528,589 3,563,078
Unamortized investment tax credits 57,460 61,364
Three Mile Island Unit 2 future costs (Note 1) 504,033 496,944
Power purchase contract loss liability (Note 1) 3,156,834 3,300,878
Other 946,647 936,747
---------- ----------
Total deferred credits and other liabilities 8,193,563 8,359,011
---------- ----------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $20,458,891 $21,697,832
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
25
<PAGE>
<TABLE>
<CAPTION>
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
(Unaudited)
In Thousands
(Except Per Share Data)
-----------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues $1,280,374 $ 892,700 $2,456,818 $1,961,403
--------- --------- --------- ---------
Operating Expenses:
Fuel 22,073 72,443 41,556 168,919
Power purchased and interchanged 471,932 266,281 883,403 512,790
Deferred costs, net (33,482) (20,226) (66,996) 144
Other operation and maintenance 411,884 273,227 669,431 513,351
Loss on sale of business 372,492 - 372,492 -
Depreciation and amortization 134,432 125,851 264,027 243,095
Taxes, other than income taxes 43,046 43,097 94,595 92,444
--------- --------- --------- ---------
Total operating expenses 1,422,377 760,673 2,258,508 1,530,743
--------- --------- --------- ---------
Operating Income/(Loss) (142,003) 132,027 198,310 430,660
---------- --------- --------- ---------
Other Income and Deductions:
Allowance for other funds used during
construction 296 100 541 165
Equity in undistributed earnings
of affiliates, net 2,120 23,247 5,772 76,499
Other income, net 31,032 19,153 50,210 68,234
--------- --------- --------- ---------
Total other income and deductions 33,448 42,500 56,523 144,898
--------- --------- --------- ---------
Income/(Loss) Before Interest Charges
and Preferred Dividends (108,555) 174,527 254,833 575,558
--------- --------- --------- ---------
Interest Charges and Preferred Dividends:
Long-term debt and notes payable 134,162 86,428 267,076 167,552
Trust preferred securities 6,347 1,000 7,345 1,000
Subsidiary-obligated mandatorily
redeemable preferred securities 7,222 5,350 14,444
Other interest 399 1,733 2,469 3,298
Allowance for borrowed funds used
during construction (756) (1,036) (1,586) (1,644)
Preferred stock dividends of subsidiaries,
inclusive of $1,268 loss on
reacquisition (6 Mos. 1999) 1,661 2,370 4,122 6,290
--------- --------- --------- ---------
Total interest charges and
preferred dividends 141,813 97,717 284,776 190,940
--------- --------- --------- ---------
Income/(Loss) Before Income Taxes
and Minority Interest (250,368) 76,810 (29,943) 384,618
Income taxes (40,164) 28,023 48,786 144,289
Minority interest net income 609 1,525 1,086 2,348
--------- --------- --------- ---------
Net Income/(Loss) $ (210,813) $ 47,262 $ (79,815) $ 237,981
========= ========= ========= =========
Basic - Earnings Per Avg. Common Share $ (1.74) $ .39 $ (.66) $ 1.88
========= ========= ========= =========
- Avg. Common Shares Outstanding 121,199 125,701 121,284 126,670
========= ========= ========= =========
Diluted - Earnings Per Avg. Common Share $ (1.74) $ .38 $ (.66) $ 1.87
========= ========= ========= =========
- Avg. Common Shares Outstanding 121,314 125,951 121,389 126,932
========= ========= ========= =========
Cash Dividends Paid Per Share $ .545 $ .530 $ 1.075 $ 1.045
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
26
<PAGE>
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
(Unaudited)
In Thousands
------------------------
Six Months
Ended June 30,
------------------------
2000 1999
---- ----
Operating Activities:
Net income/(loss) $ (79,815) $ 237,981
Adjustments to reconcile income to cash provided:
Depreciation and amortization 277,156 256,454
Amortization of property under capital leases 9,080 26,041
NJBPU restructuring rate order - 115,000
(Gain)/Loss on sale of business/investments 368,408 (38,339)
Equity in undistributed earnings
of affiliates, net of distributions received (19,886) (66,889)
Deferred income taxes and investment tax
credits, net 67,439 (343,327)
Deferred costs, net (66,996) 411
Changes in working capital:
Receivables (218,469) (92,730)
Cost and estimated earnings in excess of
billings on uncompleted contracts 5,789 -
Materials and supplies 2,180 3,806
Special deposits and prepayments 82,146 (109,353)
Payables and accrued liabilities 66,890 118,481
Billings in excess of cost and estimated
earnings on uncompleted contracts (327) -
Nonutility generation contract buyout costs (5,660) (40,250)
Other, net (88,654) 42,953
--------- ---------
Net cash provided by operating activities 399,281 110,239
--------- ---------
Investing Activities:
Acquisitions, net of cash acquired (220,242) (1,022,368)
Capital expenditures and investments (265,903) (186,344)
Proceeds from sale of business/investments 1,155,510 894,450
Contributions to decommissioning trusts (18,646) (19,302)
Proceeds from nonutility generation trusts 44,809 -
Trust fund established for repayment of debt (346,966) -
Other, net 5,847 52,912
--------- ---------
Net cash provided/(required)
by investing activities 354,409 (280,652)
--------- ---------
Financing Activities:
Issuance of long-term debt 421,169 1,614,321
Issuance of trust preferred securities - 193,070
Retirement of long-term debt (820,128) (1,463,192)
Increase in notes payable, net 13,461 348,624
Capital lease principal payments (9,784) (23,756)
Reacquisition of common stock (22,383) (102,582)
Dividends paid on common stock (130,531) (132,534)
Redemption of preferred stock of subsidiaries (21,667) (35,004)
--------- ---------
Net cash provided/(required)
by financing activities (569,863) 398,947
--------- ---------
Effect of exchange rate changes on cash (20,936) (2,835)
--------- ---------
Net increase in cash and temporary
cash investments from above activities 162,891 225,699
Cash and temporary cash investments, beginning of year 471,548 72,755
--------- ---------
Cash and temporary cash investments, end of period $ 634,439 $ 298,454
========= =========
Supplemental Disclosure:
Interest and preferred dividends paid $ 282,595 $ 191,347
========= =========
Income taxes paid $ 150,789 $ 285,016
========= =========
New capital lease obligations incurred $ 9,732 $ 28,396
========= =========
Common stock dividends declared but not paid $ - $ 66,489
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
27
<PAGE>
<TABLE>
<CAPTION>
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Balance Sheets
In Thousands
-----------------------------
June 30, December 31,
2000 1999
------------ ------------
(Unaudited)
ASSETS
Utility Plant:
<S> <C> <C>
Transmission, distribution, and general plant $3,135,214 $3,097,150
Generation plant 510,282 504,545
--------- ---------
Utility plant in service 3,645,496 3,601,695
Accumulated depreciation (1,947,437) (1,872,422)
--------- ---------
Net utility plant in service 1,698,059 1,729,273
Construction work in progress 106,414 80,671
Other, net 13,073 14,781
--------- ---------
Net utility plant 1,817,546 1,824,725
--------- ---------
Other Property and Investments:
Nuclear decommissioning trusts, at market (Note 1) 419,586 394,941
Nuclear fuel disposal trust, at market 120,609 119,293
Other, net 2,756 1,252
--------- ---------
Total other property and investments 542,951 515,486
--------- ---------
Current Assets:
Cash and temporary cash investments 53,480 68,684
Special deposits 2,479 1,035
Accounts receivable:
Customers, net 160,561 164,099
Affiliates 27,053 34,992
Other 46,989 34,696
Unbilled revenues 89,643 78,251
Fuel inventory, at average cost or less 220 240
Deferred income taxes 4,439 1,652
Prepayments 69,467 23,000
--------- ---------
Total current assets 454,331 406,649
--------- ---------
Deferred Debits and Other Assets:
Regulatory assets, net (Note 1) 2,727,532 2,810,854
Deferred income taxes 196,617 221,668
Other 56,683 31,615
--------- ---------
Total deferred debits and other assets 2,980,832 3,064,137
--------- ---------
Total Assets $5,795,660 $5,810,997
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
28
<PAGE>
<TABLE>
<CAPTION>
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Balance Sheets
In Thousands
-----------------------------
June 30, December 31,
2000 1999
------------ ------------
(Unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
<S> <C> <C>
Common stock $ 153,713 $ 153,713
Capital surplus 510,769 510,769
Retained earnings 711,760 720,878
Accumulated other comprehensive income/(loss)(Note 5) 7 7
--------- ---------
Total common stockholder's equity 1,376,249 1,385,367
Cumulative preferred stock:
With mandatory redemption 51,500 73,167
Without mandatory redemption 12,649 12,649
Company-obligated mandatorily redeemable
preferred securities 125,000 125,000
Long-term debt 1,133,880 1,133,760
--------- ---------
Total capitalization 2,699,278 2,729,943
--------- ---------
Current Liabilities:
Securities due within one year 10,846 50,846
Obligations under capital leases 39,086 48,165
Accounts payable:
Affiliates 110,665 60,527
Other 125,689 82,355
Taxes accrued 84,307 13,079
Interest accrued 23,815 24,523
Other 30,369 36,169
--------- ---------
Total current liabilities 424,777 315,664
--------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 574,710 570,568
Unamortized investment tax credits 29,205 32,114
Nuclear fuel disposal fee 152,257 148,009
Three Mile Island Unit 2 future costs (Note 1) 126,013 124,241
Power purchase contract loss liability (Note 1) 1,525,614 1,624,769
Other 263,806 265,689
--------- ---------
Total deferred credits and other liabilities 2,671,605 2,765,390
--------- ---------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $5,795,660 $5,810,997
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
29
<PAGE>
<TABLE>
<CAPTION>
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Statements of Income
(Unaudited)
In Thousands
-------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- ---------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues $ 490,150 $ 391,025 $ 942,895 $ 907,914
-------- -------- --------- --------
Operating Expenses:
Fuel 9,326 21,598 15,193 43,715
Power purchased and interchanged:
Affiliates 10,977 41,639 31,253 57,588
Others 223,153 144,908 417,275 298,358
Deferral costs, net (33,482) (20,226) (66,996) 144
Other operation and maintenance 109,700 107,899 207,827 215,745
Depreciation and amortization 56,163 64,362 112,306 127,058
Taxes, other than income taxes 14,760 19,560 30,489 40,894
-------- -------- --------- --------
Total operating expenses 390,597 379,740 747,347 783,502
-------- -------- --------- --------
Operating Income 99,553 11,285 195,548 124,412
-------- -------- --------- --------
Other Income and Deductions:
Allowance for other funds used during
construction 297 69 513 123
Other income/(expense), net (1,501) 4,463 3,931 7,482
-------- -------- --------- --------
Total other income and deductions (1,204) 4,532 4,444 7,605
-------- -------- --------- --------
Income Before Interest Charges 98,349 15,817 199,992 132,017
-------- -------- --------- --------
Interest Charges:
Long-term debt and notes payable 22,560 24,280 45,822 47,470
Company-obligated mandatorily
redeemable preferred securities 2,675 2,675 5,350 5,350
Other interest 208 461 360 656
Allowance for borrowed funds used
during construction (473) (454) (819) (686)
-------- -------- --------- --------
Total interest charges 24,970 26,962 50,713 52,790
-------- -------- --------- --------
Income/(Loss) Before Income Taxes 73,379 (11,145) 149,279 79,227
Income taxes 28,945 (5,290) 59,275 31,385
-------- -------- --------- --------
Net Income/(Loss) 44,434 (5,855) 90,004 47,842
Preferred stock dividends 1,661 2,370 4,122 4,802
-------- -------- --------- --------
Earnings/(Loss) Available for Common Stock $ 42,773 $ (8,225) $ 85,882 $ 43,040
======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
30
<PAGE>
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Statements of Cash Flows
(Unaudited)
In Thousands
-------------------------
Six Months
Ended June 30,
-------------------------
2000 1999
---- ----
Operating Activities:
Net income $ 90,004 $ 47,842
Adjustments to reconcile income to cash provided:
Depreciation and amortization 128,800 141,578
Amortization of property under capital leases 9,080 15,237
NJBPU restructuring rate order - 115,000
Deferred income taxes and investment tax
credits, net 2,690 (40,599)
Deferred costs, net (66,996) 411
Changes in working capital:
Receivables (6,750) (55,383)
Materials and supplies (1,151) 11,797
Special deposits and prepayments (47,911) (96,850)
Payables and accrued liabilities 111,921 7,058
Due to/from affiliates 58,077 (4,293)
Nonutility generation contract buyout costs - (35,500)
Other, net (41,697) 33,395
-------- --------
Net cash provided by operating activities 236,067 139,693
-------- --------
Investing Activities:
Capital expenditures and investments (68,165) (67,305)
Contributions to decommissioning trusts (14,671) (12,571)
Other, net 2,299 1,860
-------- --------
Net cash required by investing activities (80,537) (78,016)
-------- --------
Financing Activities:
Retirement of long-term debt (40,000) -
Increase in notes payable, net - 65,456
Redemption of preferred stock (21,667) (5,000)
Capital lease principal payments (9,784) (12,366)
Dividends paid on common stock (95,000) (95,000)
Dividends paid on preferred stock (4,283) (4,708)
-------- --------
Net cash required by financing activities (170,734) (51,618)
-------- --------
Net increase/(decrease) in cash and temporary
cash investments from above activities (15,204) 10,059
Cash and temporary cash investments, beginning of year 68,684 1,850
-------- --------
Cash and temporary cash investments, end of period $ 53,480 $ 11,909
======== ========
Supplemental Disclosure:
Interest and preferred dividends paid $ 55,469 $ 57,524
======== ========
Income taxes paid/(refunded) $ (22,993) $ 81,027
======== ========
New capital lease obligations incurred $ 9,732 $ 7,098
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
31
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
In Thousands
-----------------------------
June 30, December 31,
2000 1999
------------ ------------
(Unaudited)
ASSETS
Utility Plant:
<S> <C> <C>
Transmission, distribution and general plant $1,517,692 $1,500,417
Generation plant 25,232 21,683
--------- ---------
Utility plant in service 1,542,924 1,522,100
Accumulated depreciation (480,973) (462,709)
--------- ---------
Net utility plant in service 1,061,951 1,059,391
Construction work in progress 24,164 25,329
Other, net 596 643
--------- ---------
Net utility plant 1,086,711 1,085,363
--------- ---------
Other Property and Investments:
Nuclear decommissioning trusts, at market (Note 1) 150,941 144,261
Other, net 5,357 3,010
--------- ---------
Total other property and investments 156,298 147,271
--------- ---------
Current Assets:
Cash and temporary cash investments 16 10,899
Special deposits 161 160
Accounts receivable:
Customers, net 64,720 60,188
Affiliates 132,050 77,067
Other 53,279 46,377
Unbilled revenues 31,998 28,956
Deferred income taxes 2,945 2,945
Prepayments 17,047 16,715
--------- ---------
Total current assets 302,216 243,307
--------- ---------
Deferred Debits and Other Assets:
Regulatory assets, net (Note 1) 1,252,164 1,232,865
Deferred income taxes 728,003 738,189
Other 41,216 41,198
--------- ---------
Total deferred debits and other assets 2,021,383 2,012,252
--------- ---------
Total Assets $3,566,608 $3,488,193
========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
32
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
In Thousands
-----------------------------
June 30, December 31,
2000 1999
------------ ------------
(Unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
<S> <C> <C>
Common stock $ 66,273 $ 66,273
Capital surplus 400,200 400,200
Retained earnings 23,741 13,581
Accumulated other comprehensive income (Note 5) 19,222 21,363
--------- ---------
Total common stockholder's equity 509,436 501,417
Trust preferred securities 100,000 100,000
Long-term debt 496,884 496,883
--------- ---------
Total capitalization 1,106,320 1,098,300
--------- ---------
Current Liabilities:
Securities due within one year 25 50,025
Notes payable 128,600 -
Accounts payable:
Affiliates 132,645 125,179
Other 45,271 30,106
Taxes accrued 13,421 35,976
Interest accrued 15,348 16,738
Other 10,732 18,208
--------- ---------
Total current liabilities 346,042 276,232
--------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 997,287 993,427
Unamortized investment tax credits 14,586 15,010
Three Mile Island Unit 2 future costs (Note 1) 251,924 248,381
Nuclear fuel disposal fee 34,383 33,430
Power purchase contract loss liability (Note 1) 729,727 735,833
Other 86,339 87,580
--------- ---------
Total deferred credits and other liabilities 2,114,246 2,113,661
--------- ---------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $3,566,608 $3,488,193
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
33
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
(Unaudited)
In Thousands
---------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- ----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues $ 197,814 $ 198,010 $ 400,870 $ 427,167
-------- -------- --------- --------
Operating Expenses:
Fuel - 23,514 - 49,143
Power purchased and interchanged:
Affiliates 1,296 - 1,348 2,208
Others 111,566 46,039 204,064 86,997
Other operation and maintenance 38,205 54,002 66,205 105,917
Depreciation and amortization 15,941 19,191 31,745 38,320
Taxes, other than income taxes 11,593 10,641 22,976 23,707
-------- -------- --------- ---------
Total operating expenses 178,601 153,387 326,338 306,292
-------- -------- --------- ---------
Operating Income 19,213 44,623 74,532 120,875
-------- -------- --------- ---------
Other Income and Deductions:
Allowance for other funds used during
construction (1) 31 28 42
Other income, net 8,249 1,903 11,020 3,036
-------- -------- --------- --------
Total other income and deductions 8,248 1,934 11,048 3,078
-------- -------- --------- --------
Income Before Interest Charges 27,461 46,557 85,580 123,953
-------- -------- --------- --------
Interest Charges:
Long-term debt and notes payable 11,405 12,028 23,340 24,116
Trust preferred securities 1,837 694 3,675 694
Company-obligated mandatorily
redeemable preferred securities - 2,250 4,500
Other interest 560 429 1,086 851
Allowance for borrowed funds used
during construction (84) (282) (268) (458)
-------- -------- --------- -------
Total interest charges 13,718 15,119 27,833 29,703
-------- -------- --------- ---------
Income Before Income Taxes 13,743 31,438 57,747 94,250
Income taxes 5,076 12,296 22,587 42,276
-------- -------- --------- ---------
Net Income 8,667 19,142 35,160 51,974
Preferred stock dividends - - - 66
Loss on preferred stock reacquisition - - - 542
-------- -------- --------- ---------
Earnings Available for Common Stock $ 8,667 $ 19,142 $ 35,160 $ 51,366
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
34
<PAGE>
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
(Unaudited)
In Thousands
-------------------------
Six Months
Ended June 30,
-------------------------
2000 1999
---- ----
Operating Activities:
Net income $ 35,160 $ 51,974
Adjustments to reconcile income to cash provided:
Depreciation and amortization 31,616 41,302
Amortization of property under capital leases - 7,117
Deferred income taxes and investment tax
credits, net 8,138 18,161
Changes in working capital:
Receivables (11,435) 269
Materials and supplies - 10,036
Special deposits and prepayments (333) (52,958)
Payables and accrued liabilities (16,285) (91,269)
Due to/from affiliates (47,487) 52,592
Nonutility generation contract buyout costs (1,250) (1,250)
Other, net (35,461) (17,502)
-------- --------
Net cash provided/(required)
by operating activities (37,337) 18,472
-------- --------
Investing Activities:
Capital expenditures and investments (23,191) (32,321)
Contributions to decommissioning trusts (3,955) (1,485)
Other, net - (33)
-------- --------
Net cash required by investing activities (27,146) (33,839)
-------- --------
Financing Activities:
Increase/(decrease) in notes payable, net 128,600 (54,640)
Retirement of long-term debt (50,000) -
Issuance of trust preferred securities - 96,535
Redemption of preferred stock - (12,598)
Capital lease principal payments - (7,160)
Dividends paid on common stock (25,000) (30,000)
Dividends paid on preferred stock - (66)
Contribution from parent corporation - 30,000
-------- -------
Net cash provided by financing activities 53,600 22,071
-------- -------
Net increase/(decrease) in cash and temporary cash
investments from above activities (10,883) 6,704
Cash and temporary cash investments, beginning of year 10,899 442
-------- --------
Cash and temporary cash investments, end of period $ 16 $ 7,146
======== ========
Supplemental Disclosure:
Interest and preferred dividends paid $ 27,803 $ 28,112
======== ========
Income taxes paid $ 45,736 $ 76,187
======== ========
New capital lease obligations incurred $ - $ 14,199
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
35
<PAGE>
<TABLE>
<CAPTION>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
In Thousands
-----------------------------
June 30, December 31,
2000 1999
------------ ------------
(Unaudited)
ASSETS
Utility Plant:
<S> <C> <C>
Transmission, distribution and general plant $1,756,808 $1,732,386
Accumulated depreciation (575,494) (552,449)
--------- ---------
Net utility plant in service 1,181,314 1,179,937
Construction work in progress 34,166 30,329
Other, net 2,906 2,704
--------- ---------
Net utility plant 1,218,386 1,212,970
--------- ---------
Other Property and Investments:
Nonutility generation trusts, at market 221,892 266,700
Nuclear decommissioning trusts, at market (Note 1) 99,269 97,082
Other, net 2,927 1,233
--------- ---------
Total other property and investments 324,088 365,015
--------- ---------
Current Assets:
Cash and temporary cash investments 585 32,250
Special deposits 233 233
Accounts receivable:
Customers, net 72,820 69,752
Affiliates 112,777 15,546
Other 31,369 24,658
Unbilled revenues 31,738 30,836
Deferred income taxes 7,589 7,589
Prepayments 15,706 15,484
--------- ---------
Total current assets 272,817 196,348
--------- ---------
Deferred Debits and Other Assets:
Regulatory assets, net (Note 1) 660,257 672,527
Deferred income taxes 1,197,133 1,225,150
Other 23,779 23,781
--------- ---------
Total deferred debits and other assets 1,881,169 1,921,458
--------- ---------
Total Assets $3,696,460 $3,695,791
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
36
<PAGE>
<TABLE>
<CAPTION>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
In Thousands
-----------------------------
June 30, December 31,
2000 1999
------------ ------------
(Unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
<S> <C> <C>
Common stock $ 105,812 $ 105,812
Capital surplus 285,486 285,486
Retained earnings 35,746 59,265
Accumulated other comprehensive income (Note 5) 9,542 10,619
--------- ---------
Total common stockholder's equity 436,586 461,182
Trust preferred securities 100,000 100,000
Long-term debt 474,734 424,641
--------- ---------
Total capitalization 1,011,320 985,823
--------- ---------
Current Liabilities:
Securities due within one year 13 13
Notes payable 104,400 53,600
Obligations under capital leases 462 -
Accounts payable:
Affiliates 134,369 66,223
Other 52,494 34,845
Taxes accrued 5,986 108,005
Interest accrued 8,938 6,588
Other 11,175 17,567
--------- ---------
Total current liabilities 317,837 286,841
--------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 1,230,791 1,250,490
Unamortized investment tax credits 13,669 14,240
Three Mile Island Unit 2 future costs (Note 1) 126,096 124,322
Nuclear fuel disposal fee 17,197 16,717
Power Purchase contract loss liability (Note 1) 901,493 940,276
Other 78,057 77,082
--------- ---------
Total deferred credits and other liabilities 2,367,303 2,423,127
--------- ---------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $3,696,460 $3,695,791
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
37
<PAGE>
<TABLE>
<CAPTION>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
(Unaudited)
In Thousands
--------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- ----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues $ 206,789 $ 205,097 $ 426,894 $ 451,346
-------- -------- --------- ---------
Operating Expenses:
Fuel - 16,709 - 53,253
Power purchased and interchanged:
Affiliates 876 2,991 1,033 4,553
Others 120,818 54,960 225,831 93,991
Other operation and maintenance 44,425 55,215 83,231 114,618
Depreciation and amortization 13,469 18,407 25,003 41,460
Taxes, other than income taxes 12,523 11,806 23,486 25,820
-------- -------- --------- ---------
Total operating expenses 192,111 160,088 358,584 333,695
-------- -------- --------- ---------
Operating Income 14,678 45,009 68,310 117,651
-------- -------- --------- ---------
Other Income and Deductions:
Other income, net 3,858 7,192 4,705 46,101
-------- -------- --------- ---------
Total other income and deductions 3,858 7,192 4,705 46,101
-------- -------- --------- ---------
Income Before Interest Charges 18,536 52,201 73,015 163,752
-------- -------- --------- ---------
Interest Charges:
Long-term debt and notes payable 9,124 7,369 16,401 20,797
Trust preferred securities 1,835 306 3,670 306
Company-obligated mandatorily
redeemable preferred securities - 2,297 - 4,594
Other interest 311 132 607 539
Allowance for borrowed funds used
during construction (199) (300) (499) (500)
-------- -------- --------- ---------
Total interest charges 11,071 9,804 20,179 25,736
-------- -------- --------- ---------
Income Before Income Taxes 7,465 42,397 52,836 138,016
Income taxes 2,926 22,452 21,355 52,581
-------- -------- --------- ---------
Net Income 4,539 19,945 31,481 85,435
Preferred stock dividends - - - 154
Loss on preferred stock reacquisition - - - 726
-------- -------- --------- ---------
Earnings Available for Common Stock $ 4,539 $ 19,945 $ 31,481 $ 84,555
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
38
<PAGE>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
(Unaudited)
In Thousands
-------------------------
Six Months
Ended June 30,
-------------------------
2000 1999
---- ----
Operating Activities:
Net income $ 31,481 $ 85,435
Adjustments to reconcile income to cash provided:
Depreciation and amortization 24,702 40,958
Amortization of property under capital leases - 3,687
Gain on sale of investment - (38,252)
Deferred income taxes and investment tax
credits, net 12,753 (290,339)
Changes in working capital:
Receivables (9,779) 12,050
Materials and supplies - 33,195
Special deposits and prepayments (222) 2,867
Payables and accrued liabilities (88,410) 166,060
Due to/from affiliates (29,085) 9,842
Nonutility generation contract buyout costs (4,410) (3,500)
Other, net (31,879) (50,230)
-------- --------
Net cash required by operating activities (94,849) (28,227)
-------- --------
Investing Activities:
Capital expenditures and investments (29,452) (37,567)
Proceeds from sale of investment - 894,450
Proceeds from nonutility generation trusts 44,809 -
Contributions to decommissioning trusts (20) (5,246)
Other, net 2,047 915
-------- --------
Net cash provided by investing activities 17,384 852,552
-------- --------
Financing Activities:
Issuance of long-term debt 50,000 348,127
Issuance of trust preferred securities - 96,535
Retirement of long-term debt - (600,000)
Increase/(decrease) in notes payable, net 50,800 (86,023)
Redemption of preferred stock - (17,406)
Capital lease principal payments - (4,230)
Dividends paid on common stock (55,000) (380,000)
Dividends paid on preferred stock - (154)
-------- --------
Net cash provided/(required)
by financing activities 45,800 (643,151)
-------- --------
Net increase/(decrease) in cash and temporary
cash investments from above activities (31,665) 181,174
Cash and temporary cash investments, beginning of year 32,250 2,750
-------- --------
Cash and temporary cash investments, end of period $ 585 $ 183,924
======== ========
Supplemental Disclosure:
Interest and preferred dividends paid $ 10,914 $ 39,584
======== ========
Income taxes paid $ 115,575 $ 127,541
======== ========
New capital lease obligations incurred $ - $ 7,099
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
39
<PAGE>
GPU, Inc. and Subsidiary Companies
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 function, transmission and distribution operations and the operations of
the remaining non-nuclear generating facilities 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 nuclear
generation operations of GPU Energy are conducted by GPU Nuclear, Inc. (GPUN).
GPU Capital, Inc. and GPU Electric, Inc. and their subsidiaries own, operate and
fund the acquisition of electric distribution and gas transmission 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 (US) 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; MYR Group Inc. (MYR), which is a utility
infrastructure construction services company; and GPU Service, Inc. (GPUS),
which provides legal, accounting, financial and other services to the GPU
companies. All of these companies considered together are referred to as "GPU."
These notes should be read in conjunction with the notes to consolidated
financial statements included in the 1999 Annual Report on Form 10-K. The
December 31, 1999 balance sheet data contained in the attached financial
statements was derived from audited financial statements. For disclosures
required by accounting principles generally accepted in the US, see the 1999
Annual Report on Form 10-K.
1. COMMITMENTS AND CONTINGENCIES
COMPETITION AND THE CHANGING REGULATORY ENVIRONMENT
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 1998, the Pennsylvania Public Utility Commission (PaPUC) issued
Restructuring Orders to Met-Ed and Penelec which, among other things, provide
for Met-Ed and Penelec's recovery of a substantial portion of what otherwise
would have become stranded costs, and provide 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. The Pennsylvania
Supreme Court has denied an appeal filed by one intervenor in the proceeding.
GPU Energy does not know whether the intervenor will seek review by the US
Supreme Court.
40
<PAGE>
On January 31, 2000, Met-Ed and Penelec submitted Phase II Reports to the
PaPUC addressing actual net divestiture proceeds and reconciliation of stranded
costs pursuant to the 1998 Restructuring Orders. The PaPUC and other parties,
which participated in the 1998 Restructuring Orders, are currently reviewing the
Reports. There can be no assurance as to the outcome of this matter.
In May 1999, the NJBPU issued a Summary Order with respect to JCP&L's rate
unbundling, stranded cost and restructuring filings. The Summary Order provides
for, among other things, customer choice of electric generation supplier
beginning August 1, 1999 and full recovery of stranded costs. The Summary Order
did not address the pending sale of Oyster Creek, because at the time the
Summary Order was issued, it was uncertain whether the plant would be sold or
retired early. JCP&L is awaiting a final order from the NJBPU.
During 1999, the NJBPU issued final electric restructuring and
generation-related securitization orders to Public Service Electric and Gas
Company (PSE&G), a non-affiliated utility. Several parties appealed these orders
on a variety of grounds, including the use of deferred accounting associated
with above market NUG costs and the Societal Benefit Charge, which includes
recovery of nuclear decommissioning costs. In April 2000, the Appellate Division
of the New Jersey Superior Court affirmed the orders. The Appellate Division's
decision has been appealed to the New Jersey Supreme Court which is not expected
to issue a decision before January 2001. While JCP&L's Summary Order has not
been appealed, JCP&L is unable to determine the impact, if any, the appeals to
PSE&G's orders will have on its restructuring order and petition for
securitization or its use of deferred accounting.
As a result of the NJBPU and the PaPUC restructuring decisions, the GPU
Energy companies are required to supply electricity to customers who do not
choose an alternate supplier. Given that the GPU Energy companies have
essentially divested their generation business, there will be increased market
risks associated with supplying that electricity, since the GPU Energy companies
will have to supply electricity to non-shopping customers entirely from
contracted and open market purchases. While JCP&L is permitted to recover
reasonable and prudently incurred costs associated with providing basic
generation service to non-shopping customers, Met-Ed and Penelec are generally
unable to recover their energy costs in excess of established rate caps.
Management has implemented an energy risk management program, but there can be
no assurance that the GPU Energy companies will be able to fully recover the
costs to supply electricity to customers who do not choose an alternate
supplier.
Generation Agreements:
---------------------
The evolving 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.
41
<PAGE>
The GPU Energy companies have entered into agreements with third party
suppliers to purchase capacity and energy. Payments pursuant to these
agreements, which include firm commitments as well as certain assumptions
regarding, among other things, call/put arrangements and the timing of the
pending Oyster Creek sale, are estimated to be $650 million in 2000, $651
million in 2001, $323 million in 2002, $138 million in 2003 and $44 million in
2004.
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 non-utility generators (NUGs) for
the purchase of energy and capacity, which agreements have remaining terms of up
to 20 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 following table shows actual payments from 1998 through
June 30, 2000, and estimated payments thereafter through 2005:
Payments Under NUG Agreements
(in millions)
Total JCP&L Met-Ed Penelec
1998 788 403 174 211
1999 774 388 167 219
2000 741 385 141 215
2001 733 392 138 203
2002 736 394 141 201
2003 752 400 145 207
2004 767 404 150 213
2005 751 392 153 206
The NJBPU Summary Order provides JCP&L assurance of full recovery of its
NUG costs (including above-market NUG costs and certain buyout costs), whereas
the PaPUC Restructuring Orders provide Met-Ed and Penelec assurance of full
recovery of their above-market NUG costs and certain NUG buyout costs. The GPU
Energy companies have recorded, on a present value basis, a total liability of
$3.1 billion (JCP&L $1.5 billion; Met-Ed $0.7 billion; Penelec $0.9 billion) on
the Consolidated Balance Sheets for above-market NUG costs which is offset by a
corresponding regulatory asset. The GPU Energy companies are continuing efforts
to reduce the above-market costs of these 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, provided for the recovery of costs associated with the buyout of
the Freehold Cogeneration power purchase agreement (Freehold buyout). The NJBPU
approved the cost recovery of up to $135 million, over a seven-year period, on
an interim basis subject to refund. The NJBPU's Summary Order provides for the
continued recovery of the Freehold buyout in the Market Transition Charge (MTC),
but has not altered the interim nature of such recovery, pending a final
decision by the NJBPU. There can be no assurance as to the outcome of this
matter.
ACCOUNTING MATTERS
JCP&L, in 1999, and Met-Ed and Penelec in 1998, discontinued the
application of Statement of Financial Accounting Standards No. 71 (FAS 71),
42
<PAGE>
"Accounting for the Effects of Certain Types of Regulation," and adopted the
provisions of Statement of Financial Accounting Standards No. 101, "Regulated
Enterprises - Accounting for the Discontinuation of Application of FASB
Statement No. 71," and Emerging Issues Task Force (EITF) Issue 97-4,
"Deregulation of the Pricing of Electricity - Issues Related to the Application
of FAS 71 and FAS 101", with respect to their electric generation operations.
The transmission and distribution portion of the GPU Energy companies'
operations continue to be subject to the provisions of FAS 71. Regulatory
assets, net as reflected in the June 30, 2000 and December 31, 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)
----------------------------
June 30, December 31,
2000 1999
------------- ------------
Market transition charge (MTC) / basic
generation service $2,287,449 $2,359,529
Competitive transition charge (CTC) 756,406 803,064
Reserve for generation divestiture 530,912 536,904
Power purchase contract loss not in CTC 369,290 369,290
Income taxes recoverable through future rates, net 283,636 280,268
Costs recoverable through distribution rates 281,363 296,842
Three Mile Island Unit 2 (TMI-2)
decommissioning costs 100,869 100,794
Societal benefits charge 100,643 116,941
Net divestiture proceeds recoverable through MTC 58,077 37,542
Above-market deferred NUG costs (196,276) (252,348)
Other, net 67,584 67,420
--------- ---------
Total regulatory assets, net $4,639,953 $4,716,246
========= =========
JCP&L
MTC / basic generation service $2,287,449 $2,359,529
Costs recoverable through distribution rates 281,363 296,842
Societal benefits charge 100,643 116,941
Net divestiture proceeds recoverable through MTC 58,077 37,542
--------- --------
Total regulatory assets, net $2,727,532 $2,810,854
========= =========
Met-Ed
CTC $ 583,441 $ 591,316
Power purchase contract loss not in CTC 271,270 271,270
Reserve for generation divestiture 142,179 137,037
Income taxes recoverable through future rates, net 122,955 115,713
TMI-2 decommissioning costs 64,608 65,455
Other, net 67,711 52,074
--------- ---------
Total regulatory assets, net $1,252,164 $1,232,865
========= =========
Penelec
Reserve for generation divestiture $ 388,733 $ 399,867
Above-market deferred NUG costs (213,312) (252,893)
CTC 172,965 211,748
Income taxes recoverable through future rates, net 160,681 164,555
Power purchase contract loss not in CTC 98,020 98,020
Other, net 53,170 51,230
--------- ---------
Total regulatory assets, net $ 660,257 $ 672,527
========= =========
43
<PAGE>
Statement of Financial Accounting Standards 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by FAS 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133" and FAS 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - An Amendment of FASB
Statement No. 133" (collectively, FAS 133), establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. In general, FAS 133
requires that companies recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
FAS 133 (as amended) excludes from its scope certain contracts that qualify as
normal purchases and sales. To qualify for this exclusion, it must be probable
that the contract will result in physical delivery.
GPU's use of derivative instruments is intended to manage the risks of
commodity price, interest rate and foreign currency fluctuations, and may
include such transactions as electricity and natural gas forwards and futures
contracts, foreign currency swaps, interest rate swaps and options. GPU does not
intend to hold or issue derivative instruments for trading purposes. To the
extent that GPU's energy-related contracts fall within the scope of FAS 133, GPU
will be required to include them 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 their intended use and designation as a hedge. GPU will adopt this
statement on January 1, 2001 and is currently in the process of evaluating the
impact of its implementation.
NUCLEAR FACILITIES
Investments:
-----------
In December 1999, the GPU Energy companies sold TMI-1 to AmerGen for
approximately $100 million. In addition, in October 1999, JCP&L agreed to sell
Oyster Creek to AmerGen for $10 million and reimbursement of the cost (estimated
at $88 million) of the next refueling outage. JCP&L's net investment, including
nuclear fuel, in Oyster Creek as of June 30, 2000 and December 31, 1999 was $10
million, reflecting the impairment write-down from the pending sale. JCP&L,
Met-Ed and Penelec jointly own TMI-2, which was damaged during a 1979 accident,
in the percentages of 25%, 50% and 25%. JCP&L's net investment in TMI-2 as of
June 30, 2000 and December 31, 1999 was $58 million and $61 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.
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 US District Court for the
Middle District of Pennsylvania. Some of the claims also seek recovery for
injuries from alleged emissions of radioactivity before and after the accident.
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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 US Court of Appeals for the Third Circuit ruled that the
Price-Anderson Act provides coverage under its primary and secondary levels for
punitive as well as compensatory damages, but that punitive damages could not be
recovered against the Federal Government under the third level of financial
protection. In so doing, the Court of Appeals referred to the "finite fund" (the
$560 million of financial protection under the Price-Anderson Act) to which
plaintiffs must resort to get compensatory as well as punitive damages.
The Court of Appeals also ruled that the standard of care owed by the
defendants to a plaintiff was determined by the specific level of radiation
which was released into the environment, as measured at the site boundary,
rather than as measured at the specific site where the plaintiff was located at
the time of the accident (as the defendants proposed). The Court of Appeals also
held that each plaintiff still must demonstrate exposure to radiation released
during the TMI-2 accident and that such exposure had resulted in injuries. In
1996, the US Supreme Court denied petitions filed by GPU, Inc. and the GPU
Energy companies to review the Court of Appeals' rulings.
In 1996, the District Court granted a motion for summary judgment filed by
GPU, Inc. and the GPU Energy companies, and dismissed the ten initial "test
cases," which had been selected for a test case trial as well as all of the
remaining 2,100 pending claims. The Court ruled that there was no evidence which
created a genuine issue of material fact warranting submission of plaintiffs'
claims to a jury. The plaintiffs appealed the District Court's ruling to the
Court of Appeals for the Third Circuit. In November 1999, the Third Circuit
affirmed the District Court's dismissal of the ten "test cases," but set aside
the dismissal of the additional pending claims, remanding them to the District
Court for further proceedings. In remanding these claims, the Third Circuit held
that the District Court had erred in extending its summary judgment decision to
the other plaintiffs and imposing on these plaintiffs the District Court's
finding that radiation exposures below 10 rems were too speculative to establish
a causal link to cancer. The Court of Appeals stated that the non-test case
plaintiffs should be permitted to present their own individual evidence that
exposure to radiation from the accident caused their cancers. In June 2000, the
US Supreme Court denied petitions by GPU, Inc., the GPU Energy companies and the
plaintiffs.
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.
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NUCLEAR PLANT RETIREMENT COSTS
Retirement costs for nuclear plants include decommissioning the
radiological portions of the plants and the cost of removal of nonradiological
structures and materials. The disposal of spent nuclear fuel is covered
separately by contracts with the US Department of Energy (DOE).
In 1995, a consultant to GPUN performed site-specific studies of 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, JCP&L is making periodic payments
to complete the funding for Oyster Creek retirement costs by the end of the
plant's license term of 2009. The TMI-2 funding completion date is 2014,
consistent with TMI-2 remaining in long-term storage. 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 of TMI-2 and
Oyster Creek in 2014 and 2009, respectively, are $443 million and $601 million
for radiological decommissioning and $35 million and $33 million for
non-radiological removal costs (net of $12.6 million spent as of June 30,
2000)(in 2000 dollars).
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 2000. An
early shutdown would increase the retirement costs shown above to $643 million
($610 million for radiological decommissioning and $33 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. For additional information, see OTHER COMMITMENTS AND CONTINGENCIES
section.
The agreements to sell Oyster Creek to AmerGen provide, among other
things, that upon financial closing, JCP&L will transfer $430 million in
decommissioning trust funds to AmerGen, which will assume all liability for
decommissioning Oyster Creek.
The NJBPU has granted JCP&L annual revenues for Oyster Creek retirement
costs of $22.5 million based on the 1995 site-specific study. In August 2000,
the recovery of Oyster Creek retirement costs escalates to $34.4 million
annually if the plant is retired in 2000.
In the event JCP&L does not complete the pending sale of Oyster Creek,
management believes that any retirement costs, in excess of those currently
recognized for ratemaking purposes, should be recoverable from customers.
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The estimated liabilities for TMI-2 future retirement costs (reflected as
Three Mile Island Unit 2 future costs on the Consolidated Balance Sheets) as of
June 30, 2000 and December 31, 1999 are $504 million (JCP&L $126 million; Met-Ed
$252 million; Penelec $126 million) and $497 million (JCP&L $124 million; Met-Ed
$249 million; Penelec $124 million), respectively. These amounts are based upon
the 1995 site-specific study estimates (in 2000 and 1999 dollars, respectively)
discussed above and an estimate for remaining incremental monitored storage
costs of $27 million (JCP&L $7 million; Met-Ed $13 million; Penelec $7 million)
as of June 30, 2000 and December 31, 1999, as a result of TMI-2 entering
long-term monitored storage in 1993.
Offsetting the $504 million liability as of June 30, 2000 is $182 million
(JCP&L $13 million; Met-Ed $133 million; Penelec $36 million), which management
believes is probable of recovery from customers and included in Regulatory
assets, net on the Consolidated Balance Sheets, and $366 million (JCP&L $116
million; Met-Ed $151 million; Penelec $99 million) in trust funds for TMI-2 and
included in Nuclear decommissioning trusts, at market on the Consolidated
Balance Sheets.
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.
As of June 30, 2000, the accident-related portion of TMI-2 radiological
decommissioning costs is considered to be $78 million (JCP&L $19.5 million;
Met-Ed $39 million; Penelec $19.5 million), which is based on the 1995
site-specific study estimates (in 2000 dollars).
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 Oyster Creek totals $2.75 billion. In addition,
GPU has purchased property and decontamination insurance coverage for TMI-2
totaling $150 million. 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
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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 Oyster Creek to approximately $9.5 billion. Coverage for the
first $200 million of such liability is provided by private insurance. The
remaining coverage, or secondary financial protection, is provided by
retrospective premiums payable by all nuclear reactor owners. Under secondary
financial protection, a nuclear incident at any licensed nuclear power reactor
in the country, including Oyster Creek, could result in an assessment of up to
$88 million per incident, subject to an annual maximum payment of $10 million
per incident per reactor. Although TMI-2 is exempt from this assessment, the
plant is still covered by the provisions of the Price-Anderson Act. 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
$9.5 million for insurance policies currently in effect applicable to nuclear
operations and facilities. The GPU Energy companies are also subject to other
retrospective premium assessments related to policies applicable to TMI-1 and
Oyster Creek (GPU anticipates the sale of Oyster Creek to be completed in August
2000) prior to their sales to AmerGen.
JCP&L has insurance coverage for incremental replacement power costs should
an accident-related outage at Oyster Creek occur. Coverage would commence after
a 12-week waiting period at $2.1 million per week for 52 weeks, decreasing to
80% of such amount 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 addition, federal and state law
provides for payment by responsible parties for damage to natural resources.
GPU has been formally notified by the Environmental Protection Agency
(EPA) and state environmental authorities that it is among the potentially
responsible parties (PRPs) who may be jointly and severally liable to pay for
the costs associated with the investigation and remediation at 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
----- ------ ------- ---- --------- -----
6 4 2 1 1 11
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
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formally named as PRPs, although the EPA and/or 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. As of
June 30, 2000, a liability of approximately $6 million was recorded for nine PRP
sites where it is probable that a loss has been incurred and the amount could be
reasonably estimated.
The ultimate cost of remediation of all these and other hazardous waste
sites will depend upon changing circumstances as site investigations continue,
including (a) the existing technology required for site cleanup, (b) the
remedial action plan chosen and (c) the extent of site contamination and the
portion attributed to the GPU companies involved.
In 1997, the EPA filed a complaint against GPU, Inc. in the US District
Court for the District of Delaware for enforcement of its Unilateral Order
(Order) issued against GPU, Inc. to clean up the former Dover Gas Light Company
(Dover) manufactured gas production site (Site) in Dover, Delaware. Dover was
part of the AGECO/AGECORP group of companies from 1929 until 1942; GPU, Inc.
emerged from the AGECO/AGECORP reorganization proceedings in 1946. All of
Dover's common stock, which was sold in 1942 to an unaffiliated entity, was
subsequently acquired by Chesapeake Utilities Corporation (Chesapeake), which
merged with Dover in 1960. Chesapeake is currently performing the cleanup at the
Site. According to the complaint, the EPA is seeking (1) enforcement of the
Order against GPU; (2) recovery of its past response costs; (3) a declaratory
judgment that GPU is liable for any remaining cleanup costs of the Site; and (4)
statutory penalties for noncompliance with the Order. The EPA has stated that it
has incurred approximately $1 million of past response costs as of December 31,
1999. The EPA estimates the total Site cleanup costs at approximately $4.2
million. Consultants to Chesapeake have estimated the remaining remediation
ground water costs to be approximately $11.3 million to $19 million. In
accordance with its penalty policy, and in discussions with GPU, the EPA has
demanded penalties calculated at a daily rate of $8,800, rather than the
statutory maximum of $27,500 per day. As of June 30, 2000, if the statutory
maximum were applied, the total amount of penalties would be approximately $39
million. GPU believes that it has meritorious defenses to the imposition of
penalties, or that if a penalty is assessed, it should be at a lower daily rate.
Chesapeake has also sued GPU, Inc. for contribution to the cleanup of the Dover
Site. The US District Court for the District of Delaware has consolidated the
case filed by Chesapeake with the case filed by the EPA and discovery is
proceeding. There can be no assurance as to the outcome of these proceedings.
In connection with the 1999 sale of its Seward Generation Station to Sithe
Energies, Penelec has assumed up to $6 million of remediation costs associated
with certain coal mine refuse piles which are the subject of an earlier consent
decree with the Pennsylvania Department of Environmental Protection. Penelec
expects recovery of these remediation costs in Phase II of its restructuring
proceeding and has recorded a corresponding regulatory asset.
JCP&L has entered into agreements with the NJDEP for the investigation and
remediation of 17 formerly owned MGP sites. JCP&L has also entered into various
cost-sharing agreements with other utilities for most of the sites. As of June
30, 2000, JCP&L has spent approximately $38 million in connection
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with the cleanup of these sites. In addition, JCP&L has recorded an estimated
environmental liability of $54 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 the $54
million due to significant uncertainties, including changes in acceptable
remediation methods and technologies.
In 1997, the NJBPU approved JCP&L's request to establish a Remediation
Adjustment Clause for the recovery of MGP remediation costs. As a result of the
NJBPU's Summary Order, effective August 1, 1999, the recovery of these costs was
transferred to the Societal Benefits Charge. As of June 30, 2000, JCP&L had
recorded on its Consolidated Balance Sheet a regulatory asset of $46 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, and has settled with all but
one of those insurance carriers.
OTHER COMMITMENTS AND CONTINGENCIES
Class Action Litigation:
-----------------------
GPU Energy
In July 1999, New Jersey experienced a severe heat storm that resulted in
major power outages and temporary service interruptions, which affected JCP&L's
service territory. As a result, the NJBPU initiated an investigation into the
reliability of the transmission and distribution systems of all New Jersey
utilities and their response to power outages. This investigation was completed
in April 2000, resulting in Phase I and Phase II Reports. Both Reports contain,
among other things, recommendations as to certain actions that should be
undertaken by JCP&L, and were adopted by NJBPU orders requiring JCP&L to act on
the recommendations and to report back on such implementation. JCP&L has begun
to act on these recommendations. The NJBPU order adopting the Phase II Report
stated that there is not a prima facie case demonstrating that overall JCP&L
provided unsafe, inadequate or improper service to its customers. In addition,
two class action lawsuits were commenced in New Jersey Superior Court in July
1999 against GPU, Inc. and JCP&L, seeking both compensatory and punitive damages
for alleged losses suffered due to service interruptions. The GPU defendants
originally requested the Court to stay or dismiss the litigation in deference to
the NJBPU's primary jurisdiction. The Court denied the motion, consolidated the
two actions, and certified them as class actions on behalf of a class that
includes JCP&L customers as well as "all dependents, tenants, employees, and
other intended beneficiaries of customers who suffered damages as a result" of
the outages. In January 2000, the Appellate Division agreed to review the trial
court's decision on primary jurisdiction. In June 2000, the Appellate Division
affirmed the trial court's decision recognizing, however, that future
developments in the case may require a reference of certain issues to the NJBPU.
The Appellate Division also stated that the NJBPU's findings could be probative
but not determinative of at least some issues in the
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litigation. In response to GPU's demand for a statement of damages, the
plaintiffs have stated that they are seeking damages of $700 million, subject to
the results of pre-trial discovery. GPU has notified its insurance carriers of
the plaintiffs' allegations. The primary insurance carrier has stated that while
the substance of the plaintiffs' allegations are covered under GPU's policy, it
is reserving its rights concerning coverage as circumstances develop. There can
be no assurance as to the outcome of these matters.
GPU Electric
As a result of the September 1998 fire and explosion at the Longford
natural gas plant in Victoria, Australia, Victorian gas users (plaintiffs) have
brought a class action in the 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. The
plaintiffs claim that Esso was, among other things, negligent in designing,
maintaining and operating the Longford plant and also assert claims under
Australian fair trade practices law.
Esso has joined as third party 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
affiliate Transmission Pipelines (Assets) Australia (TPAA). GPU, Inc., through
GPU GasNet, acquired the assets of TPA and the shares of TPAA from the State in
June 1999. Esso asserts that the State and the gas industry were negligent in
that, among other things, they failed to ensure that the gas system would
provide a secure supply of gas to users and also asserts claims under the
Australian fair trade practices law. In addition, GPU GasNet and other private
entities (Buyers) that purchased the Victorian gas assets from the State have
joined Esso as third party defendants. Esso asserts that if the gas industry is
liable as alleged, that liability has been transferred to the Buyers as part of
the State's privatization process.
Under the acquisition agreement with the State, GPU GasNet has indemnified
TPA and the State against third party claims arising out of, among other things,
the operation of TPA's business. TPA and the State have commenced proceedings
against GPU GasNet to enforce the indemnity in respect of any liability that may
flow to TPA as a result of Esso's claim.
GPU GasNet and TPAA have filed answers denying liability to Esso, the
State and TPA, which could be material. GPU GasNet and TPAA have notified their
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.
Investments and Guarantees:
--------------------------
GPU, Inc.
GPU, Inc. has made significant investments in foreign businesses and
facilities through its subsidiaries, GPU Electric and the GPUI Group. As of June
30, 2000, GPU, Inc.'s investment in GPU Electric and the GPUI Group was $569
million and $252 million, respectively. As of that date, GPU, Inc. has also
guaranteed an additional $998 million and $30 million (including $9
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million of guarantees related to domestic operations) of GPU Electric and GPUI
Group outstanding 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.
GPU Electric
In June 2000, GPU sold GPU PowerNet for A$2.1 billion (US$1.26 billion).
For further information, see Note 2, Acquisitions and Dispositions. GPU had
previously announced its intention to sell all, or at least 50%, of the
Australian companies, for which it paid approximately US $1.9 billion (GPU
PowerNet) and US $675 million (GPU GasNet) in 1997 and 1999, respectively. GPU
is still considering the possible sale of GPU GasNet.
On June 2, 2000, repayment of approximately $218 million of maturing GPU
GasNet bank debt was extended to September 2, 2000. GPU GasNet may further
extend this loan to October 2, 2000. GPU GasNet is in the process of
establishing a commercial paper program and a medium term note program to
refinance this debt. GPU, Inc. has agreed to guarantee this loan, under certain
conditions, if it is not repaid by August 25, 2000.
Midlands Electricity plc (Midlands) (conducting business under the name
GPU Power UK) has a 40% equity interest in a 586 MW power project in Pakistan
(the Uch Power Project), which was originally scheduled to begin commercial
operation in late 1998. In June 1999, certain Project lenders for the Uch Power
Project issued notices of default to the Project sponsors (including Midlands
for, among other things, failure to pay principal and interest under various
loan agreements. In November 1999, the Project sponsors and lenders reached an
agreement under which repayment of the construction loan will be extended,
principal and interest payments deferred, and the sponsors will fund the
completion of the plant through the remaining equity contribution commitments.
Testing of the plant has begun, but the start of commercial operations has been
further delayed pending the resolution of certain technical problems, which are
being addressed.
Uch has renegotiated several of the project agreements with the Government
of Pakistan and its agencies. In April 2000, Uch signed a Memorandum of
Understanding with Pakistani authorities, in which it agreed, among other
things, to accept a reduction in the power purchase tariff averaging
approximately 8% over the project term. The agreement includes options to extend
the term of the project from 23 to 30 years. Commercial operations are now
planned to commence by the end of August, 2000. There remains a risk that
project revenues may be delayed due to the poor economic situation in Pakistan.
GPU's investment in the Uch Power Project as of June 30, 2000 was
approximately $37.1 million, plus a guarantee letter of credit of $5.2 million,
and its share of the projected completion costs represents an additional $3.9
million commitment. Cinergy Corp. has agreed to fund up to an aggregate of $20
million of the required capital contributions and/or certain future "cash
losses," which could be incurred on the Uch Power Project. Cinergy has
reimbursed GPU Electric for $4.9 million of capital contributions through June
30, 2000, leaving a remaining commitment of up to $15.1 million. There can be no
assurance as to the outcome of this matter.
As part of the 1999 sale of the GPU Power UK supply business and the
purchase of the 50% of GPU Power UK that GPU did not already own, certain
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long-term purchase obligations under natural gas supply contracts were retained.
Most of these contracts, which extend to September 2005, were at fixed prices in
excess of the market price of gas, and a liability was established for the
estimated loss under such contracts. However, as a result of increasing gas
prices during the second quarter of 2000, GPU Power UK was able to enter into
matching forward sale contracts for the majority of the gas purchases, resulting
in a reduction in the estimated liability and a credit to income of $15.9
million pre-tax. The estimated liability as of June 30, 2000 was $25 million, of
which approximately $19 million was "locked-in" under new forward sale
contracts. GPU Power UK was still exposed to future price risk on the remaining
$6 million of liabilities as of June 30, 2000.
In a recent English court decision involving two unaffiliated utilities
(National Grid and National Power), the court held that utilities improperly
used a pension plan surplus in the UK Electricity Supply Pension Scheme to
eliminate scheduled payments in respect of early retirement costs and employer
contributions. The Court found that, in the case of National Grid and National
Power, procedures had not been strictly followed, and as such, a liability may
now exist. At a subsequent hearing, the Court refused to consider the validity
or effectiveness of retrospective amendments to the plan. National Grid and
National Power have appealed the Court's decision to the House of Lords. Pending
the outcome of the Appeal, the requirement for any payments has been stayed. If
a similar complaint were to be made against GPU Power UK, GPU Power UK's
potential liability is estimated to be a maximum of British pound 63 million
(US$96 million), exclusive of any applicable interest charges or penalties. The
GPU Power UK section of the Electricity Supply Pension Scheme remains in
substantial surplus and any payment to the plan that might ultimately prove to
be necessary would be accounted for as an increase in pension assets, and would
not have an immediate impact on income. However, any related penalties or
interest (which could be assessed, though none are currently proposed) would
adversely affect income. There can be no assurance as to the outcome of this
matter.
Emdersa's operating companies are subject to a number of government claims
related to Value-added tax liabilities and to Social Security taxes collected in
their electric rates, which aggregate approximately $22 million. The claims are
generally related to transitional issues surrounding the privatization of
Argentina's electricity industry. There can be no assurance as to the outcome of
these matters.
GPUI Group
On July 9, 1999, DIAN (the Colombian national tax authority) issued a
"Special Requirement" on the Termobarranquilla S.A., Empresa de Servicios
Publicos (TEBSA) 1996 income tax return, which challenges the exclusion from
taxable income of an inflation adjustment related to the value of assets used
for power generation (EI Barranquilla, a wholly owned subsidiary of GPU Power,
ABB Barranquilla, Corporacion Electrica de la Costa Atlantica and Distral Group
have a 28.7%, 28.7%, 42.5% and 0.1% interest in TEBSA, respectively). The
failure to give notice of this Special Requirement to the US Export Import Bank
(EXIM Bank) is an event of default under the loan agreement. GPU Power also
believes that other events of default exist under the loan agreements with
project lenders including the Overseas Private Investments Corporation (OPIC)
and a commercial bank syndicate. As a result, certain required certifications
have not been delivered to EXIM Bank, OPIC and the other project lenders, which
failure is, itself, an event of default
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under the loan agreements. These issues are currently being discussed with EXIM
Bank and the other project lenders. GPU Power also expects that it will be
necessary to address these issues with the Government of Colombia, as well as
the other partners in the TEBSA project. As of June 30, 2000, GPU Power has an
investment of approximately $84.4 million in TEBSA and is committed to make
additional standby equity contributions of $21.3 million, which GPU, Inc. has
guaranteed. The total outstanding senior debt of the TEBSA project is $399
million and, in addition, GPU International has guaranteed the obligations of
the operators of the TEBSA project, up to a maximum of $5 million, under the
project's operations and maintenance agreement. There can be no assurance as to
the outcome of these matters.
GPU Telcom
In March 2000, GPU, Inc. announced its participation in America's Fiber
Network LLC (AFN), of which GPU, Inc. anticipates owning 25%. AFN is a
high-speed fiber optics company with a network of more than 7,000 route miles,
or 140,000 fiber miles, connecting major markets in the eastern US to secondary
markets with a growing need for broadband access. GPU, Inc. anticipates
investing approximately $40 million (of which $1.9 million has been invested as
of June 30, 2000) in AFN through GPU Telcom, which includes existing and new
fiber routes and electronic equipment.
In April 2000, GPU, Inc. announced the formation of Telergy Mid-Atlantic
(TMA), a joint venture between GPU Telcom and Telergy, Inc. TMA combines
established telecommunication services and marketing expertise with utilities'
existing fiber networks and natural positioning in serving retail markets.
GPU, Inc. has invested $20 million in Telergy, Inc. through GPU Telcom.
Other:
-----
JCP&L and Public Service Electric & Gas Company (PSE&G) each hold a 50%
undivided ownership interest in Yards Creek Pumped Storage Facility (Yards
Creek). In December 1998, JCP&L filed a petition with the 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 June 30, 2000 book value of $22 million. There
can be no assurance as to the outcome of this matter.
Concurrent with GPU's July 1999 acquisition of the 50% of GPU Power UK
which it did not already own, GPU began to evaluate existing restructuring plans
and formulate additional plans to reduce operating expenses and achieve ongoing
cost reductions. As of December 31, 1999, GPU had identified and approved a cost
reduction plan. At the acquisition date, GPU Power UK had recorded a liability
of $28.6 million related to previous cost reduction plans. GPU retained $25.7
million of this liability, related to contractual termination and other
severance benefits for 276 employees identified in a 1999 business process
reengineering project. GPU identified an additional 355 employees (234 in
Engineering Services, 38 in metering, 21 in Network Services and 62 from other
specific functions) to be terminated as part of the plan and recorded an
additional liability of $39.3 million. A net charge of $18.2 million for GPU's
50% share of these adjustments was included in expense in 1999 and the other 50%
was recorded in Goodwill as a purchase accounting adjustment.
54
<PAGE>
In 2000, a change in the investment return assumptions, due to better than
expected investment performance, resulted in a reduction of approximately $6.9
million to $22.6 million in the estimated liability for the remaining 459
employees at December 31, 1999. Consequently, goodwill was credited for $3.4
million (50% of the change in estimate) and $3.5 million was credited to income.
Also in 2000, $14.2 million was paid to 338 employees. The remaining severance
liability of $7.5 million at June 30, 2000 reflects the above transactions as
well as currency translation adjustments and the impact of five employees who
were retained and is included in Other current liabilities on the Consolidated
Balance Sheets. Management expects the plan will be substantially completed by
September 2000.
GPU AR has entered into contracts to supply electricity to retail
customers through June 2002. In connection with meeting its supply obligations,
GPU AR has entered into purchase commitments for energy and capacity with
payment obligations totaling approximately $22.5 million as of June 30, 2000.
GPU, Inc. has guaranteed up to $19.1 million of these payments.
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. AmerGen has assumed all liability for disposal costs related
to spent fuel generated after its purchase of TMI-1 and has agreed to assume
this liability for Oyster Creek following its purchase of that plant. In 1996,
the DOE notified the GPU Energy companies and other standard contract holders
that it would 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. 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 Utah. There can
be no assurance as to the outcome of these matters.
GPU, Inc. and consolidated affiliates have approximately 15,500 employees
worldwide, of whom 11,500 are employed in the US, 3,500 are in the United
Kingdom (UK) and the remaining 500 are in South America and Australia. The
majority of the US workforce is employed by the GPU Energy companies (5,600) and
MYR (5,500), of which approximately 3,300 and 4,800, respectively, are
represented by unions for collective bargaining purposes. In the UK,
approximately 3,100 GPU Power UK employees are represented by unions, and the
terms and conditions of various bargaining agreements are generally reviewed
annually, on April 1. JCP&L, Met-Ed and Penelec's collective bargaining
agreements with the International Brotherhood of Electrical Workers expire on
October 31, 2002, May 1, 2003 and May 14, 2002, respectively. Penelec's
collective bargaining agreement with the Utility Workers Union of America
expires on June 30, 2001.
During the normal course of the operation of its businesses, in addition
to the matters described above, GPU is from time to time involved in disputes,
claims and, in some cases, as a defendant in litigation in which compensatory
and punitive damages are sought by the public, customers, contractors, vendors
and other suppliers of equipment and services and by employees alleging unlawful
employment practices. While management does not expect that the outcome of these
matters will have a material effect on GPU's
55
<PAGE>
financial position or results of operations, there can be no assurance that this
will continue to be the case.
2. ACQUISITIONS AND DISPOSITIONS
MYR Group Inc. Acquisition
In April 2000, GPU, Inc. completed its acquisition of MYR Group Inc. (MYR)
for approximately $217.5 million. The fair value of the assets acquired totaled
approximately $154.7 million and the amount of liabilities assumed totaled
approximately $99.7 million.
MYR, a suburban Chicago-based infrastructure construction services
company, is the fifth largest specialty contractor in the US. MYR provides a
complete range of power line and commercial/industrial electrical construction
services for electric utilities, telecommunications providers, commercial and
industrial facilities and government agencies across the US. MYR also builds
cellular towers for the wireless communications market.
The acquisition was partially financed through the issuance of GPU, Inc.
short-term debt and was accounted for under the purchase method of accounting.
The total acquisition cost exceeded the estimated value of net assets by $162.5
million. This excess is considered goodwill and is being amortized on a
straight-line basis over 40 years.
The following is a summary of significant accounting policies for MYR's
construction services business:
Revenue Recognition
-------------------
MYR recognizes revenue on construction contracts using the
percentage-of-completion accounting method determined in each case by the ratio
of cost incurred to date on the contract (excluding uninstalled direct
materials) to management's estimate of the contract's total cost. Contract cost
includes all direct material, subcontract and labor costs and those indirect
costs related to contract performance, such as supplies, tool repairs and
depreciation. MYR charges selling, general, and administrative costs, including
indirect costs associated with maintaining district offices, to expense as
incurred.
Provisions for estimated losses on uncompleted contracts are recorded in
the period in which such losses are determined. Changes in estimated revenues
and costs are recognized in the periods in which such estimates are revised.
Significant claims are included in revenue in accordance with industry practice.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts," represents amounts billed in excess of revenues
recognized.
Classification of Current Assets and Current Liabilities
----------------------------------------------------------
The length of MYR's contracts vary, with some larger contracts exceeding
one year. In accordance with industry practice, MYR includes in current assets
and current liabilities amounts realizable and payable under contracts which may
extend beyond one year.
56
<PAGE>
GPU PowerNet Sale
On June 30, 2000, GPU, Inc. sold GPU PowerNet to Singapore Power
International (SPI) for A$2.1 billion (approximately US $1.26 billion). As part
of the sales price, SPI assumed liability for A$230 million (US$137.8 million)
of medium term notes. GPU applied the net proceeds from the sale as follows:
A$1,288 million (US$772 million) was used to repay debt; and $A579 million
(US$347 million) was placed in a trust (which is included in Special deposits on
the Consolidated Balance Sheets) to provide for the repayment of the remaining
medium term notes (A$174 million/US$104 million) and outstanding commercial
paper (A$405 million/US$243 million) at maturity. As a result of the sale, GPU
recorded in Operating expenses on the Consolidated Statements of Income, a
pre-tax loss in the quarter ended June 30, 2000 of $372 million($295 million
after-tax, or $2.43 per share), including a $94 million foreign currency loss.
Pending Sale of Oyster Creek
In 1999, the GPU Energy companies sold Three Mile Island Unit 1 (TMI-1)
nuclear generating station and substantially all of their fossil and
hydroelectric generating stations. In October 1999, JCP&L agreed to sell Oyster
Creek to AmerGen Energy Company, LLC (AmerGen), a joint venture of PECO Energy
and British Energy, for $10 million and reimbursement of the cost (estimated at
$88 million) of the next scheduled refueling outage. The Oyster Creek plant was
written down to its fair market value in 1999, consistent with its sale price.
The write-down of the plant asset was deferred as a regulatory asset pending
separate and further review by the NJBPU.
3. ACCOUNTING FOR DERIVATIVE INSTRUMENTS
GPU's use of derivative instruments is intended primarily to manage the
risk of interest rate, foreign currency and commodity price fluctuations. GPU
does not intend to hold or issue derivative instruments for trading purposes.
Commodity Derivatives:
---------------------
The GPU Energy companies use futures contracts to manage the risk of
fluctuations in the market price of electricity and natural gas. These contracts
qualify for hedge accounting treatment under current accounting rules since
price movements of the commodity derivatives are highly correlated with the
underlying hedged commodities and the transactions are designated as hedges at
inception. Accordingly, under the deferral method of accounting, gains and
losses related to commodity derivatives are recognized in Power purchased and
interchanged in the Consolidated Statements of Income when the hedged
transaction closes or if the commodity derivative is no longer sufficiently
correlated. Prior to income or loss recognition, deferred gains and losses
relating to these transactions are recorded in Current Assets or Current
Liabilities in the Consolidated Balance Sheets.
Interest Rate Swap Agreements:
-----------------------------
GPU Electric uses interest rate swap agreements to manage the risk of
increases in variable interest rates. As of June 30, 2000, these agreements
covered approximately $549 million of debt, including commercial paper, and
were scheduled to expire on various dates through November 2007. Differences
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<PAGE>
between amounts paid and received under interest rate swaps are recorded as
adjustments to the interest expense of the underlying debt since the swaps are
related to specific assets, liabilities or anticipated transactions. All of the
agreements effectively convert variable rate debt, including commercial paper,
to fixed rate debt. For the quarter ended June 30, 2000, fixed rate interest
expense incurred in connection with the swap agreements exceeded the variable
rate interest expense that would have been incurred had the swaps not been in
place by approximately $380 thousand.
Due to the sale of GPU PowerNet, the amount of debt subject to interest
rate swaps at GPU Electric declined from $1,299 million at March 31, 2000 to
$549 million at June 30, 2000. Swap positions associated with the retired debt
were closed out, and swap breakage costs of $2.1 million pre-tax were included
as part of the loss on the sale of GPU PowerNet.
In April 2000, Penelec issued a total of $50 million of variable rate
senior notes as unsecured medium-term notes. These variable rate securities were
converted to fixed rate obligations through interest rate swap agreements.
Currency Swap Agreements:
------------------------
GPU Electric uses currency swap agreements to manage currency risk caused
by fluctuations in the US dollar exchange rate related to debt issued in the US
by Avon Energy Partners Holdings (Avon). These swap agreements effectively
convert principal and interest payments on this US dollar debt to fixed sterling
principal and interest payments, and expire on the maturity dates of the bonds.
Interest expense is recorded based on the fixed sterling interest rate. As of
June 30, 2000, these currency swap agreements covered British pound 561 million
(US $850 million) of debt. Interest expense would have been British pound 9.4
million (US $14.3 million) as compared to British pound 9.8 million (US $14.9
million) for the quarter ended June 30, 2000 had these agreements not been in
place.
Gain on Forward Foreign Exchange Contracts:
-------------------------------------------
In connection with its previously announced intention to sell its
Australian assets, GPU Electric entered into forward foreign exchange contracts
in order to lock in the then-current A$/US$ exchange rate on the projected
remittance of Australian dollar proceeds arising from the expected sale of GPU
PowerNet and GPU GasNet. On May 24, 2000, GPU announced that it had declined all
bids submitted in connection with the sale process. Consequently, GPU Electric
closed out its forward foreign exchange positions, and recognized a pre-tax gain
of $4.5 million in the second quarter of 2000.
Indexed Swap Agreement:
----------------------
In June 1998, Onondaga Cogeneration L.P. (Onondaga), a GPU
International, Inc. subsidiary, and Niagara Mohawk Power Corporation (NIMO)
renegotiated their existing power purchase agreement and entered into a
10-year power put indexed swap agreement.
The power put agreement gives Onondaga the right, but not the obligation,
to sell energy and capacity to NIMO at a proxy market price up to the specified
contract quantity.
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<PAGE>
Under the indexed swap agreement, Onondaga pays NIMO the market price of
energy and capacity and NIMO pays Onondaga a contract price which is fixed for
the first two years and then adjusted monthly, according to an indexing formula,
for the remaining term. As of June 30, 2000, the unamortized balance of the swap
contract was valued at $51.7 million, and was included in Other - Deferred
Debits and Other Assets on the Consolidated Balance Sheets. This valuation was
derived using the discounted estimated cash flows related to payments expected
to be received by Onondaga. A corresponding amount was recorded in deferred
revenue (which is included in Other - Current Liabilities on the Consolidated
Balance Sheets) and will be recognized to income over a period not to exceed 10
years.
Concurrent with the establishment of a competitive market for electricity
in New York (Power Exchange) and meeting specific trading volume criteria,
certain rights between Onondaga and NIMO expire under the power put agreement.
As a result, in 2000, GPU International, Inc. expects to recognize in income all
unamortized deferred revenue, including that from the indexed swap agreement,
which will be largely offset by an impairment of the Onondaga facility and a
provision for out-of-market gas transportation costs.
4. SEGMENT INFORMATION
The following is presented in accordance with Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information."
GPU's reportable segments are strategic business units that are managed
separately due to their different operating and regulatory environments. GPU's
management evaluates the performance of its business units based upon income
before extraordinary and non-recurring items. For the purpose of providing
segment information, domestic electric utility operations (GPU Energy) is
comprised of the three electric utility operating companies serving customers in
New Jersey and Pennsylvania, as well as GPU Generation, Inc. (sold in late
1999), GPUN, GPU Telcom and GPUS. For additional information on GPU's
organizational structure and businesses, see preface to the Notes to
Consolidated Financial Statements.
59
<PAGE>
<TABLE>
<CAPTION>
Business Segment Data (in thousands)
Income
Interest Before Extra-
Depreciation Charges and Income Tax ordinary and Capital
Operating and Preferred Expense/ Non-recurring Total Expenditures
Revenues Amortization Dividends (Benefit)(a) Items Assets(b) and Investments
-------- ------------ --------- ------------ ----- --------- ---------------
For the six months ended
June 30, 2000
Domestic Segments:
Electric Utility Operations
<S> <C> <C> <C> <C> <C> <C> <C>
(GPU Energy) $1,730,089 $ 169,356 $ 102,847 $102,722 $ 151,819 $13,383,056 $ 158,362
Independ Power Prod
(GPU International) 43,692 4,700 416 73 (446) 361,276 4,266
Electric Retail Energy Sales
(GPU AR) 39,874 - - 848 1,221 22,940 8
Construction Services
(MYR) (e) 99,532 1,311 2,389 1,147 613 328,926 1,284
------- ------ ------ ------ ------ --------- ------
Subtotal 1,913,187 175,367 105,652 104,790 153,207 14,096,198 163,920
------- ------ ------ ------ ------ --------- ------
Foreign Segments:
Electric/Gas Utility Operations: (GPU Electric)
Electric Distribution -
United Kingdom 325,106 52,376 91,451 29,795 49,978 4,425,427 74,937
Electric Distribution -
Argentina 81,614 7,663 12,749 6,881 2,942 609,301 18,091
Electric Transmission -
Australia (d) 90,007 19,947 46,822 (10,921) 9,242 489,023 4,993
Gas Transmission -
Australia 27,183 5,520 21,114 (6,675) 5,672 725,347 3,389
Independ Power Prod -
S. America (GPU Power) 21,082 3,154 2,183 2,408 4,344 244,530 73
------- ------ ------ ------ ------ --------- ------
Subtotal 544,992 88,660 174,319 21,488 72,178 6,493,628 101,483
------- ------ ------ ------ ------ --------- ------
Corporate and Eliminations (1,361) - 4,805 - (10,200) (130,935) 500
------- ------ ------ ------ ------ --------- ------
Consolidated Total $2,456,818 $ 264,027 $ 284,776 $126,278 $ 215,185 $20,458,891 $ 265,903
========== ========== ========== ======== ========== =========== ==========
For the six months ended June 30, 1999
Domestic Segments:
Electric Utility Operations
(GPU Energy) $1,712,716 $ 206,963 $114,519 163,060 $ 219,584 $13,224,051 $ 138,721
Independ Power Prod
(GPU International) 42,197 4,649 619 182 (847) 359,374 596
Electric Retail Energy
Sales (GPU AR) 37,521 - - 1,032 1,581 24,630 -
------- ------ ------ ------ ------ --------- ------
Subtotal 1,792,434 211,612 115,138 164,274 220,318 13,608,055 139,317
------- ------ ------ ------ ------ --------- ------
Foreign Segments:
Electric/Gas Utility Operations: (GPU Electric)
Electric Distribution -
United Kingdom 603 - 9,835 2,171 44,348(c) 4,687,476 -
Electric Distribution -
Argentina 48,999 6,190 8,008 1,986 (72) 579,907 10,851
Electric Transmission -
Australia (d) 95,912 21,367 52,526 4,462 5,985 1,824,309 3,984
Gas Transmission -
Australia 5,721 1,227 3,589 422 (222) 795,527 2,168
Independ Power Prod -
S. America (GPU Power) 17,734 2,699 1,363 2,272 3,515 238,644 30,024
------- ------ ------ ------ ------ --------- ------
Subtotal 168,969 31,483 75,321 11,313 53,554 8,125,863 47,027
------- ------ ------ ------ ------ --------- ------
Corporate and Eliminations - - 481 - (5,353) (36,086) -
------- ------ ------ ------ ------ --------- ------
Consolidated Total $1,961,403 $ 243,095 $ 190,940 $175,587 $ 268,519 $21,697,832 $ 186,344
========== ========== ========== ======== ========== =========== ==========
</TABLE>
(a) Represents income taxes on income before extraordinary and non-recurring
items.
(b) The comparative 1999 Total Assets is as of December 31, 1999.
(c) Includes equity in net income of investee accounted for under the equity
method of $73.5 million, for the period prior to the consolidation
of GPU Power UK.
(d) Represents GPU PowerNet, which was sold in June 2000.
(e) MYR was acquired in May 2000.
60
<PAGE>
5. COMPREHENSIVE INCOME
For the six months ended June 30, 2000 and 1999, comprehensive income is
summarized below.
(in thousands)
Six months
Ended June 30,
GPU, Inc. and Subsidiary Companies 2000 1999
---------------------------------- ---- ----
Net income/(loss) $ (79,815) $ 237,981
--------- --------
Other comprehensive income/(loss), net of tax:
Net unrealized gains/(loss) on investments 13,028 (4,758)
Foreign currency translation (41,852) 8,169
-------- --------
Total other comprehensive income/(loss) (28,824) 3,411
-------- --------
Comprehensive income/(loss) $(108,639) $ 241,392
========= ========
JCP&L
Net income $ 90,004 $ 47,842
-------- --------
Other comprehensive income/(loss), net of tax:
Net unrealized gains/(loss) on investments - -
-------- --------
Comprehensive income $ 90,004 $ 47,842
======== ========
Met-Ed
Net income $ 35,160 $ 51,974
-------- --------
Other comprehensive income/(loss), net of tax:
Net unrealized gains/(loss) on investments (2,141) 2,816
-------- --------
Comprehensive income $ 33,019 $ 54,790
======== ========
Penelec
Net income $ 31,481 $ 85,435
-------- --------
Other comprehensive income/(loss), net of tax:
Net unrealized gains/(loss) on investments (1,076) 1,337
-------- --------
Comprehensive income $ 30,405 $ 86,772
======== ========
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<PAGE>
PART II
ITEM 1 - LEGAL PROCEEDINGS
Information concerning the current status of certain legal
proceedings instituted against GPU, Inc. and the GPU Energy
companies discussed in Part I of this report in Combined Notes to
Consolidated Financial Statements is incorporated herein by
reference and made a part hereof.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(4) Instruments defining the rights of security holders,
including indentures
A - First Supplemental Indenture between Met-Ed and United
States Trust Company of New York, dated August 1, 2000.
B - First Supplemental Indenture between Penelec and
United States Trust Company of New York, dated August 1,
2000.
(12) Statements Showing Computation of Ratio of
Earnings to Fixed Charges and Ratio of Earnings to
Combined Fixed Charges and Preferred Stock
Dividends Based on SEC Regulation S-K, Item 503
A - JCP&L
B - Met-Ed
C - Penelec
(27) Financial Data Schedules
A - GPU, Inc. and Subsidiary Companies
B - JCP&L
C - Met-Ed
D - Penelec
(b) Reports on Form 8-K
GPU, Inc.:
---------
Dated June 21, 2000, under Item 5 (Other Events).
Dated June 30, 2000, under Item 5 (Other Events).
Dated August 3, 2000, under Item 5 (Other Events).
Jersey Central Power & Light Company:
------------------------------------
Dated August 3, 2000, under Item 5 (Other Events).
Metropolitan Edison Company:
---------------------------
Dated August 3, 2000, under Item 5 (Other Events).
Pennsylvania Electric Company:
-----------------------------
Dated August 3, 2000, under Item 5 (Other Events).
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<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
GPU, INC.
August 4, 2000 By: /s/ B. L. Levy
---------------
B. L. Levy, Senior Vice President and
Chief Financial Officer
August 4, 2000 By: /s/ P. E. Maricondo
-------------------
P. E. Maricondo, Vice President
and Comptroller
(principal accounting officer)
JERSEY CENTRAL POWER & LIGHT COMPANY
METROPOLITAN EDISON COMPANY
PENNSYLVANIA ELECTRIC COMPANY
August 4, 2000 By: /s/ M. J. Chesser
------------------
M. J. Chesser, President and
Chief Executive Officer
August 4, 2000 By: /s/ M. P. O'Flynn
------------------
M. P. O'Flynn, Vice President- Finance
and Rates & Comptroller
(principal accounting officer)
63
