UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 31, 2000, was as follows:
Shares
Registrant Title Outstanding
---------- ----- -----------
GPU, Inc. Common Stock, $2.50 par value 121,338,841
Jersey Central Power & Light Company Common Stock, $10 par value 15,371,270
Metropolitan Edison Company Common Stock, no par value 859,500
Pennsylvania Electric Company Common Stock, $20 par value 5,290,596
<PAGE>
GPU, Inc. and Subsidiary Companies
Quarterly Report on Form 10-Q
September 30, 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 26
Statements of Income 28
Statements of Cash Flows 29
Jersey Central Power & Light Company
------------------------------------
Balance Sheets 30
Statements of Income 32
Statements of Cash Flows 33
Metropolitan Edison Company
---------------------------
Balance Sheets 34
Statements of Income 36
Statements of Cash Flows 37
Pennsylvania Electric Company
-----------------------------
Balance Sheets 38
Statements of Income 40
Statements of Cash Flows 41
Combined Notes to Consolidated Financial Statements 42
PART II - Other Information 68
Signatures 69
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.
<PAGE>
SAFE HARBOR STATEMENT UNDER
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, GPU, Inc., Jersey Central Power & Light Company,
Metropolitan Edison Company and Pennsylvania Electric Company (the GPU
registrants) are hereby filing cautionary statements identifying important
factors that could cause their actual results to differ materially from those
projected in forward-looking statements (as that term is defined in the Private
Securities Litigation Reform Act of 1995) made by or on behalf of the GPU
registrants which are made in this Form 10-Q. Any statements that express, or
involve discussions as to, expectations, beliefs, plans, objectives, assumptions
or future events or performance (often, but not always, through the use of words
or phrases such as "anticipates," "believes," "estimates," "expects," "intends,"
"plans," "projects," "will likely," "result," "will continue" or similar
expressions) are not statements of historical facts and may be forward-looking.
Forward-looking statements involve estimates, assumptions and
uncertainties and are qualified in their entirety by reference to, and are
accompanied by, the following important factors, which are difficult to predict,
contain uncertainties, are beyond the control of the GPU registrants and may
cause actual results to differ materially from those contained in those
forward-looking statements:
- the consummation of the proposed merger of GPU, Inc. with
FirstEnergy Corp.;
- the effects of regulatory decisions, including any conditions imposed upon
the proposed merger with FirstEnergy Corp.;
- 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;
- energy prices and availability; and
- uncertainties involved with foreign operations including political risks
and foreign currency fluctuations.
Any forward-looking statement speaks only as of the date on which that
statement is made, and the GPU registrants undertake no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which that statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for
management to predict all of those factors, nor can it assess the impact of each
of those factors on the business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statement.
<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). These electric
utilities are conducting business under the name GPU Energy and considered
together are referred to as the "GPU Energy companies." 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 Electric's foreign utility companies
include Midlands Electricity plc (conducting business as GPU Power UK); Empresa
Distribuidora Electrica Regional S.A. (Emdersa); and GPU GasNet. 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 Nine Months Ended
(on a diluted basis) September 30, September 30,
--------------------- -----------------------
2000 1999 Change 2000 1999 Change
---- ---- ------- ---- ---- -------
Operations:
GPU Energy companies * $ 0.48 $ 1.31 $(0.83) $ 1.72 $ 3.04 $(1.32)
GPU Electric 0.03 (0.08) 0.11 0.59 0.31 0.28
GPUI Group 0.08 0.06 0.02 0.11 0.08 0.03
GPU AR (0.03) (0.07) 0.04 (0.02) (0.06) 0.04
MYR -- -- -- 0.01 -- 0.01
GPU, Inc. (Corporate) (0.05) (0.04) (0.01) (0.13) (0.08) (0.05)
----- ----- ----- ----- ----- -----
Total operations 0.51 1.18 (0.67) 2.28 3.29 (1.01)
Non-recurring items:
GPU Energy companies 0.13 -- 0.13 0.13 (0.32) 0.45
GPU Electric -- -- -- (2.43) 0.08 (2.51)
GPUI Group 0.22 -- 0.22 0.22 -- 0.22
----- ----- ----- ----- ----- -----
Total $ 0.86 $ 1.18 $(0.32) $ 0.20 $ 3.05 $(2.85)
===== ===== ===== ===== ===== =====
* Includes GPU Telcom
GPU's third quarter 2000 income before non-recurring items was $60.9
million, or $0.51 per share, against income before non-recurring items of $147.5
million, or $1.18 per share in the third quarter of 1999. The lower 2000 third
quarter income before non-recurring items was primarily due to the impact of
electric utility restructuring in New Jersey and Pennsylvania, GPU's sale of
substantially all its generation facilities, lower demand for electricity
resulting from cooler weather during the Summer of 2000 compared to the previous
summer, higher energy costs in Pennsylvania, and lower electric delivery rates
charged to customers in New Jersey. Partially
1
<PAGE>
offsetting the decrease was lower operating and maintenance (O&M) expenses and
depreciation costs at the GPU Energy companies and higher GPU Electric earnings
primarily due to the acquisition of the remaining 50% ownership interest of GPU
Power UK in July 1999.
After taking into account the 2000 non-recurring items, GPU recorded net
income of $103.5 million, or $0.86 per share, in the third quarter 2000. The
2000 quarterly results included: a non-recurring after-tax gain of $26.2
million, or $0.22 per share, for the recognition of a net gain related to a
restructured power supply agreement between a GPU independent power project and
Niagara Mohawk Corporation (NIMO); and a non-recurring after-tax gain of $16.5
million, or $0.13 per share, for the reversal of certain deferred taxes and
realization of an investment tax credit related to the sale of the Oyster Creek
Nuclear Generating Station (Oyster Creek).
For the nine months ended September 30, 2000, income before non-recurring
items was $276 million, or $2.28 per share, against $416.1 million, or $3.29 per
share, for the first nine months of 1999. The same factors affecting the
comparable quarterly results also affected the year to date comparison.
Including non-recurring items, GPU recorded net income for the first nine
months of 2000 of $23.7 million, or $0.20 per share, against net income of
$385.5 million, or $3.05 per share, in the first nine months of 1999. The nine
months 2000 net income included a non-recurring charge of $295 million
after-tax, or $2.43 per share, on the June 2000 sale of GPU's Australian
electric transmission subsidiary, GPU PowerNet, in addition to the non-recurring
gains described above. 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 ; a non-recurring gain on the sale of the GPU Power UK supply
business of $9.7 million after-tax, or $0.08 per share; and a non-recurring gain
of $27.8 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 (Homer City)
related to wholesale operations.
OPERATING REVENUES:
-------------------
Operating revenues for the third quarter 2000 increased $31 million to
$1.5 billion, as compared to the third quarter 1999. For the nine months ended
September 30, 2000, operating revenues increased $526.4 million to $3.9 billion,
as compared to the same period last year. The components of the changes are as
follows:
2
<PAGE>
2000 vs. 1999 (in millions)
----------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
GPU Energy companies:
Kilowatt-hour (KWH) revenues $ (98.4) $(386.2)
Energy and restructuring-related
Revenues (NJ) 43.1 222.7
Competitive transition charge
(CTC) revenues (PA) (1.5) 10.1
Obligation to refund revenues (NJ) -- 115.0
GPU Telcom revenues 1.4 2.1
Other revenues (29.6) (31.3)
------ ------
Total GPU Energy companies (85.0) (67.6)
GPU Electric (36.3) 336.4
GPUI Group (2.4) 2.4
GPU AR (15.3) (12.9)
MYR 170.0 268.1
------ ------
Total increase $ 31.0 $ 526.4
====== ======
GPU Energy companies
Kilowatt-hour revenues
----------------------
The decrease for the three and nine months ended September 30, 2000 was
due to GPU Energy having less generation available for sale to other utilities
in 2000 of approximately $29.5 million year to date, lower rates charged to
customers in New Jersey resulting in a decrease in revenues of approximately $82
million year to date, and lower weather-related sales due to cooler weather
during the Summer of 2000 compared to the previous summer. In addition, certain
JCP&L revenues related to stranded cost recovery that were previously included
in KWH revenues are now included in 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 nine months ended September 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 addition, in 1999 JCP&L changed its
estimate for unbilled revenue, which resulted in the recording of additional
revenues, partially offsetting the increase in the nine 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 nine month period was due to the absence this year of
a reduction in operating revenues of $115 million as a result of the
3
<PAGE>
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.
Other Revenues
--------------
The decrease for both periods was due to decreased transmission revenues
as a result of less load served by alternative suppliers in Pennsylvania, and
lower revenue taxes in New Jersey, which did not have an impact on earnings.
GPU Electric
The increase in revenues for the nine months ended September 30, 2000 was
primarily due to the inclusion of a full nine months of revenues from: GPU Power
UK (acquired the remaining 50% ownership interest in July 1999), approximately
$323.3 million year to date; Emdersa (acquired in March 1999), approximately
$41.2 million year to date; and GPU GasNet (acquired in June 1999),
approximately $26.6 million year to date; partially offset by a reduction in
revenues at GPU PowerNet. The decrease in revenues for the three months ended
September 30, 2000 was primarily due to the sale of GPU PowerNet in June 2000.
GPUI Group
The decrease for the three months ended September 30, 2000 was due
primarily to lower revenues associated with the Onondaga and Lake cogeneration
projects.
The increase for the nine months ended September 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 commenced operations in June 1999.
GPU AR
The decrease for the three and nine months ended September 30, 2000 was
due to GPU AR having fewer customers to supply electricity to compared to the
same periods last year.
MYR
The increase for the three and nine months ended September 30, 2000 was
due to the inclusion of revenues from MYR following its acquisition by GPU, Inc.
in the second quarter 2000.
OPERATING INCOME:
-----------------
Operating income for the third quarter 2000 decreased $184.9 million to
$192.2 million, as compared to the third quarter 1999. For the nine months ended
September 30, 2000, operating income decreased $417.2 million to $390.5 million,
as compared to the same period last year. The components of the changes are as
follows:
4
<PAGE>
2000 vs. 1999 (in millions)
----------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
GPU Energy companies $(184.2) $(208.6)
GPU Electric (9.1) (223.5)
GPUI Group (3.2) 1.0
GPU AR 7.4 6.6
MYR 3.9 7.8
GPU, Inc. 0.3 (0.5)
------ ------
Total decrease $(184.9) $(417.2)
====== ======
GPU Energy companies
The decrease for the three and nine months ended September 30, 2000 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 (approximately $242.5 million year to date)
following the sale of their generating assets. Partially offsetting this
decrease was lower O&M expenses (approximately $133.9 million year to date)
primarily due to the sale of essentially all GPU Energy's generating assets in
1999; and lower depreciation expense (approximately $62.7 million year to date)
due to the sale of generating assets and the effect of the impairment write-down
of Oyster Creek, which was also recorded in 1999.
GPU Electric
The decrease for the nine months ended September 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 this decrease was increased operating income
at GPU Power UK due primarily to the acquisition of the remaining 50% ownership
interest in 1999, and the inclusion of Emdersa and GPU GasNet following their
acquisitions. Prior to its purchase of the remaining 50% ownership interest, GPU
accounted for its investment in GPU Power UK under the equity method and
included its share of GPU Power UK's income in Equity in undistributed earnings
of affiliates, net on the Consolidated Statements of Income.
Partially offsetting the decrease was a credit to income 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 entered into
by 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
Lower revenues associated with the Onondaga and Lake cogeneration projects
reduced the 2000 quarterly operating income. The increase for the nine months
ended September 30, 2000 was due to the absence of an impairment loss of $6.5
million recorded in 1999 against GPU International, Inc.'s investment in the
Lake cogeneration project.
5
<PAGE>
GPU AR
The decrease in operating loss for the three and nine months ended
September 30, 2000 was primarily due to lower energy purchases related to GPU AR
having fewer customers to supply electricity to, as compared to the same periods
last year, partially offset by lower revenues for the same reason.
MYR
The increase for the three and nine months ended September 30, 2000 was
due to the inclusion of MYR following its acquisition by GPU, Inc. in the second
quarter 2000.
OTHER INCOME AND DEDUCTIONS:
----------------------------
Other income and deductions for the third quarter 2000 increased $67.4
million to $79.3 million, as compared to the third quarter 1999. For the nine
months ended September 30, 2000, other income and deductions decreased $21
million to $135.8 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 Nine Months Ended
September 30, September 30,
------------------- ------------------
GPU Energy companies $ 9.4 $ (29.2)
GPU Electric 8.3 (38.6)
GPUI Group 49.3 45.9
GPU AR 0.2 0.5
MYR 0.2 0.4
GPU, Inc. -- --
------ ------
Total increase/(decrease) $ 67.4 $ (21.0)
====== ======
GPU Energy companies
The increase for the three months ended September 30, 2000 was due to the
reversal of the effect of discounting the receivable from AmerGen Energy Company
LLC (AmerGen) relating to Oyster Creek outage costs, previously recorded in the
second quarter 2000, higher interest income and a gain on the sale of property.
Partially offsetting the increase was the write-down of regulatory assets by
$11.7 million for Three Mile Island Unit 2 (TMI-2) decommissioning, representing
the realized gains previously recorded by Met-Ed and Penelec on the
accident-related portion of the TMI-2 decommissioning trusts.
The decrease for the nine months ended September 30, 2000 was due to: the
absence, in 2000, of the gain of $38.3 million pre-tax on the sale of Penelec's
Homer City Station in the first quarter 1999; and the write-down of regulatory
assets by $11.7 million in the third quarter 2000; partially offset by higher
interest income and a gain on the sale of property.
6
<PAGE>
GPU Electric
The decrease for the nine months ended September 30, 2000 was due
primarily to the consolidation of GPU Power UK following the acquisition of the
remaining 50% ownership interest 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 Equity in undistributed earnings of
affiliates, net on the Consolidated Statements of Income. The increase for the
three months ended September 30, 2000 was due to the increase in investment
income associated with GPU Power UK's investment in Turkey.
GPUI Group
The increase for the three and nine months ended September 30, 2000 was
due to the recognition of a $40.3 million pre-tax net gain related to a
restructured power supply agreement between a GPU independent power project and
NIMO. For additional information, see Note 3 to the Consolidated Financial
Statements.
INTEREST CHARGES AND PREFERRED DIVIDENDS:
-----------------------------------------
Interest charges and preferred dividends for the third quarter 2000
decreased $19.1 million to $124.5 million, as compared to the third quarter
1999. For the nine months ended September 30, 2000, interest charges and
preferred dividends increased $74.7 million to $409.3 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 Nine Months Ended
September 30, September 30,
------------------- ------------------
GPU Energy companies $ (0.3) $ (12.0)
GPU Electric (24.1) 74.1
GPUI Group 0.8 1.7
MYR 2.9 5.3
GPU, Inc. 1.6 5.6
------ ------
Total increase/(decrease) $ (19.1) $ 74.7
====== ======
GPU Energy companies
The decrease for the nine months ended September 30, 2000 was primarily
due to the following: in 2000, JCP&L redeemed $16.7 million stated value
cumulative preferred stock pursuant to mandatory and optional sinking fund
provisions; Penelec redeemed $25 million of long-term debt; JCP&L and Met-Ed
redeemed $40 million and $50 million, respectively, of first mortgage bonds
(FMBs); and 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 FMBs. Partially offsetting these decreases were
increased interest expense associated with Penelec's issuance of $350 million of
senior notes in 1999, the issuance of $50 million and $68 million of senior
notes in April 2000 and August 2000, respectively; and the issuance of $100
million each of company-obligated trust preferred securities by Met-Ed and
Penelec in 1999.
7
<PAGE>
GPU Electric
The increase for the nine months ended September 30, 2000 was primarily
due to higher debt levels from the 1999 acquisitions of GPU Power UK (the
remaining 50% ownership interest), Emdersa and GPU GasNet, which resulted in
additional debt and related interest expense of approximately $105.3 million
year to date, partially offset by lower interest expense related to GPU PowerNet
due to its sale. The decrease for the three months ended September 30, 2000 was
primarily due to lower debt levels resulting from the sale of GPU PowerNet on
June 30, 2000.
MYR
The increase for the three and nine months ended September 30, 2000 was
due to the inclusion of MYR following its acquisition by GPU, Inc. in the second
quarter 2000.
GPU, Inc.
The increase for the three and nine month periods was due to higher
average debt levels in 2000, partially due to the acquisition of MYR.
JCP&L RESULTS OF OPERATIONS
---------------------------
JCP&L's earnings for the third quarter 2000 were $91.4 million compared to
third quarter 1999 earnings of $100.6 million. Excluding a non-recurring
after-tax gain of $16.5 million, which resulted from the reversal of certain
deferred taxes and realization of an investment tax credit related to the sale
of Oyster Creek, earnings for the quarter ended September 30, 2000 would have
been $74.9 million. The decline in earnings on this basis was primarily due to
lower demand for electricity resulting from cooler weather during the Summer of
2000 compared to the previous summer; and 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, both of which occurred in 1999.
For the nine months ended September 30, 2000, JCP&L's earnings were $177.3
million, compared to $143.6 million for the same period in 1999. Excluding the
non-recurring gain discussed above, earnings for 2000 would have been $160.8
million. Excluding a non-recurring charge of $68 million, which resulted from
the NJBPU's Summary Order for JCP&L, earnings for the nine months ended
September 30, 1999 would have been $211.6 million. The decrease in earnings on
this basis was due to lower demand for electricity resulting from cooler weather
during the Summer of 2000 compared to the previous summer; and 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 were
recorded in 1999, and a reduction in O&M expenses.
OPERATING REVENUES:
-------------------
Operating revenues for the third quarter 2000 decreased $65.2 million to
$605 million, as compared to the third quarter 1999. For the nine months
8
<PAGE>
ended September 30, 2000, earnings decreased $30.2 million, to $1.5 billion,
compared to the same period last year. The components of the changes are as
follows:
2000 vs. 1999 (in millions)
--------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
KWH revenues $ (98.9) $(355.3)
Energy and restructuring-related
revenues 43.1 222.7
Obligation to refund revenues
to customers per NJBPU Order -- 115.0
Other revenues (9.4) (12.6)
------ ------
Decrease in revenues $ (65.2) $ (30.2)
====== ======
KWH revenues
------------
The decline for the three and nine 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 $82 million year to date,
the effect of New Jersey customers choosing other electric energy suppliers,
resulting in a decrease of revenues of approximately $79 million year to date,
and lower weather-related sales.
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 as a
result of 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 nine-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 nine month period 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 third quarter 2000 decreased $59 million to
$135.8 million, as compared to the third quarter 1999. The decrease was due
primarily to lower revenues, resulting from lower rates charged to customers as
a result of the New Jersey rate restructuring. Partially offsetting the
9
<PAGE>
decrease was a decline 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 nine months ended September 30, 2000, operating income increased
$12.1 million, to $331.4 million, versus the same period last year. The increase
was due primarily to a decrease in depreciation expense (approximately $11.1
million) 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 (approximately
$24.6 million). Partially offsetting the increase was lower operating revenues,
as discussed above.
OTHER INCOME AND DEDUCTIONS:
----------------------------
Other income and deductions for the third quarter 2000 increased $14.5
million to $16.1 million, versus the third quarter 1999. For the nine months
ended September 30, 2000, other income and deductions increased $11.3 million to
$20.6 million, compared to the same period last year. The increase in both
periods was due to the reversal of the effect of discounting the receivable from
AmerGen relating to Oyster Creek outage costs, higher interest income and a gain
on the sale of property.
MET-ED RESULTS OF OPERATIONS
----------------------------
Met-Ed incurred a loss for the third quarter 2000 of $3.8 million,
compared to third quarter 1999 earnings of $41.6 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 nine months ended September 30, 2000, earnings were $31.4 million,
compared to earnings of $93 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.
OPERATING REVENUES:
-------------------
Operating revenues for the third quarter 2000 decreased $52.8 million to
$227.4 million, as compared to the third quarter 1999. Operating revenues for
the nine-month period ended September 30, 2000 decreased $79.1 million, to
$628.3 million, as compared to same period in 1999. The components of the
changes are as follows:
2000 vs. 1999 (in millions)
--------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
KWH revenues $ (44.4) $ (82.1)
CTC revenues (0.6) 9.1
Other revenues (7.8) (6.1)
------ ------
Decrease in revenues $ (52.8) $ (79.1)
====== ======
10
<PAGE>
KWH revenues
------------
The decrease for the three and nine month periods was due in part to
Met-Ed having less generation available for sale to other utilities in 2000,
approximately $78.9 million year to date.
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.
Other revenues
--------------
The decrease for both periods was primarily due to decreased transmission
revenues as a result of less load served by alternative suppliers in
Pennsylvania.
OPERATING INCOME:
-----------------
Operating income for the third quarter 2000 decreased $71.4 million, to
$9.8 million, as compared to the third 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 nine months ended September 30, 2000 decreased
$117.8 million, to $84.4 million, as compared to the nine months ended September
30, 1999. The decrease was attributed to lower revenues, as discussed above, as
well as higher energy purchase costs (approximately $112.5 million). This
decrease was offset by a reduction in O&M expenses (approximately $65 million),
and depreciation expense (approximately $24.6 million) due to the sale of
generating assets.
OTHER INCOME AND DEDUCTIONS:
----------------------------
Other income and deductions for the third quarter 2000 decreased $3.2
million, to a loss of $3.8 million, as compared to the third quarter 1999. The
decrease was due to the write-down of regulatory assets by $7.9 million for
TMI-2 decommissioning, representing the net realized gain previously recorded on
the accident-related portion of the TMI-2 decommissioning trust.
For the nine months ended September 30, 2000, other income and deductions
increased $4.8 million, to $7.2 million, versus the same period last year. The
change was due primarily to an increase in interest and dividend income,
partially offset by the write-down of regulatory assets by $7.9 million in the
third quarter 2000.
INTEREST CHARGES AND PREFERRED DIVIDENDS:
-----------------------------------------
Interest charges and preferred dividends for the third quarter 2000
decreased $2.2 million to $13.5 million, versus the third quarter 1999.
11
<PAGE>
Interest charges and preferred dividends for the nine months ended September 30,
2000 decreased $4.1 million to $41.3 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 company-obligated trust
preferred securities in 1999.
PENELEC RESULTS OF OPERATIONS
-----------------------------
Penelec incurred a loss for the third quarter 2000 of $14 million,
compared to third quarter 1999 earnings of $22.5 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.
For the nine months ended September 30, 2000, earnings were $17.5 million,
compared to earnings of $107.1 million for the same period last year. Excluding
the net gain of $27.8 million after-tax for the portion of the sale of Homer
City related to wholesale operations, earnings for the nine months ended
September 30, 1999 would have been $79.3 million. The decrease in earnings on
this basis was primarily due to higher energy purchase costs, which were
partially offset by reductions in O&M expenses and depreciation expense, and
additional income tax expense in 1999 related to the deregulation of generating
assets in Pennsylvania. In addition, the company experienced a decrease in
revenues as a result of Pennsylvania rate restructuring.
OPERATING REVENUES:
-------------------
Operating revenues for the third quarter 2000 decreased $17.9 million, to
$236.7 million, compared to the third quarter 1999. For the nine months ended
September 30, 2000, revenues decreased $42.4 million, to $663.6 million,
compared to the same period last year. The components of the changes are as
follows:
2000 vs. 1999 (in millions)
--------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
KWH revenues $ (3.8) $ (28.2)
CTC revenues (0.9) 1.0
Other revenues (13.2) (15.2)
------ ------
Decrease in revenues $ (17.9) $ (42.4)
====== ======
KWH revenues
------------
The decrease for the three and nine month periods was due in part to
Penelec having less generation available for sale to other utilities in 2000,
approximately $24.5 million year to date.
12
<PAGE>
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.
Other revenues
--------------
The decrease for both periods was primarily due to decreased transmission
revenues as a result of less load served by alternative suppliers in
Pennsylvania.
OPERATING INCOME:
-----------------
Operating income for the third quarter 2000 decreased $52.7 million, to a
loss of $11.1 million, as compared to the third 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 nine months ended September 30, 2000 decreased
$102 million, to $57.2 million, as compared to the nine months ended September
30, 1999. The decrease was attributed to lower revenues, as discussed above, as
well as higher energy purchase costs (approximately $130 million). This decrease
was offset by a reduction in O&M expenses (approximately $47 million), and
depreciation expense (approximately $27 million) due to the sale of generating
assets.
OTHER INCOME AND DEDUCTIONS:
----------------------------
Other income and deductions for the third quarter 2000 decreased $2.5
million, to a loss of $1.7 million, as compared to the third quarter 1999. The
decrease was due to the write-down of regulatory assets by $3.8 million for
TMI-2 decommissioning, representing the net realized gain previously recorded on
the accident-related portion of the TMI-2 decommissioning trust.
Other income and deductions for the nine months ended September 30, 2000
decreased $43.9 million, to $3 million, versus the same period last year. The
decrease was due to: the absence, in 2000, of the gain of $38.3 million pre-tax
on the sale of Penelec's Homer City Station in the first quarter 1999; and the
write-down of regulatory assets by $3.8 million in the third quarter 2000.
INTEREST CHARGES AND PREFERRED DIVIDENDS:
-----------------------------------------
Interest charges and preferred dividends for the third quarter 2000
increased $3 million, to $12.1 million, due primarily to an increase in interest
expense on notes payable and commercial paper.
Interest charges and preferred dividends for the first nine months of 2000
decreased $2.5 million, to $32.3 million, as compared to the first nine months
of 1999. The decrease was primarily due to the redemption of all
13
<PAGE>
Penelec's company-obligated mandatorily redeemable preferred securities and
cumulative preferred stock (the redemption of preferred stock resulted in a loss
of $0.7 million), the redemption of $600 million of FMBs in 1999, and the
redemption of $25 million of long-term debt in 2000. Partially offsetting these
decreases were increased interest expense associated with the issuance of $350
million of senior notes in 1999; the issuance of $100 million of
company-obligated trust preferred securities in 1999; and the issuance of $68
million senior notes in 2000.
PENDING MERGER OF FIRSTENERGY CORP. AND GPU
-------------------------------------------
On August 8, 2000, GPU, Inc. entered into an agreement to merge with
FirstEnergy Corp. (FirstEnergy), an Ohio corporation, headquartered in Akron,
Ohio. Under the merger agreement, FirstEnergy would acquire all of the
outstanding shares of GPU's common stock for approximately $4.5 billion in cash
and FirstEnergy common stock.
The Merger has been approved by the Boards of Directors of GPU, Inc. and
FirstEnergy and is expected to close promptly after all of the conditions to the
consummation of the Merger, including shareholder approval and the receipt of
all necessary regulatory approvals, are fulfilled or waived. The receipt of all
necessary federal and state regulatory approvals is expected to take
approximately nine to twelve months from the date of the merger agreement. A
joint proxy statement/prospectus has been mailed to shareholders of both
companies, and special meetings of the shareholders of GPU, Inc. and FirstEnergy
are scheduled for November 21, 2000 to consider and vote on the Merger.
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 September
30, 2000. At September 30, 2000, GPU, Inc. has remaining authorization to
finance approximately $527 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 and, as a result, 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
September 30, 2000, GPU, Inc.'s aggregate investment in GPU Electric was $571
million. GPU, Inc. has also guaranteed up to an additional $1.04 billion of
outstanding GPU Electric obligations.
14
<PAGE>
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 September 30, 2000, GPU, Inc.'s
aggregate investment in the GPUI Group was $291.7 million. GPU, Inc. has also
guaranteed up to an additional $30.3 million of GPUI Group obligations.
In October 2000, GPU, Inc. agreed to sell GPU International, Inc. (GPUI)
to Aquila Energy Corporation, a subsidiary of UtiliCorp United, for $225
million. The sale includes GPUI's interests in its six domestic operating
plants, and a one-half interest in a 715 MW development stage project. GPU, Inc.
expects to complete the sale, which is subject to certain federal and state
regulatory approvals, by the end of 2000 and expects to realize an after-tax
gain on the sale of between $60 million and $80 million.
MYR GROUP INC.
--------------
In April 2000, GPU, Inc. acquired MYR for approximately $217.5 million.
For additional information, see Note 2, Acquisitions and Dispositions.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Capital Expenditures and Investments
------------------------------------
GPU Energy companies
The GPU Energy companies' capital spending for the nine months ended
September 30, 2000 was $211 million (JCP&L $85 million; Met-Ed $27 million;
Penelec $48 million; Other $51 million), and was used primarily to expand and
improve existing transmission and distribution (T&D) facilities and for new
customer connections; and for investments by GPU Telcom in telecommunications
infrastructure and businesses. For 2000, capital expenditures are estimated to
be $349 million (JCP&L $178 million; Met-Ed $57 million; Penelec $82 million;
Other $32 million), a substantial portion of which management estimates will be
satisfied through internally generated funds.
GPU Electric
GPU Electric's capital spending for the nine months ended September 30,
2000 was $154.5 million, and was used primarily to fund on-going network capital
replacements, 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
Systems, Inc.
15
<PAGE>
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 September
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 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 September
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 $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 $264 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. Subject to market conditions, GPU, Inc. plans
to sell these securities during the fourth quarter of 2000.
GPU Energy companies
Met-Ed and Penelec have regulatory approval to issue senior notes through
December 31, 2002 in the amounts of $150 million and $157 million, respectively.
JCP&L has regulatory approval to issue senior notes in the amount of $300
million through December 31, 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 indentures include provisions that limit the amount
of FMBs the companies may issue. JCP&L and Met-Ed's interest coverage
16
<PAGE>
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 stock dividend coverage ratio is
currently in excess of this charter restriction.
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.
In August 2000, Penelec issued two tranches totaling $68 million of fixed
rate senior notes.
In July 2000, JCP&L redeemed $16.7 million stated value cumulative
preferred stock pursuant to mandatory and optional sinking fund provisions, and
in August 2000, Penelec redeemed $25 million of long-term debt.
Based on September 30, 2000 financial statements, Met-Ed and Penelec had
retained earnings available to pay common stock dividends of $16.5 million and
$11.6 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 September 30, 2000, the common
equity ratios of Met-Ed, Penelec and GPU, Inc. were 40.4%, 36.2% and 31.8%,
respectively.
GPU Electric
In August 2000, GPU GasNet refinanced A$375 million (US$203 million) of
maturing bank debt as follows: A$250 million (US$135 million) of proceeds from a
new commercial paper program at GPU GasNet; A$51 million (US$28 million) of
proceeds from the issuance of additional commercial paper by GPU Australia
Holdings under its commercial paper program; and A$37 million (US$20 million) of
cash proceeds from the sale of marketable securities by an affiliate. At
September 30, 2000, US$135 million of commercial paper was outstanding under the
GPU GasNet commercial paper program and included in Long-term debt on the
Consolidated Balance Sheets. GPU GasNet has also established a A$750 million
(US$406 million) revolving credit facility, which serves as backstop for the GPU
GasNet commercial paper program. No borrowings were outstanding under this
facility at September 30, 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 which has been established to fund GPU Electric
acquisitions. GPU, Inc. has guaranteed GPU Capital's obligations
17
<PAGE>
under this program. At September 30, 2000, $927 million was outstanding under
the commercial paper program, of which $585 million is included in Long-term
debt on the Consolidated Balance Sheets since it is management's intent to
reissue this amount of commercial paper on a long-term basis. GPU, Inc. is
negotiating a one year extension of this facility.
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' commercial paper
program. GPU, Inc. has guaranteed GPU Australia Holdings' obligations under this
program. Approximately $183 million of commercial paper was outstanding as of
September 30, 2000.
GPU Power UK maintains a (pound)150 million (approximately US $222
million) bilateral revolving credit facility with six banks for working capital
purposes, which matures at various dates through June 2005. At September 30,
2000, no borrowings 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 such that the resultant increased cost 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 by implementing a program to manage risk,
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 September 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 enhance shareholder value by reducing its ownership in non-core and
under-performing assets.
18
<PAGE>
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 $2.2 million has been invested as
of September 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 September 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 a program to manage energy risk, 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. The GPU Energy companies also have contracts
with non-utility generation (NUG) facilities totaling 1,600 MW (JCP&L 926 MW;
Met-Ed 273 MW; Penelec 401 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, as well as the energy associated with 400 MW of the
capacity contracted for by JCP&L. The GPU Energy companies have agreed to
purchase all of the capacity and energy from the Three Mile Island Unit 1
(TMI-1) and Oyster Creek nuclear generating stations (which they sold to AmerGen
Energy Company LLC (AmerGen)) through December 31, 2001 and through March 31,
2003, respectively. In addition, the GPU Energy companies have the capacity of
the Homer City Station (in which Penelec sold its 50% interest to a subsidiary
of Edison Mission Energy) (942 MW) through May 31, 2001 and the right to the
capacity of the generating stations sold to Sithe Energies (3,970 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
19
<PAGE>
expected high energy price volatility and reliance on spot market purchases
during other periods.
Provider of Last Resort
-----------------------
Under the 1998 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.
This process was concluded without resolution of the issues surrounding the
companies' PLR risk. In November 2000, Met-Ed and Penelec plan to file a
petition with the PaPUC seeking regulatory relief in connection with their PLR
obligation. There can be no assurance as to the outcome of this matter.
Met-Ed and Penelec previously estimated that the failed CDS bid would
require them to supply 550 MW of electric power more than they had planned.
Subsequently, customers requiring approximately 600 MW of power returned to
Met-Ed and Penelec from their alternate suppliers for the Summer of 2000,
thereby increasing the previously estimated amount of additional supply
resulting from the failed CDS bid to approximately 670 MW. The total of these
additional energy requirements, coupled with higher than anticipated energy
prices, have resulted in GPU's Pennsylvania supply business recording a loss
through September 2000 of approximately $0.31 per share.
Under the terms of their restructuring settlements, Met-Ed and Penelec are
required to seek alternative providers through a CDS bidding process for a
portion of their load again in 2001. Should the 2001 CDS bidding process be
successful, then up to 40% of Met-Ed and Penelec's load would be served by third
party energy providers starting on June 1, 2001. If the bidding process is not
successful and there is no state regulatory relief, GPU expects its 2001
earnings will continue to be negatively impacted by Met-Ed and Penelec's supply
obligations.
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.
20
<PAGE>
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 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 fixed
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 affect 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
21
<PAGE>
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.
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 August 2000, JCP&L sold Oyster Creek to AmerGen, a joint venture of
PECO Energy and British Energy, for approximately $10 million. As part of the
sale, AmerGen has assumed full responsibility for decommissioning the plant.
JCP&L has transferred $440 million of Oyster Creek decommissioning trust funds
to AmerGen, of which approximately $114 million was paid into the trust by JCP&L
at closing. JCP&L has agreed to fund the station's outage cost (up to a maximum
of $88 million), including the fuel reload, for the refueling outage which is
currently underway. AmerGen will repay these outage costs to JCP&L in nine equal
annual installments without interest, beginning August 2001. In addition, JCP&L
has agreed to purchase energy and capacity from Oyster Creek at fixed prices
through March 2003. 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.
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,
22
<PAGE>
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 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, but that 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 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. In
connection with Phase II of their proceedings, on September 1, 2000, Met-Ed and
Penelec submitted filings to reflect the impact of actual generation divestiture
results on their stranded costs. The Phase II proceedings are expected to
conclude by the end of 2000.
In 1999, Penelec deposited a portion of the proceeds from its generation
asset sale into a NUG Trust, which has a balance at September 30, 2000 of $205
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
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.
23
<PAGE>
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. In September 2000, an Administrative
Law Judge (ALJ) was assigned to the complaint proceeding and established a
procedural schedule. The initial ALJ decision is due by October 1, 2001. 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
$3.3 billion (JCP&L $1.6 billion; Met-Ed $0.8 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.
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.
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by FAS 137,
24
<PAGE>
"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 will adopt this
statement on January 1, 2001.
GPU's use of derivative instruments is intended to manage the risk of
fluctuations in commodity prices, interest rates, and foreign currencies. GPU
does not intend to hold or issue derivative instruments for trading purposes.
GPU enters into fixed-price contracts for future purchases of electricity and
natural gas with individual counterparties or through traded exchanges. The
majority of these commodity contracts entered into by GPU would be considered
"normal purchases," as defined in FAS 133, and, therefore, would be excluded
from the statement's scope. Commodity contracts accounted for as derivatives
under FAS 133 would be designated as cash flow hedges of the underlying
commodity purchases, to the extent they qualify for such treatment. FAS 133
requires that the effective portion of the gain or loss on a derivative
instrument designated and qualifying as a cash flow hedge be reported as a
component of Other Comprehensive Income, net of tax. If GPU adopted this
statement as of September 30, 2000, management believes the impact of FAS 133 as
it relates to these commodity contracts would be immaterial to GPU's earnings or
financial position.
GPU also uses various types of interest rate swaps to convert
floating-rate loans to fixed rates. These instruments will be accounted for as
cash flow hedges, to the extent they are effective hedges. If GPU adopted this
statement as of September 30, 2000, the value of these interest rate swaps under
FAS 133 would be immaterial to GPU's earnings or financial position.
GPU 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. These instruments will be accounted for as cash
flow hedges, to the extent they are effective hedges. If FAS 133 were applied to
currency swaps in place at September 30, 2000, derivative assets of
approximately $50 million would be recognized on the Consolidated Balance Sheet,
with an offset, net of tax, to Accumulated other comprehensive income. Currency
swaps determined to be ineffective hedges would have had an immaterial impact on
the Consolidated Statement of Income for the nine months ended September 30,
2000.
GPU has entered into numerous forward capacity purchase contracts with
third parties. GPU has also entered into fixed transmission rights agreements
(FTRs) periodically for the purpose of hedging against high transmission rates
along certain routes during times of congestion. Evaluation of the impact of FAS
133 as it relates to capacity purchase contracts and FTRs is in process.
The actual impact of FAS 133 upon adoption would differ from that noted
above depending on the portfolio of derivative contracts in effect on January 1,
2001, prevailing market rates, the completion of the pending sale of GPU
International, Inc. or implementation issues to be resolved by the Financial
Accounting Standards Board's Derivatives Implementation Group.
25
<PAGE>
<TABLE>
<CAPTION>
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
In Thousands
-----------------------------
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
ASSETS
Utility Plant:
<S> <C> <C>
Utility plant in service $ 9,941,749 $11,766,446
Accumulated depreciation (3,218,081) (3,929,963)
---------- ----------
Net utility plant in service 6,723,668 7,836,483
Construction work in progress 222,281 170,317
Other, net 18,687 18,128
---------- ----------
Net utility plant 6,964,636 8,024,928
---------- ----------
Other Property and Investments:
Equity investments 223,297 207,029
Goodwill, net 1,999,695 2,615,301
Nuclear decommissioning trusts, at market (Note 1) 389,588 636,284
Nuclear fuel disposal trust, at market 125,698 119,293
Other, net 613,667 716,142
---------- ----------
Total other property and investments 3,351,945 4,294,049
---------- ----------
Current Assets:
Cash and temporary cash investments 398,807 471,548
Marketable securities 30,953 26,946
Special deposits 66,239 42,687
Accounts receivable:
Customers, net 608,316 445,745
Other 211,166 185,968
Unbilled revenues 163,383 152,263
Cost and estimated earnings in excess of
billings on uncompleted contracts 28,846 -
Materials and supplies, at average cost or less 78,258 101,255
Deferred income taxes 37,948 72,249
Prepayments 282,205 141,352
---------- ----------
Total current assets 1,906,121 1,640,013
---------- ----------
Deferred Debits and Other Assets:
Regulatory assets, net (Note 1) 5,020,086 4,716,246
Deferred income taxes 2,501,836 2,528,393
Other 588,462 494,203
---------- ----------
Total deferred debits and other assets 8,110,384 7,738,842
---------- ----------
Total Assets $20,333,086 $21,697,832
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
26
<PAGE>
<TABLE>
<CAPTION>
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
In Thousands
-----------------------------
September 30, December 31,
2000 1999
-------------- ------------
(Unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
<S> <C> <C>
Common stock $ 331,958 $ 331,958
Capital surplus 1,014,196 1,011,721
Retained earnings 2,317,970 2,426,350
Accumulated other comprehensive loss (Note 5) (59,628) (6,341)
---------- ----------
Total 3,604,496 3,763,688
Reacquired common stock, at cost (313,643) (298,735)
---------- ----------
Total common stockholders' equity 3,290,853 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
Subsidiary-obligated trust preferred securities (Note 6) 200,000 200,000
Long-term debt 4,268,567 5,631,394
---------- ----------
Total capitalization 7,948,569 9,507,163
---------- ----------
Current Liabilities:
Securities due within one year 919,624 581,147
Notes payable 1,486,722 1,391,071
Bank overdraft 248,666 224,585
Obligations under capital leases 474 48,165
Accounts payable 456,348 468,825
Billings in excess of cost and estimated
earnings on uncompleted contracts 21,751 -
Taxes accrued 6,379 309,509
Interest accrued 80,811 76,246
Other 450,383 732,110
---------- ----------
Total current liabilities 3,671,158 3,831,658
---------- ----------
Deferred Credits and Other Liabilities:
Deferred income taxes 3,847,077 3,563,078
Unamortized investment tax credits 45,745 61,364
Three Mile Island Unit 2 future costs (Note 1) 507,577 496,944
Power purchase contract loss liability (Note 1) 3,309,791 3,300,878
Other 1,003,169 936,747
---------- ----------
Total deferred credits and other liabilities 8,713,359 8,359,011
---------- ----------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $20,333,086 $21,697,832
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
27
<PAGE>
<TABLE>
<CAPTION>
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
---------------------------------
(Unaudited)
In Thousands
(Except Per Share Data)
-----------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues $1,455,286 $1,424,286 $3,912,104 $3,385,689
--------- --------- --------- ---------
Operating Expenses:
Fuel 13,928 86,448 55,484 255,367
Power purchased and interchanged 787,033 462,675 1,704,997 994,797
Deferred costs, net (131,954) (23,194) (198,950) (23,050)
Other operation and maintenance 379,671 331,140 1,014,543 825,159
Loss on sale of business - - 372,492 -
Depreciation and amortization 136,621 139,799 400,648 382,894
Taxes, other than income taxes 77,825 50,448 172,420 142,892
--------- --------- --------- ---------
Total operating expenses 1,263,124 1,047,316 3,521,634 2,578,059
--------- --------- --------- ---------
Operating Income 192,162 376,970 390,470 807,630
--------- --------- --------- ---------
Other Income and Deductions:
Allowance for other funds used during
construction 442 52 983 217
Equity in undistributed earnings
of affiliates, net 16,506 2,871 22,278 79,370
Other income, net 62,357 9,049 112,568 77,283
--------- --------- --------- ---------
Total other income and deductions 79,305 11,972 135,829 156,870
--------- --------- --------- ---------
Income Before Interest Charges
and Preferred Dividends 271,467 388,942 526,299 964,500
--------- --------- --------- ---------
Interest Charges and Preferred Dividends:
Long-term debt and notes payable 116,394 132,427 383,470 301,231
Subsidiary-obligated trust
preferred securities 2,672 3,673 10,017 4,673
Subsidiary-obligated mandatorily,
redeemable preferred securities 2,675 5,308 8,025 19,752
Other interest 2,388 1,260 4,857 3,306
Allowance for borrowed funds used
during construction (972) (1,343) (2,558) (2,987)
Preferred stock dividends of subsidiaries,
inclusive of $1,268 loss on
reacquisition (9 Mos. 1999) 1,391 2,338 5,513 8,628
--------- --------- --------- ---------
Total interest charges and
preferred dividends 124,548 143,663 409,324 334,603
--------- --------- --------- ---------
Income Before Income Taxes
and Minority Interest 146,919 245,279 116,975 629,897
Income taxes 41,679 98,284 90,464 242,573
Minority interest net income/(loss) 1,730 (552) 2,816 1,796
--------- -------- --------- ---------
Net Income $ 103,510 $ 147,547 $ 23,695 $ 385,528
========= ========== ========= =========
Basic - Earnings Per Avg. Common Share $ 0.86 $ 1.18 $ 0.20 $ 3.06
========= ========= ========= =========
- Avg. Common Shares Outstanding 121,329 125,046 121,299 126,123
========= ========= ========= =========
Diluted - Earnings Per Avg. Common Share $ 0.86 $ 1.18 $ 0.20 $ 3.05
========= ========= ========= =========
- Avg. Common Shares Outstanding 121,409 125,307 121,391 126,383
========= ========= ========= =========
Cash Dividends Paid Per Share $ 0.545 $ 0.53 $ 1.62 $ 1.575
========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
28
</TABLE>
<PAGE>
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
In Thousands
-------------------------
Nine Months
Ended September 30,
-------------------------
2000 1999
---- ----
Operating Activities:
Net income $ 23,695 $ 385,528
Adjustments to reconcile income to cash provided:
Depreciation and amortization 429,300 401,340
Amortization of property under capital leases 11,472 37,538
Gain on restructured supply agreement (42,781) -
NJBPU restructuring rate order - 115,000
(Gain)/Loss on sale of business/investments 370,053 (40,209)
Equity in undistributed earnings
of affiliates, net of distributions received (18,270) (75,724)
Deferred income taxes and investment tax
credits, net 445,075 (436,712)
Deferred costs, net (198,950) (22,767)
Changes in working capital:
Receivables (303,000) (65,913)
Cost and estimated earnings in excess of
billings on uncompleted contracts (1,916) -
Materials and supplies 13,680 5,205
Special deposits and prepayments (141,501) (84,240)
Payables and accrued liabilities (309,390) 237,482
Billings in excess of cost and estimated
earnings on uncompleted contracts 1,940 -
Nonutility generation contract buyout costs (5,660) (41,500)
Other, net (44,295) 3,202
--------- ---------
Net cash provided by operating activities 229,452 418,230
--------- ---------
Investing Activities:
Acquisitions, net of cash acquired (220,242) (1,670,739)
Capital expenditures and investments (382,511) (276,412)
Proceeds from sale of business/investments 1,164,875 937,540
Contributions to decommissioning trusts (136,499) (26,531)
Proceeds from nonutility generation trusts 62,116 -
Trust fund established for repayment of debt (95,861) -
Other, net 8,009 79,290
--------- ---------
Net cash provided/(required)
by investing activities 399,887 (956,852)
--------- ---------
Financing Activities:
Issuance of long-term debt 335,241 1,792,828
Issuance of subsidiary-obligated
trust preferred securities - 193,070
Retirement of long-term debt (977,910) (1,540,183)
Increase in notes payable, net 264,387 788,200
Capital lease principal payments (48,516) (36,185)
Reacquisition of common stock (22,383) (160,112)
Redemption of subsidiary-obligated mandatorily
redeemable preferred securities - (105,383)
Dividends paid on common stock (196,631) (199,023)
Redemption of preferred stock of subsidiaries (21,667) (35,004)
--------- ---------
Net cash provided/(required)
by financing activities (667,479) 698,208
--------- ---------
Effect of exchange rate changes on cash (34,601) 8,968
--------- ---------
Net increase/(decrease) in cash and temporary
cash investments from above activities (72,741) 168,554
Cash and temporary cash investments, beginning of year 471,548 72,755
--------- ---------
Cash and temporary cash investments, end of period $ 398,807 $ 241,309
========= =========
Supplemental Disclosure:
Interest and preferred dividends paid $ 365,499 $ 322,348
========= =========
Income taxes paid $ 159,053 $ 345,254
========= =========
New capital lease obligations incurred $ 41,580 $ 36,962
========= =========
Common stock dividends declared but not paid $ - $ -
========= =========
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 Balance Sheets
---------------------------
In Thousands
-----------------------------
September 30, December 31,
2000 1999
-------------- ------------
(Unaudited)
ASSETS
Utility Plant:
<S> <C> <C>
Utility plant in service $3,215,351 $3,601,695
Accumulated depreciation (1,213,560) (1,872,422)
--------- ---------
Net utility plant in service 2,001,791 1,729,273
Construction work in progress 105,362 80,671
Other, net 15,312 14,781
--------- ---------
Net utility plant 2,122,465 1,824,725
--------- ---------
Other Property and Investments:
Nuclear decommissioning trusts, at market (Note 1) 122,834 394,941
Nuclear fuel disposal trust, at market 125,698 119,293
Other, net 3,095 1,252
--------- ---------
Total other property and investments 251,627 515,486
--------- ---------
Current Assets:
Cash and temporary cash investments 391 68,684
Special deposits 2,529 1,035
Accounts receivable:
Customers, net 196,092 164,099
Affiliates 27,985 34,992
Other 34,923 34,696
Unbilled revenues 78,971 78,251
Fuel inventory, at average cost or less 146 240
Deferred income taxes 13,440 1,652
Prepayments 181,993 23,000
--------- ---------
Total current assets 536,470 406,649
--------- ---------
Deferred Debits and Other Assets:
Regulatory assets, net (Note 1) 3,143,472 2,810,854
Deferred income taxes 103,951 221,668
Other 36,819 31,615
--------- ---------
Total deferred debits and other assets 3,284,242 3,064,137
--------- ---------
Total Assets $6,194,804 $5,810,997
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
30
<PAGE>
<TABLE>
<CAPTION>
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Balance Sheets
---------------------------
In Thousands
-----------------------------
September 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 768,162 720,878
Accumulated other comprehensive income (Note 5) 7 7
--------- ---------
Total common stockholder's equity 1,432,651 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 1,133,940 1,133,760
--------- ---------
Total capitalization 2,755,740 2,729,943
--------- ---------
Current Liabilities:
Securities due within one year 10,846 50,846
Notes Payable 163,000 -
Obligations under capital leases - 48,165
Accounts payable:
Affiliates 105,629 60,527
Other 98,754 82,355
Taxes accrued 1,327 13,079
Interest accrued 27,818 24,523
Other 33,280 36,169
--------- ---------
Total current liabilities 440,654 315,664
--------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 804,824 570,568
Unamortized investment tax credits 17,987 32,114
Nuclear fuel disposal fee 154,541 148,009
Three Mile Island Unit 2 future costs (Note 1) 126,899 124,241
Power purchase contract loss liability (Note 1) 1,640,329 1,624,769
Other 253,830 265,689
--------- ---------
Total deferred credits and other liabilities 2,998,410 2,765,390
--------- ---------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $6,194,804 $5,810,997
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
31
<PAGE>
<TABLE>
<CAPTION>
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Statements of Income
---------------------------------
(Unaudited)
In Thousands
-------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues $ 605,045 $ 670,245 $1,547,940 $1,578,159
-------- -------- --------- ---------
Operating Expenses:
Fuel 4,773 31,399 19,966 75,114
Power purchased and interchanged:
Affiliates 6,430 53,831 37,683 111,419
Others 417,837 220,614 835,112 518,972
Deferred costs, net (131,954) (23,194) (198,950) (23,050)
Other operation and maintenance 97,579 114,211 305,406 329,956
Depreciation and amortization 57,467 59,859 169,773 186,917
Taxes, other than income taxes 17,078 18,679 47,567 59,573
-------- -------- --------- ---------
Total operating expenses 469,210 475,399 1,216,557 1,258,901
-------- -------- --------- ---------
Operating Income 135,835 194,846 331,383 319,258
-------- -------- --------- ---------
Other Income and Deductions:
Allowance for other funds used during
construction 442 - 955 123
Other income, net 15,701 1,693 19,632 9,175
-------- -------- --------- ---------
Total other income and deductions 16,143 1,693 20,587 9,298
-------- -------- --------- ---------
Income Before Interest Charges 151,978 196,539 351,970 328,556
-------- -------- --------- ---------
Interest Charges:
Long-term debt and notes payable 24,143 24,501 69,965 71,971
Company-obligated mandatorily
redeemable preferred securities 2,675 2,675 8,025 8,025
Other interest 537 403 897 1,059
Allowance for borrowed funds used
during construction (620) (633) (1,439) (1,319)
-------- -------- --------- ---------
Total interest charges 26,735 26,946 77,448 79,736
-------- -------- --------- ---------
Income Before Income Taxes 125,243 169,593 274,522 248,820
Income taxes 32,450 66,690 91,725 98,075
-------- -------- --------- ---------
Net Income 92,793 102,903 182,797 150,745
Preferred stock dividends 1,391 2,338 5,513 7,140
-------- -------- --------- ---------
Earnings Available for Common Stock $ 91,402 $ 100,565 $ 177,284 $ 143,605
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
32
<PAGE>
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
In Thousands
-------------------------
Nine Months
Ended September 30,
-------------------------
2000 1999
---- ----
Operating Activities:
Net income $ 182,797 $ 150,745
Adjustments to reconcile income to cash provided:
Depreciation and amortization 195,620 209,045
Amortization of property under capital leases 11,472 22,659
NJBPU restructuring rate order - 115,000
Deferred income taxes and investment tax
credits, net 285,710 (29,932)
Deferred costs, net (198,950) (22,767)
Changes in working capital:
Receivables (32,939) (99,320)
Materials and supplies 95 15,518
Special deposits and prepayments (160,487) (38,046)
Payables and accrued liabilities (11,983) 40,364
Due to/from affiliates 52,108 5,223
Nonutility generation contract buyout costs - (35,500)
Other, net (103,754) 4,250
-------- --------
Net cash provided by operating activities 219,689 337,239
-------- --------
Investing Activities:
Capital expenditures and investments (84,569) (99,526)
Contributions to decommissioning trusts (130,141) (19,777)
Proceeds from sale of investments 9,265 -
Other, net 320 1,743
-------- --------
Net cash required by investing activities (205,125) (117,560)
-------- --------
Financing Activities:
Retirement of long-term debt (40,000) (12)
Increase/(decrease) in notes payable, net 163,000 (38,344)
Redemption of preferred stock (21,667) (5,000)
Capital lease principal payments (48,516) (20,057)
Dividends paid on common stock (130,000) (150,000)
Dividends paid on preferred stock (5,674) (7,046)
-------- --------
Net cash required by financing activities (82,857) (220,459)
-------- --------
Net decrease in cash and temporary
cash investments from above activities (68,293) (780)
Cash and temporary cash investments, beginning of year 68,684 1,850
-------- --------
Cash and temporary cash investments, end of period $ 391 $ 1,070
======== ========
Supplemental Disclosure:
Interest and preferred dividends paid $ 79,007 $ 85,460
======== ========
Income taxes paid/(refunded) $ (40,634) $ 84,130
======== ========
New capital lease obligations incurred $ 41,580 $ 9,239
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
33
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
In Thousands
-----------------------------
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
ASSETS
Utility Plant:
<S> <C> <C>
Utility plant in service $1,549,875 $1,522,100
Accumulated depreciation (487,833) (462,709)
--------- ---------
Net utility plant in service 1,062,042 1,059,391
Construction work in progress 28,693 25,329
Other, net 596 643
--------- ---------
Net utility plant 1,091,331 1,085,363
--------- ---------
Other Property and Investments:
Nuclear decommissioning trusts, at market (Note 1) 161,912 144,261
Other, net 3,005 3,010
--------- ---------
Total other property and investments 164,917 147,271
--------- ---------
Current Assets:
Cash and temporary cash investments 3,196 10,899
Special deposits 282 160
Accounts receivable:
Customers, net 74,957 60,188
Affiliates 45,543 77,067
Other 36,250 46,377
Unbilled revenues 30,839 28,956
Deferred income taxes 4,644 2,945
Prepayments 10,315 16,715
--------- ---------
Total current assets 206,026 243,307
--------- ---------
Deferred Debits and Other Assets:
Regulatory assets, net (Note 1) 1,227,821 1,232,865
Deferred income taxes 746,229 738,189
Other 40,620 41,198
--------- ---------
Total deferred debits and other assets 2,014,670 2,012,252
--------- ---------
Total Assets $3,476,944 $3,488,193
========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
34
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
In Thousands
-----------------------------
September 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 19,950 13,581
Accumulated other comprehensive income (Note 5) 130 21,363
--------- ---------
Total common stockholder's equity 486,553 501,417
Company-obligated trust preferred securities (Note 6) 100,000 100,000
Long-term debt 496,886 496,883
--------- ---------
Total capitalization 1,083,439 1,098,300
--------- ---------
Current Liabilities:
Securities due within one year 25 50,025
Notes payable 121,100 -
Accounts payable:
Affiliates 53,412 125,179
Other 38,191 30,106
Taxes accrued 13,406 35,976
Interest accrued 10,715 16,738
Other 12,417 18,208
--------- ---------
Total current liabilities 249,266 276,232
--------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 995,533 993,427
Unamortized investment tax credits 14,374 15,010
Three Mile Island Unit 2 future costs (Note 1) 253,695 248,381
Nuclear fuel disposal fee 34,910 33,430
Power purchase contract loss liability (Note 1) 761,496 735,833
Other 84,231 87,580
--------- ---------
Total deferred credits and other liabilities 2,144,239 2,113,661
--------- ---------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $3,476,944 $3,488,193
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
35
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
---------------------------------
(Unaudited)
In Thousands
---------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- ---------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues $ 227,442 $ 280,235 $ 628,312 $ 707,402
-------- -------- -------- --------
Operating Expenses:
Fuel - 26,162 - 75,305
Power purchased and interchanged:
Affiliates 79 863 1,427 3,071
Others 156,927 84,541 360,991 171,538
Other operation and maintenance 32,838 58,155 99,043 164,072
Depreciation and amortization 16,519 19,004 48,264 57,324
Taxes, other than income taxes 11,235 10,253 34,211 33,960
-------- -------- -------- --------
Total operating expenses 217,598 198,978 543,936 505,270
-------- -------- -------- --------
Operating Income 9,844 81,257 84,376 202,132
-------- -------- -------- --------
Other Income and Deductions:
Allowance for other funds used during
construction - 52 28 94
Other income/(expense),net (3,825) (679) 7,195 2,357
-------- --------- -------- --------
Total other income and deductions (3,825) (627) 7,223 2,451
-------- --------- -------- --------
Income Before Interest Charges 6,019 80,630 91,599 204,583
-------- -------- -------- --------
Interest Charges:
Long-term debt and notes payable 11,900 11,350 35,240 35,466
Company-obligated trust preferred securities 1,143 1,838 4,818 2,532
Company-obligated mandatorily
redeemable preferred securities - 2,250 - 6,750
Other interest 579 572 1,665 1,423
Allowance for borrowed funds used
during construction (137) (332) (405) (790)
-------- -------- -------- --------
Total interest charges 13,485 15,678 41,318 45,381
-------- -------- -------- --------
Income/(Loss) Before Income Taxes (7,466) 64,952 50,281 159,202
Income taxes (3,675) 23,330 18,912 65,606
-------- -------- -------- --------
Net Income/(Loss) (3,791) 41,622 31,369 93,596
Preferred stock dividends - - - 66
Loss on preferred stock reacquisition - - - 542
-------- -------- -------- --------
Earnings/(Losses) Available for Common Stock $ (3,791) $ 41,622 $ 31,369 $ 92,988
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
36
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
In Thousands
------------------------
Nine Months
Ended September 30,
2000 1999
---- ----
Operating Activities:
<S> <C> <C>
Net income $ 31,369 $ 93,596
Adjustments to reconcile income to cash provided:
Depreciation and amortization 55,699 59,942
Amortization of property under capital leases - 9,921
Nuclear outage maintenance costs, net - (2,338)
Deferred income taxes and investment tax
credits, net 1,077 34,929
Changes in working capital:
Receivables (4,641) (937)
Materials and supplies - 8,395
Special deposits and prepayments 6,278 (3,124)
Payables and accrued liabilities (26,299) (57,150)
Due to/from affiliates (40,214) 35,788
Nonutility generation contract buyout costs (1,250) (2,500)
Other, net (30,505) (55,685)
-------- --------
Net cash provided/(required)
by operating activities (8,486) 120,837
-------- --------
Investing Activities:
Capital expenditures and investments (38,989) (43,368)
Contributions to decommissioning trusts (6,328) (1,488)
Other, net - (46)
-------- --------
Net cash required by investing activities (45,317) (44,902)
-------- --------
Financing Activities:
Increase/(decrease) in notes payable, net 121,100 (79,540)
Retirement of long-term debt (50,000) (23)
Issuance of company-obligated trust
preferred securities - 96,535
Redemption of preferred stock - (12,598)
Capital lease principal payments - (10,736)
Dividends paid on common stock (25,000) (55,000)
Dividends paid on preferred stock - (66)
Contribution from parent corporation - 30,000
-------- --------
Net cash provided by financing activities 46,100 (31,428)
-------- --------
Net increase/(decrease) in cash and temporary cash
investments from above activities (7,703) 44,507
Cash and temporary cash investments, beginning of year 10,899 442
-------- --------
Cash and temporary cash investments, end of period $ 3,196 $ 44,949
======== ========
Supplemental Disclosure:
Interest and preferred dividends paid $ 45,153 $ 50,087
======== ========
Income taxes paid $ 52,230 $ 25,564
======== ========
New capital lease obligations incurred $ - $ 18,482
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
37
<PAGE>
<TABLE>
<CAPTION>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
In Thousands
-----------------------------
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
ASSETS
Utility Plant:
<S> <C> <C>
Utility plant in service $1,768,155 $1,732,386
Accumulated depreciation (583,525) (552,449)
--------- ---------
Net utility plant in service 1,184,630 1,179,937
Construction work in progress 38,166 30,329
Other, net 2,779 2,704
--------- ---------
Net utility plant 1,225,575 1,212,970
--------- ---------
Other Property and Investments:
Nonutility generation trusts, at market 204,584 266,700
Nuclear decommissioning trusts, at market (Note 1) 104,842 97,082
Other, net 418 1,233
--------- ---------
Total other property and investments 309,844 365,015
--------- ---------
Current Assets:
Cash and temporary cash investments 473 32,250
Special deposits 302 233
Accounts receivable:
Customers, net 80,237 69,752
Affiliates 25,309 15,546
Other 19,373 24,658
Unbilled revenues 30,972 30,836
Deferred income taxes 8,428 7,589
Prepayments 64,353 15,484
--------- ---------
Total current assets 229,447 196,348
--------- ---------
Deferred Debits and Other Assets:
Regulatory assets, net (Note 1) 648,793 672,527
Deferred income taxes 1,181,805 1,225,150
Other 23,541 23,781
--------- ---------
Total deferred debits and other assets 1,854,139 1,921,458
--------- ---------
Total Assets $3,619,005 $3,695,791
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
38
<PAGE>
<TABLE>
<CAPTION>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
In Thousands
-----------------------------
September 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 21,737 59,265
Accumulated other comprehensive income (Note 5) 10 10,619
--------- ---------
Total common stockholder's equity 413,045 461,182
Company-obligated trust preferred securities (Note 6) 100,000 100,000
Long-term debt 517,780 424,641
--------- ---------
Total capitalization 1,030,825 985,823
--------- ---------
Current Liabilities:
Securities due within one year 13 13
Notes payable 109,300 53,600
Obligations under capital leases 474 -
Accounts payable:
Affiliates 34,529 66,223
Other 46,540 34,845
Taxes accrued 4,157 108,005
Interest accrued 14,164 6,588
Other 6,640 17,567
--------- ---------
Total current liabilities 215,817 286,841
--------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 1,253,749 1,250,490
Unamortized investment tax credits 13,384 14,240
Three Mile Island Unit 2 future costs (Note 1) 126,983 124,322
Nuclear fuel disposal fee 17,455 16,717
Power Purchase contract loss liability (Note 1) 907,966 940,276
Other 52,826 77,082
--------- ---------
Total deferred credits and other liabilities 2,372,363 2,423,127
--------- ---------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $3,619,005 $3,695,791
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
39
<PAGE>
<TABLE>
<CAPTION>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
---------------------------------
(Unaudited)
In Thousands
--------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- ---------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues $ 236,729 $ 254,609 $ 663,623 $ 705,955
-------- -------- --------- ---------
Operating Expenses:
Fuel - 18,399 - 71,652
Power purchased and interchanged:
Affiliates 946 1,444 1,979 5,997
Others 179,473 105,651 405,304 199,642
Other operation and maintenance 42,157 57,807 125,388 172,425
Depreciation and amortization 13,343 18,389 38,346 59,849
Taxes, other than income taxes 11,877 11,306 35,363 37,126
-------- -------- --------- ---------
Total operating expenses 247,796 212,996 606,380 546,691
-------- -------- --------- ---------
Operating Income/(Loss) (11,067) 41,613 57,243 159,264
-------- -------- --------- ---------
Other Income and Deductions:
Other income/(expense), net (1,748) 790 2,957 46,891
--------- -------- --------- ---------
Total other income and deductions (1,748) 790 2,957 46,891
-------- -------- --------- ---------
Income/(Loss) Before Interest Charges (12,815) 42,403 60,200 206,155
-------- -------- --------- ---------
Interest Charges:
Long-term debt and notes payable 10,494 6,992 26,895 27,789
Company-obligated trust preferred securities 1,529 1,835 5,199 2,141
Company-obligated mandatorily
redeemable preferred securities - 383 - 4,977
Other interest 331 285 938 824
Allowance for borrowed funds used
during construction (215) (378) (714) (878)
-------- -------- --------- ---------
Total interest charges 12,139 9,117 32,318 34,853
-------- -------- --------- ---------
Income/(Loss) Before Income Taxes (24,954) 33,286 27,882 171,302
Income taxes (10,945) 10,771 10,410 63,352
-------- -------- --------- ---------
Net Income/(Loss) (14,009) 22,515 17,472 107,950
Preferred stock dividends - - - 154
Loss on preferred stock reacquisition - - - 726
-------- -------- --------- ---------
Earnings/(Losses) Available for Common Stock $ (14,009) $ 22,515 $ 17,472 $ 107,070
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
40
<PAGE>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
In Thousands
------------------------
Nine Months
Ended September 30,
2000 1999
---- ----
Operating Activities:
Net income $ 17,472 $ 107,950
Adjustments to reconcile income to cash provided:
Depreciation and amortization 41,006 58,776
Amortization of property under capital leases - 4,958
Gain/(loss) on sale of investment 1,813 (40,209)
Deferred income taxes and investment tax
credits, net 58,360 (301,604)
Changes in working capital:
Receivables (5,198) 9,156
Materials and supplies - 34,053
Special deposits and prepayments (48,938) 9,135
Payables and accrued liabilities (95,504) 101,321
Due to/from affiliates (41,458) (21,476)
Nonutility generation contract buyout costs (4,410) (3,500)
Other, net (64,397) (57,835)
-------- --------
Net cash required by operating activities (141,254) (99,275)
-------- --------
Investing Activities:
Capital expenditures and investments (48,356) (65,779)
Proceeds from sale of investment - 937,540
Proceeds from nonutility generation trusts 62,116 -
Contributions to decommissioning trusts (30) (5,266)
Other, net 2,047 1,945
-------- --------
Net cash provided by investing activities 15,777 868,440
-------- --------
Financing Activities:
Issuance of long-term debt 118,000 348,172
Issuance of company-obligated trust
preferred securities - 96,535
Retirement of long-term debt (25,000) (600,011)
Increase/(decrease) in notes payable, net 55,700 (86,023)
Redemption of preferred stock - (17,406)
Redemption of company-obligated mandatorily
redeemable preferred securities - (105,383)
Capital lease principal payments - (5,392)
Dividends paid on common stock (55,000) (380,000)
Dividends paid on preferred stock - (154)
-------- --------
Net cash provided/(required)
by financing activities 93,700 (749,662)
-------- --------
Net increase/(decrease) in cash and temporary
cash investments from above activities (31,777) 19,503
Cash and temporary cash investments, beginning of year 32,250 2,750
-------- --------
Cash and temporary cash investments, end of period $ 473 $ 22,253
======== ========
Supplemental Disclosure:
Interest and preferred dividends paid $ 23,039 $ 42,167
======== ========
Income taxes paid $ 117,293 $ 245,574
======== ========
New capital lease obligations incurred $ - $ 9,241
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
41
<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). These electric
utilities are conducting business under the name GPU Energy, and considered
together are referred to as the "GPU Energy companies." 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 Electric's foreign utility companies
include Midlands Electricity plc (conducting business as GPU Power UK); Empresa
Distribuidora Electrica Regional S.A. (Emdersa); and GPU GasNet. 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
PENDING MERGER OF FIRSTENERGY CORP. AND GPU
-------------------------------------------
On August 8, 2000, GPU, Inc. entered into an agreement to merge with
FirstEnergy Corp. (FirstEnergy), an Ohio corporation, headquartered in Akron,
Ohio. Under the merger agreement, FirstEnergy would acquire all of the
outstanding shares of GPU's common stock for approximately $4.5 billion in cash
and FirstEnergy common stock.
Under the agreement, GPU shareholders would receive $36.50 for each share
of GPU common stock they own, payable in cash or the equivalent of $36.50 per
share in FirstEnergy common stock, as long as FirstEnergy's common stock price
is between $24.24 and $29.63. Each GPU shareholder would be able to elect the
form of consideration they wish to receive, subject to proration so that the
aggregate consideration to all GPU shareholders will be 50 percent cash and 50
percent FirstEnergy common stock. Each GPU share converted into FirstEnergy
common stock would receive not less than 1.2318 and not more than 1.5055 shares
of FirstEnergy common stock, depending on the average closing price of
FirstEnergy stock during the 20-day trading period ending on the sixth trading
date prior to the merger closing.
The Merger has been approved by the Boards of Directors of GPU, Inc. and
FirstEnergy and is expected to close promptly after all of the conditions to the
consummation of the Merger, including shareholder approval and the
42
<PAGE>
receipt of all necessary regulatory approvals, are fulfilled or waived. The
receipt of all necessary federal and state regulatory approvals is expected to
take approximately nine to twelve months from the date of the merger agreement.
A joint proxy statement/prospectus has been mailed to shareholders of both
companies and special meetings of the shareholders of GPU, Inc. and FirstEnergy
are scheduled for November 21, 2000 to consider and vote on the Merger.
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 Phase II proceedings following
the completion of their generation divestitures to make a final determination of
the extent of that stranded cost recovery.
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. On September 1, 2000 Met-Ed and Penelec requested approval of their
Phase II Reports by no later than January 2001. On October 25, 2000, the PaPUC
issued an order establishing evidentiary proceedings for the companies'
petitions and testimony. These proceedings are scheduled to end by December 31,
2000. There can be no assurance as to the outcome of this matter.
In May 1999, the New Jersey Board of Public Utilities (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 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, but that 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,
43
<PAGE>
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. JCP&L is permitted to recover reasonable
and prudently incurred costs associated with providing basic generation service
to non-shopping customers. However, Met-Ed and Penelec are unable to recover
their energy costs in excess of established rate caps, absent a request to the
PaPUC, or specific rate treatment provided for in the 1998 Restructuring Orders.
Management has implemented a program to manage energy risk, 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.
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, are estimated to be $222
million in 2000, $910 million in 2001, $339 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
September 30, 2000, and estimated payments thereafter through 2005:
44
<PAGE>
Payments Under NUG Agreements
-----------------------------
(in millions)
Total JCP&L Met-Ed Penelec
----- ----- ------ -------
1998 788 403 174 211
1999 774 388 167 219
2000 762 411 146 205
2001 788 453 144 191
2002 787 452 147 188
2003 770 427 151 192
2004 769 408 156 205
2005 753 393 160 200
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
$3.3 billion (JCP&L $1.6 billion; Met-Ed $0.8 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),
"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 September 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:
45
<PAGE>
GPU, Inc. and Subsidiary Companies
----------------------------------
(in thousands)
----------------------------
September 30, December 31,
2000 1999
------------- ------------
Market transition charge (MTC) / basic
generation service $2,684,852 $2,397,071
Competitive transition charge (CTC) 785,397 803,064
Reserve for generation divestiture 533,941 536,904
Power purchase contract loss not in CTC 369,290 369,290
Income taxes recoverable through future rates, net 280,889 280,268
Costs recoverable through distribution rates 260,126 296,842
Three Mile Island Unit 2 (TMI-2)
decommissioning costs 49,517 100,794
Societal benefits charge 198,494 116,941
Above-market deferred NUG costs (189,619) (252,348)
Other, net 47,199 67,420
--------- ---------
Total regulatory assets, net $5,020,086 $4,716,246
========= =========
JCP&L
-----
MTC / basic generation service $2,684,852 $2,397,071
Costs recoverable through distribution rates 260,126 296,842
Societal benefits charge 198,494 116,941
--------- ---------
Total regulatory assets, net $3,143,472 $2,810,854
========= =========
Met-Ed
------
CTC $ 614,074 $ 591,316
Power purchase contract loss not in CTC 271,270 271,270
Reserve for generation divestiture 143,434 137,037
Income taxes recoverable through future rates, net 121,692 115,713
TMI-2 decommissioning costs 16,637 65,455
Above-market deferred NUG costs 10,067 545
Other, net 50,647 51,529
--------- ---------
Total regulatory assets, net $1,227,821 $1,232,865
========= =========
Penelec
-------
Reserve for generation divestiture $ 390,507 $ 399,867
Above-market deferred NUG costs (199,686) (252,893)
CTC 171,323 211,748
Income taxes recoverable through future rates, net 159,197 164,555
Power purchase contract loss not in CTC 98,020 98,020
TMI-2 decommissioning costs 32,880 35,339
Other, net (3,448) 15,891
--------- ---------
Total regulatory assets, net $ 648,793 $ 672,527
========= =========
Statement of Financial Accounting Standards No. 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
46
<PAGE>
qualify for this exclusion, it must be probable that the contract will result in
physical delivery. GPU will adopt this statement on January 1, 2001.
GPU's use of derivative instruments is intended to manage the risk of
fluctuations in commodity prices, interest rates, and foreign currencies. GPU
does not intend to hold or issue derivative instruments for trading purposes.
GPU enters into fixed-price contracts for future purchases of electricity and
natural gas with individual counterparties or through traded exchanges. The
majority of these commodity contracts entered into by GPU would be considered
"normal purchases," as defined in FAS 133, and, therefore, would be excluded
from the statement's scope. Commodity contracts accounted for as derivatives
under FAS 133 would be designated as cash flow hedges of the underlying
commodity purchases, to the extent they qualify for such treatment. FAS 133
requires that the effective portion of the gain or loss on a derivative
instrument designated and qualifying as a cash flow hedge be reported as a
component of Other Comprehensive Income, net of tax. If GPU adopted this
statement as of September 30, 2000, management believes the impact of FAS 133 as
it relates to these commodity contracts would be immaterial to GPU's earnings or
financial position.
GPU also uses various types of interest rate swaps to convert
floating-rate loans to fixed rates. These instruments will be accounted for as
cash flow hedges, to the extent they are effective hedges. If GPU adopted this
statement as of September 30, 2000, the value of these interest rate swaps under
FAS 133 would be immaterial to GPU's earnings or financial position.
GPU 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. These instruments will be accounted for as cash
flow hedges, to the extent they are effective hedges. If FAS 133 were applied to
currency swaps in place at September 30, 2000, derivative assets of
approximately $50 million would be recognized on the Consolidated Balance Sheet,
with an offset, net of tax, to Accumulated other comprehensive income. Currency
swaps determined to be ineffective hedges would have had an immaterial impact on
the Consolidated Statement of Income for the nine months ended September 30,
2000.
GPU has entered into numerous forward capacity purchase contracts with
third parties. GPU has also entered into fixed transmission rights agreements
(FTRs) periodically for the purpose of hedging against high transmission rates
along certain routes during times of congestion. Evaluation of the impact of FAS
133 as it relates to capacity purchase contracts and FTRs is in process.
The actual impact of FAS 133 upon adoption would differ from that noted
above depending on the portfolio of derivative contracts in effect on January 1,
2001, prevailing market rates, the completion of the pending sale of GPU
International, Inc. or implementation issues to be resolved by the Financial
Accounting Standards Board's Derivatives Implementation Group.
NUCLEAR FACILITIES
------------------
Investments:
-----------
In December 1999, the GPU Energy companies sold Three Mile Island Unit 1
(TMI-1) to AmerGen Energy Company, LLC (AmerGen), a joint venture of PECO Energy
and British Energy, for approximately $100 million. In August
47
<PAGE>
2000, JCP&L sold Oyster Creek to AmerGen for approximately $10 million. As part
of the sales, AmerGen has assumed full responsibility for decommissioning the
plants, and the GPU Energy companies have transferred $320 million and $430
million of TMI-1 and Oyster Creek decommissioning trust funds, respectively, to
AmerGen. 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 September 30, 2000 and December 31, 1999 was $57 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.
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
48
<PAGE>
"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.
In September 2000, the defendants filed a Motion for Summary Judgment in
the District Court. Meanwhile, the plaintiffs have taken an interlocutory appeal
to the Third Circuit seeking review of the District Court's determination that
the remaining plaintiffs should be allowed to advance causation theories based
only on the admissible evidence of record at the close of discovery in the case.
The Third Circuit has scheduled oral arguments on the plaintiffs' appeal
for January 2001. There can be no assurance as to the outcome of this
litigation.
GPU, Inc. and the GPU Energy companies believe that any liability to which
they might be subject by reason of the TMI-2 accident will not exceed their
financial protection under the Price-Anderson Act.
NUCLEAR PLANT RETIREMENT COSTS
------------------------------
Retirement costs for nuclear plants include decommissioning the
radiological portions of the plants and the cost of removal of nonradiological
structures and materials. The disposal of spent nuclear fuel is covered
separately by contracts with the US Department of Energy (DOE).
In 1995, a consultant performed a site-specific study of TMI-2 that
considered various decommissioning methods and estimated the cost of
decommissioning the radiological portion and the cost of removal of the
nonradiological portion of the plant, using the prompt removal/dismantlement
method. Management has reviewed the methodology and assumptions used in this
study, is in agreement with them, and believes the results are reasonable. The
TMI-2 funding completion date is 2014, consistent with TMI-2 remaining in
long-term storage. The retirement cost estimates under the 1995 site-specific
study, assuming decommissioning of TMI-2 in 2014, is $446 million for
radiological decommissioning and $36 million for non-radiological removal costs
(net of $12.6 million spent as of September 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
TMI-2 may be different from the cost estimate contained in this site-specific
study. Also, the cost estimate contained in this site-specific
49
<PAGE>
study is significantly greater than the decommissioning funding targets
established by the NRC.
The estimated liability for future TMI-2 retirement costs (reflected as
Three Mile Island Unit 2 future costs on the Consolidated Balance Sheets) as of
September 30, 2000 and December 31, 1999 is $508 million (JCP&L $127 million;
Met-Ed $254 million; Penelec $127 million) and $497 million (JCP&L $124 million;
Met-Ed $249 million; Penelec $124 million), respectively. This liability is
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 $25 million (JCP&L $6 million; Met-Ed $13 million;
Penelec $6 million) and $27 million (JCP&L $7 million; Met-Ed $13 million;
Penelec $7 million) as of September 30, 2000 and December 31, 1999,
respectively, as a result of TMI-2 entering long-term monitored storage in 1993.
Offsetting the $508 million liability as of September 30, 2000 is $121
million (JCP&L $7 million; Met-Ed $84 million; Penelec $30 million), which
management believes is probable of recovery from customers and included in
Regulatory assets, net on the Consolidated Balance Sheets, and $390 million
(JCP&L $123 million; Met-Ed $162 million; Penelec $105 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 study estimates. In addition, JCP&L is recovering a
portion of 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 September 30, 2000, the accident-related portion of TMI-2
radiological decommissioning costs is estimated to be $79 million (JCP&L $20
million; Met-Ed $39 million; Penelec $20 million), which is based on the 1995
site-specific study (in 2000 dollars). In connection with rate case resolutions,
JCP&L, Met-Ed and Penelec made contributions to irrevocable external trusts for
their respective shares of the accident-related portion of the decommissioning
liability in amounts of $15 million, $40 million and $20 million, respectively.
These contributions were not recoverable from customers and were expensed in
1990, in the case of JCP&L, and in 1991 for Met-Ed and Penelec.
The GPU Energy companies intend to seek recovery for any increases in
TMI-2 retirement costs, but recognize that recovery cannot be assured.
Prior to September 2000, increases in the accident-related portion of
Met-Ed and Penelec's TMI-2 decommissioning liability were charged to expense, in
amounts totaling $23.2 million (Met-Ed $15.4 million; Penelec $7.8 million)
through August 2000. Likewise, through August 2000, earnings on Met-Ed and
Penelec's contributions to external trusts, in amounts totaling $34.9 million
(Met-Ed $23.3 million; Penelec $11.6 million), were taken to income, and the
related unrealized gains and losses were accrued to Accumulated Other
Comprehensive Income on the Consolidated Balance Sheets.
During the course of ongoing regulatory proceedings in Pennsylvania,
Met-Ed and Penelec determined, in the third quarter 2000, that a portion of
50
<PAGE>
their regulatory assets for TMI-2 decommissioning previously regarded as
probable of recovery in rates, are now no longer deemed probable of recovery. As
a result, in the third quarter 2000, Met-Ed and Penelec charged to income $11.7
million (Met-Ed $7.9 million; Penelec $3.8 million) pre-tax for the write-down
of their respective regulatory assets for TMI-2 decommissioning, representing
the net realized gain they previously recorded on the accident-related portion
of the TMI-2 decommissioning trust. Furthermore, the unrealized gains or losses
associated with the accident-related portion of the TMI-2 decommissioning trust
(previously recorded in Accumulated other comprehensive income) were transferred
to Regulatory assets, net on the Consolidated Balance Sheets, and will no longer
be recorded in Accumulated other comprehensive income.
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. 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.
GPU has purchased property and decontamination insurance coverage for
TMI-2 totaling $150 million.
The Price-Anderson Act limits an owner's liability to third parties
resulting from a nuclear incident 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. Although TMI-2 is
exempt from retrospective premium assessments, the plant is still covered by the
provisions of the Price-Anderson Act. In addition, the GPU Energy companies are
subject to other retrospective premium assessments related to policies
applicable to TMI-1 prior to its sale to AmerGen.
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
51
<PAGE>
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 3 2 1 2 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
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
September 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 $1.4 million of past response costs as of September
30, 2000. 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 September 30, 2000, if the statutory
maximum were applied, the total amount of penalties would be approximately $42
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.
52
<PAGE>
In August 2000, Rochester Gas & Electric Corporation (RG&E) filed suit
against GPU, Inc. in the United States District Court for the Western District
of New York for the reimbursement of $5.2 million of costs and damages it has
allegedly incurred, and a declaratory judgement with respect to future costs and
damages, in connection with two former MGP sites and a third property where
wastes from one of those sites were allegedly deposited. All of the properties
are located in Rochester, New York. According to the complaint, RG&E was an
indirect subsidiary of AGECO from May 1929 until January 1946, and a subsidiary
of General Public Utilities (now by merger and change of name GPU, Inc.) from
January 1946 until October 1949, when it was divested by order of the SEC under
the Public Utility Holding Company Act. GPU, Inc. has not yet answered the
complaint. There can be no assurance as to the outcome of this matter.
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
September 30, 2000, JCP&L has spent approximately $39 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 September 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
53
<PAGE>
Jersey utilities and their response to power outages. This investigation was
essentially 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.
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 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. In September 2000, GPU received from its primary
insurance carrier the initial indemnification payment for certain expenses
incurred by GPU relative to these lawsuits. In October 2000, the GPU defendants
filed a motion in the trial court, seeking decertification of the class. 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
54
<PAGE>
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 notified GPU GasNet that
they have formed the preliminary view that GPU GasNet is not entitled to
coverage under the liability policy. GPU GasNet believes that it is entitled to
coverage, and discussions with the insurers are continuing. 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
September 30, 2000, GPU, Inc.'s investment in GPU Electric and the GPUI Group
was $571 million and $292 million, respectively. As of that date, GPU, Inc. has
also guaranteed an additional $1.04 billion 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.
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.
In August 2000, GPU GasNet refinanced A$375 million (US$203 million) of
maturing bank debt as follows: A$250 million (US$135 million) of proceeds from a
new commercial paper program at GPU GasNet; A$51 million (US$28 million) of
proceeds from the issuance of additional commercial paper by GPU Australia
Holdings under its commercial paper program; and A$37 million (US$20 million) of
cash proceeds from the sale of marketable securities by an affiliate. At
September 30, 2000, $135 million of commercial paper was outstanding under the
GPU GasNet commercial paper program and included in Long-term Debt on the
Consolidated Balance Sheets. GPU GasNet has also established a A$750 million
(US$406 million) revolving credit facility, which serves as backstop for the
GasNet commercial paper program. No borrowings were outstanding under this
facility at September 30, 2000.
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
GPU Power UK) 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 was
extended, principal and interest payments deferred, and
55
<PAGE>
the sponsors agreed to fund the completion of the plant through the remaining
equity contribution commitments. The plant commenced commercial operations in
October 2000.
Uch has renegotiated several of the project agreements with the Government
of Pakistan and its agencies, under 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. Although commercial operations have begun, 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 September 30, 2000 was
approximately $37.9 million, plus a guarantee letter of credit of $ 3.6 million,
and its share of the projected completion costs represents an additional $3.1
million commitment. Cinergy Corp. (the former owner of 50% of Midlands
Electricity plc) agreed to fund up to an aggregate of $20 million of the
required capital contributions, for a period of one year from July 15, 1999, and
"cash losses," which could be incurred on the Uch Power Project, for a period of
up to ten years from July 15, 1999. Cinergy has reimbursed GPU Electric for $4.9
million of capital contributions through September 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 had been 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 pre-tax credit to income of
$15.9 million. Other open gas contracts, which extend to 2005, require GPU Power
UK to purchase or to sell gas at fixed prices. The estimated out-of-market
position of all contracts at September 30, 2000 was $24 million; however, the
remaining open positions included both sales and purchases, thereby reducing the
remaining exposure to future price changes.
In an 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. The
appeal in the House of Lords is expected to be heard in the first quarter of
2001. 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
56
<PAGE>
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, the other project lenders, and the
Government of Colombia, as well as the other partners in the TEBSA project. As
of September 30, 2000, GPU Power has an investment of approximately $88 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 $385 million at September 30, 2000, 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.
With regard to the "Special Requirement" issued by DIAN, DIAN asserts that
TEBSA should be liable for approximately $4.9 million consisting of $1.5 million
in additional tax and $3.4 million in penalties and interest. TEBSA has filed
both procedural and substantive objections to these assertions, the DIAN
responded to these objections reiterating its previous position, and TEBSA, in
turn, filed an appeal with the DIAN on June 2, 2000. A response is expected
within six months.
In July 2000, the DIAN issued a "Special Requirement" on the 1997 income
tax return of TEBSA challenging a tax exemption benefit under a Colombian income
tax statute. The DIAN requested payment of approximately $1 million in
additional tax and penalties. On October 12, 2000, TEBSA filed a response with
the DIAN stating arguments supporting its tax exemption benefit. Management is
unable to determine the outcome of this matter.
57
<PAGE>
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 $2.2 million has been invested as
of September 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 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 NJBPU seeking a declaratory order that PSE&G's right of first
refusal to purchase JCP&L's ownership interest at its current book value under a
1964 agreement between the companies is void and unenforceable. Management
believes that the fair market value of JCP&L's ownership interest in Yards Creek
is substantially in excess of its September 30, 2000 book value of $22 million.
There can be no assurance as to the outcome of this matter.
In March 1999, Penelec and New York State Electric & Gas Corporation
(NYSEG) each sold their 50% undivided ownership interests in the Homer City
Station to a subsidiary of Edison Mission Energy (EME) for a total of $1.9
billion. In connection with the sale, Penelec and NYSEG indemnified the buyer
with respect to certain contingent liabilities, including costs or expenses
which the EPA might impose for failure to comply with New Source Performance
Standards, Prevention of Significant Deterioration and New Source Review
regulations under the Clean Air Act prior to the date of the sale. In 1998, the
EPA had conducted inspections at Homer City with regard to the plant's
compliance with these regulations. On October 30, 2000, EME notified Penelec and
NYSEG that the EPA had concluded that these regulations applied to Homer City
prior to the sale to EME and that Homer City was operating in violation of these
Clean Air Act regulations. Penelec, NYSEG and EME have met with the EPA
regarding the EPA's initial findings and conclusions. If it is ultimately
determined that these regulations were so applicable to Homer City, the EPA
could assess substantial monetary penalties and require capital modifications to
the plant, the costs of which would be material. To the extent Penelec and NYSEG
are obligated to indemnify EME for any of these costs, they would each be
severally liable for a 50% share. 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
58
<PAGE>
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. Consequently, goodwill was credited for $3.4 million (50% of the
change in estimate) and $3.5 million was credited to income. During the first
nine months of 2000, $16.2 million was paid to 378 employees. The remaining
severance liability of $5.2 million at September 30, 2000 reflects the above
transactions as well as currency translation adjustments and the impact of seven
employees who were retained, and is included in Other Current Liabilities on the
Consolidated Balance Sheets. Management expects 46 of the remaining 74 employees
to leave by year-end 2000, and the balance of the employees by March 31, 2001.
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 $17.3 million as of September 30,
2000. GPU, Inc. has guaranteed up to $19 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. 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. In June 1997, a
consortium of electric utilities, including GPU Nuclear, Inc. (GPUN), filed a
license application with the NRC seeking permission to build an interim
above-ground disposal facility for spent nuclear fuel in Utah.
At September 30, 2000, GPU has recorded a liability of $206.9 million
(JCP&L $154.5 million; Met-Ed $34.9 million; Penelec $17.5 million) owed to the
Nuclear Waste Fund, related to spent nuclear fuel generated prior to the sales
of TMI-1 and Oyster Creek to AmerGen. AmerGen has assumed all liability for
disposal costs related to spent nuclear fuel generated following its purchase of
the plants.
On July 26, 2000, GPUN filed suit in the United States Court of Claims
seeking to recover damages as a result of the DOE's failure to commence disposal
of GPUN's spent nuclear fuel on January 31, 1998, as required by the terms of
the Standard Contract between GPUN and DOE. The complaint seeks damages from the
Government in an amount to be determined at trial. GPUN has alleged that it is
entitled to damages attributable to operations at both TMI-1 and Oyster Creek.
The Government has not yet answered the complaint. There can be no assurance as
to the outcome of this matter.
59
<PAGE>
GPU, Inc. and consolidated affiliates have approximately 15,200 employees
worldwide, of whom 11,150 are employed in the US, 3,550 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 (4,800) and
MYR (5,900), of which approximately 3,100 and 5,200, respectively, are
represented by unions for collective bargaining purposes. In the UK,
approximately 2,300 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. acquired MYR for approximately $217.5 million.
The fair value of the assets acquired totaled approximately $156.9 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.
Although certain preacquisition items are still being investigated, the fair
value of net assets acquired is estimated to be $57.2 million. The total
acquisition cost exceeded this amount by $160.3 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
60
<PAGE>
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 A$579 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.
During the third quarter, all $243 million of commercial paper outstanding at
June 30, 2000 was redeemed from trust assets. The Medium Term Notes, which will
also be retired using trust assets, mature as follows: A$50 million (US$27
million) in April 2001 and A$120 million (US$65 million) in October 2001.
Oyster Creek Sale
-----------------
In 1999, the GPU Energy companies completed the sales of TMI-1 and
substantially all of their fossil-fuel and hydroelectric generating stations. In
August 2000, JCP&L sold Oyster Creek to AmerGen for approximately $10 million.
As part of the sale, AmerGen has assumed full responsibility for decommissioning
the plant. JCP&L has transferred $440 million of Oyster Creek decommissioning
trust funds to AmerGen, of which approximately $114 million was paid into the
trust by JCP&L at closing. JCP&L has agreed to fund the station's outage costs
(up to a maximum of $88 million), including the fuel reload, for the refueling
outage, which is currently underway. AmerGen will repay these outage costs to
JCP&L in nine equal annual
61
<PAGE>
installments without interest, beginning August 2001. In addition, JCP&L has
agreed to purchase energy and capacity from Oyster Creek at fixed prices through
March 2003. 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 Sale of GPU International, Inc. (GPUI)
----------------------------------------------
In October 2000, GPU, Inc. agreed to sell GPUI to Aquila Energy
Corporation, a subsidiary of UtiliCorp United, for $225 million. The sale
includes GPUI's interests in its six domestic operating plants and a one-half
interest in a 715 MW development stage project.
GPU, Inc. expects to complete the sale, which is subject to certain
federal and state regulatory approvals, by the end of the year. GPU expects to
realize an after-tax gain on the sale of between $60 million and $80 million.
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 New York Mercantile Exchange (NYMEX) futures
and Over-the-Counter (OTC) Options on forwards 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 September 30, 2000, these agreements
covered approximately $510 million of debt, and were scheduled to expire on
various dates through June 2006. Differences between the 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 to fixed rate debt. For the quarter ended September
30, 2000, the variable rate interest expense that would have been incurred had
the swaps not been in place exceeded the fixed rate interest expense incurred in
connection with the swap agreements by approximately $345 thousand.
62
<PAGE>
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
September 30, 2000, these currency swap agreements covered (pound)527 million
(US $779 million) of debt. Interest expense would have been (pound)9.8 million
(US $14.5 million) as compared to (pound)9.9 million (US $14.6 million) for the
quarter ended September 30, 2000 had these agreements not been in place.
Gain on Forward Foreign Exchange Contracts:
------------------------------------------
In connection with its previously announced intention to sell its
Australian assets, GPU Electric entered into forward foreign exchange contracts
in order to lock in the then-current A$/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.
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 September 30, 2000, the unamortized balance of the
swap contract was valued at $90.8 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.
Effective September 29, 2000, Onondaga terminated its rights under the
power put thereby terminating all agreements Onondaga had with NIMO to sell
energy and capacity under the restructured power purchase agreement. As a
result, in the third quarter 2000, a net pre-tax gain of $42.8 million was
recorded in Other Income and Deductions on the Consolidated Statement of Income,
as follows: the deferred gain of $86.7 million pre-tax related to the
restructured power purchase agreement with NIMO was recognized in income; and
63
<PAGE>
the indexed swap agreement was marked to market and the associated deferred
revenue was taken to income resulting in a pre-tax gain of $90.8 million. In
addition, as a result of terminating the power put with NIMO and based on
information supplied by an outside independent expert, management determined
that the Onondaga plant would not operate on an economically profitable basis in
the merchant generation market, and that the equipment would be technologically
obsolete. As a result, an impairment test was performed under Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," using the
undiscounted cash flows of its operations, and it was determined that the plant
was impaired. Management has written down the carrying value of the plant by
$69.1 million pre-tax as of September 30, 2000. Also, as a result of the
termination of Onondaga's rights under the power put, a review of firmly
committed long-term executory gas transportation contracts was performed and
determined to be out of market, which resulted in a charge to income of $65.6
million for out-of-market gas transportation costs. Management's analysis
utilized gas and energy pricing supplied by an independent expert.
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.
64
<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 nine months ended September 30, 2000
--------------------------------------------
Domestic Segments:
Electric Utility
<S> <C> <C> <C> <C> <C> <C> <C>
Operations (GPU Energy) $2,788,456 $ 256,744 $ 156,597 $136,585 $ 208,339 $13,666,814 $ 220,154
Independ Power Prod
(GPU International) 61,769 7,077 1,357 4,533 7,113 338,333 4,975
Electric Retail
Energy Sales (GPU AR) 48,502 - - (1,078) (2,196) 17,225 10
Construction Services
(MYR) (e) 268,147 3,451 5,277 2,054 791 335,763 2,232
--------- ------- ------- ------- ------- ---------- -------
Subtotal 3,166,874 267,272 163,231 142,094 214,047 14,358,135 227,371
--------- ------- ------- ------- ------- ---------- -------
Foreign Segments:
Electric/Gas Utility
Operations: (GPU Electric)
Electric Distribution
- United Kingdom 442,374 85,105 136,231 35,218 54,280 4,309,055 114,683
Electric Distribution
- Argentina 134,870 13,096 19,640 7,834 2,805 613,343 32,270
Electric Transmission
- Australia (d) 90,007 19,947 46,822 (10,921) 9,242 - 4,993
Gas Transmission - Australia 45,929 10,534 32,410 (7,904) 5,391 869,173 2,573
Independ Power Prod
- S. America (GPU Power) 32,050 4,694 2,559 4,004 6,710 247,217 121
--------- ------- ------- ------- ------- ---------- -------
Subtotal 745,230 133,376 237,662 28,231 78,428 6,038,788 154,640
--------- ------- ------- ------- ------- ---------- -------
Corporate and Eliminations - - 8,431 - (16,430) (63,837) 500
--------- ------- ------- ------- ------- ---------- -------
Consolidated Total $3,912,104 $ 400,648 $ 409,324 $ 170,325 $ 276,045 $20,333,086 $ 382,511
========== ========== ========== ========== ========== =========== ==========
For the nine months ended September 30, 1999
--------------------------------------------
Domestic Segments:
Electric Utility Operations
(GPU Energy) $2,856,087 $ 304,323 $ 168,598 263,562 $ 383,942 $13,224,051 $ 212,436
Independ Power Prod
(GPU International) 62,681 7,045 803 3,126 3,923 359,374 1,011
Electric Retail Energy
Sales (GPU AR) 61,402 - - (3,627) (6,783) 24,630 -
--------- ------- ------- ------- ------- ---------- -------
Subtotal 2,980,170 311,368 169,401 263,061 381,082 13,608,055 213,447
--------- ------- ------- ------- ------- ---------- -------
Foreign Segments:
Electric/Gas Utility
Operations: (GPU Electric)
Electric Distribution -
United Kingdom 119,041 21,587 50,617 4,656 44,792(c) 4,687,476 4,018
Electric Distribution -
Argentina 93,700 9,453 15,603 837 2,590 579,907 19,839
Electric Transmission -
Australia (d) 144,678 32,348 77,994 3,728 (4,957) 1,824,309 5,199
Gas Transmission -
Australia 19,373 3,744 16,719 (2,169) (3,255) 795,527 3,392
Independ Power Prod -
S. America (GPU Power) 28,727 4,394 1,435 3,758 6,150 238,644 30,517
--------- ------- ------- ------- ------- ---------- -------
Subtotal 405,519 71,526 162,368 10,810 45,320 8,125,863 62,965
--------- ------- ------- ------- ------- ---------- -------
Corporate and Eliminations - - 2,834 - (10,336) (36,086) -
--------- ------- ------- ------- ------- ---------- -------
Consolidated Total $3,385,689 $ 382,894 $ 334,603 $ 273,871 $ 416,066 $21,697,832 $ 276,412
========== ========== ========== ========== ========== =========== ==========
</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 $74 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 April 2000.
65
<PAGE>
5. COMPREHENSIVE INCOME
For the nine months ended September 30, 2000 and 1999, comprehensive
income is summarized below.
(in thousands)
Nine months
Ended September 30,
-------------------
GPU, Inc. and Subsidiary Companies 2000 1999
---------------------------------- ---- -----
Net income $ 23,695 $ 385,528
-------- --------
Other comprehensive income/(loss), net of tax:
Net unrealized loss on investments (11,785) (5,291)
Foreign currency translation (41,502) 23,375
-------- --------
Total other comprehensive income/(loss) (53,287) 18,084
-------- --------
Comprehensive income/(loss) $ (29,592) $ 403,612
========= ========
JCP&L
-----
Net income $ 182,797 $ 150,745
-------- --------
Other comprehensive income/(loss), net of tax:
Net unrealized gain on investments - -
-------- --------
Comprehensive income $ 182,797 $ 150,745
======== =========
Met-Ed
------
Net income $ 31,369 $ 93,596
-------- --------
Other comprehensive income/(loss), net of tax:
Net unrealized gain/(loss) on investments (21,233) 2,881
-------- --------
Comprehensive income $ 10,136 $ 96,477
======== ========
Penelec
-------
Net income $ 17,472 $ 107,950
-------- ---------
Other comprehensive income/(loss), net of tax:
Net unrealized gain/(loss) on investments (10,609) 1,373
-------- --------
Comprehensive income $ 6,863 $ 109,323
======== ========
The net unrealized loss on investments, reflected above, for the nine
months ended September 30, 2000, is due to the reclassification of previous
unrealized gains totaling $31.8 million (Met-Ed $21.2 million; Penelec $10.6
million), from Accumulated other comprehensive income to Regulatory assets, net
on the Consolidated Balance Sheets. See Nuclear Plant Retirement Costs section
of Note 1, COMMITMENTS & CONTINGENCIES.
66
<PAGE>
6. COMPANY-OBLIGATED TRUST PREFERRED SECURITIES
In 1999, Met-Ed Capital Trust, a wholly-owned subsidiary of Met-Ed, issued
$100 million of trust preferred securities (Met-Ed Trust Preferred Securities)
at 7.35%, due 2039. The sole assets of Met-Ed Capital Trust are the 7.35%
Cumulative Preferred Securities of Met-Ed Capital II, L.P. (Met-Ed Partnership
Preferred Securities). Each Met-Ed Trust Preferred Security represents a Met-Ed
Partnership Security. Met-Ed Capital II, L.P. is a wholly-owned subsidiary of
Met-Ed and the sponsor of Met-Ed Capital Trust. The sole assets of Met-Ed
Capital II, L.P. are Met-Ed's 7.35% Subordinated Debentures, Series A, due 2039,
which have an aggregate principal amount of $103.1 million. Met-Ed has fully and
unconditionally guaranteed the Met-Ed Partnership Preferred Securities, and,
therefore, the Met-Ed Trust Preferred Securities.
In 1999, Penelec Capital Trust, a wholly-owned subsidiary of Penelec,
issued $100 million of trust preferred securities (Penelec Trust Preferred
Securities) at 7.34%, due 2039. The sole assets of Penelec Capital Trust are the
7.34% Cumulative Preferred Securities of Penelec Capital II, L.P. (Penelec
Partnership Preferred Securities). Each Penelec Trust Preferred Security
represents a Penelec Partnership Security. Penelec Capital II, L.P. is a
wholly-owned subsidiary of Penelec and the sponsor of Penelec Capital Trust. The
sole assets of Penelec Capital II, L.P. are Penelec's 7.34% Subordinated
Debentures, Series A, due 2039, which have an aggregate principal amount of
$103.1 million. Penelec has fully and unconditionally guaranteed the Penelec
Partnership Preferred Securities, and, therefore, the Penelec Trust Preferred
Securities.
67
<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
(12) Statements Showing Computation of Ratio of Earnings to
Fixed Charges and Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends Based on SEC
Regulation S-K, Item 503
A - GPU, Inc. and Subsidiary Companies
B - JCP&L
C - Met-Ed
D - Penelec
(27) Financial Data Schedules
A - GPU, Inc. and Subsidiary Companies
B - JCP&L
C - Met-Ed
D - Penelec
(b) Reports on Form 8-K
GPU, Inc.:
---------
Dated August 11, 2000, under Item 5 (Other Events)
Dated October 6, 2000, under Item 5 (Other Events)
Jersey Central Power & Light Company:
------------------------------------
Dated August 11, 2000, under Item 5 (Other Events)
Metropolitan Edison Company:
---------------------------
Dated August 11, 2000, under Item 5 (Other Events)
Pennsylvania Electric Company:
-----------------------------
Dated August 11, 2000, under Item 5 (Other Events)
68
<PAGE>
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
GPU, INC.
November 9, 2000 By: /s/ B. L. Levy
-----------------------------------
B. L. Levy, Senior Vice President and
Chief Financial Officer
November 9, 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
November 9, 2000 By: /s/ M. J. Chesser
-----------------------------------
M. J. Chesser, President and
Chief Executive Officer
November 9, 2000 By: /s/ M. P. O'Flynn
-----------------------------------
M. P. O'Flynn, Vice President- Finance
and Rates & Comptroller
(principal accounting officer)
69
