<TABLE>
<CAPTION>
Financial Statements
Item 6(b) 1-b
Page 5 of 27
GPU, Inc. and Subsidiaries
Consolidated Balance Sheets
Actual and Pro Forma (unaudited)
June 30, 2000
(In Thousands)
ASSETS Actual Adjustments Pro Forma
------------ ------------ ------------
Utility Plant:
<S> <C> <C> <C>
Utility plant in service $10,463,643 $ - $10,463,643
Accumulated depreciation (3,962,894) - (3,962,894)
------------ ------------ ------------
Net utility plant in service 6,500,749 - 6,500,749
Construction work in progress 210,101 - 210,101
Other, net 16,575 - 16,575
------------ ------------ ------------
Net utility plant 6,727,425 - 6,727,425
------------ ------------ ------------
Other Property and Investments:
Equity investments 215,184 - 215,184
Goodwill, net 2,227,483 - 2,227,483
Nuclear decommissioning trusts, at market 669,796 - 669,796
Nuclear fuel disposal trust, at market 120,609 - 120,609
Other, net 543,220 - 543,220
------------ ------------ ------------
Total other property and investments 3,776,292 - 3,776,292
------------ ------------ ------------
Current Assets:
Cash and temporary cash investments 634,439 31,039 665,478
Marketable securities 28,479 - 28,479
Special deposits 386,910 - 386,910
Accounts receivable:
Customers, net 541,689 - 541,689
Other 233,243 - 233,243
Unbilled revenues 178,509 - 178,509
Costs and estimated earnings in excess
of billings on uncompleted contracts 21,141 - 21,141
Materials and supplies, at average cost or less:
Construction and maintenance 76,896 - 76,896
Fuel 459 - 459
Deferred income taxes 260,947 - 260,947
Prepayments 156,234 - 156,234
------------ ------------ ------------
Total current assets 2,518,946 31,039 2,549,985
------------ ------------ ------------
Deferred Debits and Other Assets:
Regulatory assets, net 4,639,953 - 4,639,953
Deferred income taxes 2,294,588 - 2,294,588
Other 501,687 - 501,687
------------ ------------ ------------
Total deferred debits and other assets 7,436,228 - 7,436,228
------------ ------------ ------------
Total Assets $20,458,891 $ 31,039 $20,489,930
============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Financial Statements
Item 6(b) 1-b
Page 6 of 27
GPU, Inc. and Subsidiaries
Consolidated Balance Sheets
Actual and Pro Forma (unaudited)
June 30, 2000
(In Thousands)
LIABILITIES AND CAPITALIZATION Actual Adjustments Pro Forma
------------ ------------ ------------
Capitalization:
<S> <C> <C> <C>
Common stock $ 331,958 $ - $ 331,958
Capital surplus 1,014,032 (674) 1,013,358
Retained earnings 2,280,561 - 2,280,561
Accumulated other comprehensive income/(loss) (35,165) - (35,165)
------------ ------------ ------------
Total 3,591,386 (674) 3,590,712
Reacquired common stock, at cost (315,000) 31,713 (283,287)
------------ ------------ ------------
Total common stockholders' equity 3,276,386 31,039 3,307,425
Cumulative preferred stock:
With mandatory redemption 51,500 - 51,500
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 - 4,894,739
------------ ------------ ------------
Total capitalization 8,560,274 31,039 8,591,313
------------ ------------ ------------
Current Liabilities:
Securities due within one year 588,626 - 588,626
Notes payable 1,297,733 - 1,297,733
Bank overdraft 236,536 - 236,536
Obligations under capital leases 39,548 - 39,548
Accounts payable 673,229 - 673,229
Billings in excess of costs and estimated
earnings on uncompleted contracts 19,484 - 19,484
Taxes accrued 161,981 - 161,981
Interest accrued 68,547 - 68,547
Other 619,370 - 619,370
------------ ------------ ------------
Total current liabilities 3,705,054 - 3,705,054
------------ ------------ ------------
Deferred Credits and Other Liabilities:
Deferred income taxes 3,528,589 - 3,528,589
Unamortized investment tax credits 57,460 - 57,460
Three Mile Island Unit 2 future costs 504,033 - 504,033
Purchase power contract loss liability 3,156,834 - 3,156,834
Other 946,647 - 946,647
------------ ------------ ------------
Total deferred credits and other liabilities 8,193,563 - 8,193,563
------------ ------------ ------------
Total Liabilities and Capitalization $20,458,891 $ 31,039 $20,489,930
============ ============ ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Financial Statements
Item 6(b) 1-b
Page 7 of 27
GPU, Inc. and Subsidiaries
Consolidated Statements of Income and Retained Earnings
Actual and Pro Forma (unaudited)
For The Twelve Months Ended June 30, 2000
-----------------------------------------
(In Thousands)
Actual Adjustments Pro Forma
---------- ------------ ---------
<S> <C> <C> <C>
Operating Revenues $5,252,539 $ - $5,252,539
---------- ------------ ---------
Operating Expenses:
Fuel 177,258 - 177,258
Power purchased and interchanged 1,623,841 - 1,623,841
Deferred costs, net (105,248) - (105,248)
Other operation and maintenance 1,652,886 - 1,652,886
Loss of sale of business 372,492 - 372,492
Depreciation and amortization 563,871 - 563,871
Taxes, other than income taxes 192,363 - 192,363
---------- ------------ ---------
Total operating expenses 4,477,463 - 4,477,463
---------- ------------ ---------
Operating Income 775,076 - 775,076
---------- ------------ ---------
Other Income and Deductions:
Allowance for other funds used during construction 808 - 808
Equity in undistributed earnings
of affiliates, net 19,019 - 19,019
Other income, net 68,711 - 68,711
---------- ------------ ---------
Total other income and deductions 88,538 - 88,538
---------- ------------ ---------
Income Before Interest Charges and
Preferred Dividends 863,614 - 863,614
---------- ------------ ---------
Interest Charges and Preferred Dividends:
Long-term debt and notes payable 530,355 - 530,355
Trust preferred securities 14,690 - 14,690
Subsidiary-obligated mandatorily
redeemable preferred securities 15,533 - 15,533
Other interest 10,471 - 10,471
Allowance for borrowed funds used
during construction (3,839) - (3,839)
Preferred stock dividends of subsidiaries, inclusive
of $2,116 loss on reacquisition 8,838 - 8,838
---------- ------------ ---------
Total interest charges and preferred dividends 576,048 - 576,048
---------- ------------ ---------
Income Before Income Taxes and Minority Interest 287,566 - 287,566
Income taxes 144,120 - 144,120
Minority interest net income 2,228 - 2,228
---------- ------------ ---------
Net Income $ 141,218 $ - $ 141,218
========== =========== ==========
Retained Earnings:
Balance at beginning of period $2,335,325 $ - $2,335,325
Net income/(Loss) 141,218) - 141,218
Cash dividends declared on common stock (195,957) - (195,957)
Other adjustments, net (25) - (25)
---------- ------------ ---------
Balance at end of period $2,280,561 $ - $2,280,561
========== ========== ==========
</TABLE>
<PAGE>
Financial Statements
Item 6(b) 1-b
Page 8 of 27
GPU, Inc. and Subsidiaries
Pro Forma Journal Entries
-------------------------------------
(In Thousands)
(1)
Cash and temporary cash investments $ 31,039
Capital surplus 674
Reacquired common stock, at cost $ 31,713
To record the proposed issuance and sale of 1,146,955 shares (authorized
2,500,000 limit less 1,353,045 shares sold to date) of $2.50 par value common
stock at $27.06 per share as of 6/30/2000 under the Dividend Reinvestment and
Stock Purchase Plan.
<PAGE>
Financial Statements
Item 6(b) 1-b
Page 9 of 27
GPU, Inc. and Subsidiaries
Pro Forma Journal Entries
-------------------------------------
Notes: These pro forma financial statements do not include the impact of the
----- proposed issuance of $471 million of transition bonds, by an affiliate of
JCP&L, to securitize the recovery of bondable stranded costs attributable
to the projected net investment in the Oyster Creek Nuclear Generating
Station. The proceeds would be used to paydown outstanding debt and to
fund decommissioning of the plant.
The proposed declaration and payment of common stock dividends by Met-Ed
and Penelec (SEC File No. 70-9593) does not have an impact on GPU's
consolidated financial statements since such dividends would be paid to
GPU, Inc., the parent company of Met-Ed and Penelec.
<PAGE>
Financial Statements
Item 6(b)
Page 10 of 27
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
<PAGE>
Financial Statements
Item 6(b) 1-a
Page 11 of 27
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.
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.
<PAGE>
Financial Statements
Item 6(b) 1-a
Page 12 of 27
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.
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.
<PAGE>
Financial Statements
Item 6(b) 1-a
Page 13 of 27
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),
"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
<PAGE>
Financial Statements
Item 6(b) 1-a
Page 14 of 27
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
========= =======
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.
<PAGE>
Financial Statements
Item 6(b) 1-a
Page 15 of 27
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.
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.
<PAGE>
Financial Statements
Item 6(b) 1-a
Page 16 of 27
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.
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 <PAGE>
Financial Statements
Item 6(b) 1-a
Page 17 of 27
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.
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 <PAGE>
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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 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):
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JCP&L MET-ED PENELEC GPUN GPU, INC. TOTAL
----- ------ ------- ---- --------- -----
6 4 2 1 1 1
In addition, certain of the GPU companies have been requested to
participate in the remediation or supply information to the EPA and state
environmental authorities on several other sites for which they have not been
formally named as PRPs, although the EPA and/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
<PAGE>
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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 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 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
<PAGE>
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Item 6(b) 1-a
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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 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.
<PAGE>
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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
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
<PAGE>
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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 (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 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.
<PAGE>
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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.
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
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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 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.
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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.
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
<PAGE>
Financial Statements
Item 6(b) 1-a
Page 27 of 27
(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.
