SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of
earliest event reported): March 3, 2000
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) 455-8200
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
------------------------------------------------------------------
(c) Exhibit
99. GPU 1999 Financial Report.
<PAGE>
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
GPU, INC.
By: /s/ T. G. Howson
-------------------------------
T. G. Howson, Vice President
and Treasurer
Date: March 3, 2000
EXHIBIT TO BE FILED BY EDGAR
----------------------------
(c) 99. GPU 1999 Financial Report.
Exhibit 99
1999 FINANCIAL REPORT CONTENTS
Page
Selected Financial Data 2
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 3
Statement of Management 30
Report of Independent Accountants 31
Consolidated Financial Statements 32
Notes to Consolidated Financial Statements 37
Quarterly Financial Data 79
GPU Energy Companies' Statistics 80
<PAGE>
GPU, Inc. and Subsidiary Companies
<TABLE>
SELECTED FINANCIAL DATA
<CAPTION>
For The Years Ended December 31, 1999(1) 1998(2) 1997(3) 1996(4) 1995(5)
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stock Data
Earnings per common share before extraordinary item:
<S> <C> <C> <C> <C> <C>
Basic $ 3.66 $ 3.03 $ 2.78 $ 2.48 $ 3.79
Diluted $ 3.66 $ 3.03 $ 2.77 $ 2.47 $ 3.79
Earnings per common share:
Basic $ 3.66 $ 2.83 $ 2.78 $ 2.48 $ 3.79
Diluted $ 3.66 $ 2.83 $ 2.77 $ 2.47 $ 3.79
Cash dividends paid per share $ 2.105 $ 2.045 $ 1.985 $ 1.925 $ 1.86
Book value per share $ 28.45 $ 27.01 $ 25.59 $ 25.21 $ 24.66
Closing market price per share $ 29 3/4 $44 3/16 $ 42 1/8 $ 33 5/8 $ 34
Common shares outstanding (in thousands):
Basic average 125,368 127,093 120,722 120,513 116,063
Diluted average 125,570 127,312 121,002 120,751 116,179
At year-end 121,806 127,996 120,833 120,611 120,423
Market price to book value at year-end 105% 164% 165% 133% 138%
Price/earnings ratio 8.1 15.6 15.2 13.6 9.0
Return on average common equity 13.0% 10.7% 10.7% 9.8% 16.0%
Financial Data (in millions)
Operating revenues $4,757.1 $4,248.8 $4,143.4 $3,970.7 $3,822.5
Other operation and maintenance expense 1,495.4 1,106.9 993.7 1,114.9 965.1
Income before extraordinary item 459.0 385.9 335.1 298.4 440.1
Net income 459.0 360.1 335.1 298.4 440.1
Net utility plant in service 7,836.5 6,565.1 7,100.5 5,942.4 5,862.4
Total assets 21,718.1 16,288.1 12,822.9 10,851.4 9,751.5
Long-term debt 5,850.6 3,825.6 4,326.0 3,177.0 2,567.9
Long-term capital lease obligations 2.2 2.6 3.3 6.6 11.7
Trust preferred securities 200.0 - - - -
Subsidiary-obligated mandatorily
redeemable preferred securities 125.0 330.0 330.0 330.0 330.0
Cumulative preferred stock with
mandatory redemption 73.2 86.5 91.5 114.0 134.0
Capital expenditures and
investments (includes acquisitions) 2,131.7 468.2 2,268.6 977.5 626.7
Employees 10,830 8,957 9,346 9,345 10,286
</TABLE>
(1) Results for 1999 include net gains of $36.1 million (after-tax), or $0.29
per share, as a result of the sales of substantially all the GPU Energy
companies' electric generating stations as well as a gain on the sale of
the Midlands supply business of $6.8 million (after-tax), or $0.05 per
share. Also in 1999, as a result of the NJBPU Restructuring Order, GPU
recorded a non-recurring charge of $68 million (after-tax), or $0.54 per
share. For additional information, see Note 7, Acquisitions.
(2) Results for 1998 include an extraordinary charge of $25.8 million
(after-tax), or $0.20 per share, as a result of the PaPUC's Restructuring
Orders on Met-Ed and Penelec's restructuring plans. Also in 1998, as a
result of the PaPUC Orders, GPU recorded a non-recurring charge of $40
million (after-tax), or $0.32 per share, related to the obligation to
refund 1998 revenues; and for the establishment of a sustainable energy
fund.
(3) Results for 1997 reflect a non-recurring charge of $109.3 million, or
$0.90 per share, for a windfall profits tax imposed on privatized
utilities, including Midlands, by the Government of the United Kingdom.
(4) Results for 1996 reflect a non-recurring charge of $74.5 million
(after-tax), or $0.62 per share, for costs related to voluntary enhanced
retirement programs.
(5) Results for 1995 reflect the reversal of $104.9 million (after-tax), or
$0.91 per share, of certain future TMI-2 retirement costs written off in
1994. The reversal of this write-off resulted from a 1995 Pennsylvania
Supreme Court decision that overturned a 1994 lower court order, and
restored a 1993 PaPUC order allowing for the recovery of such costs.
Partially offsetting this increase was a non-recurring charge to income of
$8.4 million (after-tax), or $0.07 per share, of TMI-2 monitored storage
costs deemed not probable of recovery through ratemaking.
2
<PAGE>
GPU, Inc. and Subsidiary Companies
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GPU, Inc. owns all the outstanding common stock of three domestic
electric utilities -- Jersey Central Power & Light Company (JCP&L), Metropolitan
Edison Company (Met-Ed) and Pennsylvania Electric Company (Penelec). The
customer service function, transmission and distribution operations and the
operations of the remaining non-nuclear generating facilities of these electric
utilities are conducting business under the name GPU Energy. JCP&L, Met-Ed and
Penelec considered together are referred to as the "GPU Energy companies." The
nuclear generation operations of GPU Energy are conducted by GPU Nuclear, Inc.
(GPUN). GPU Capital, Inc. and GPU Electric, Inc. and their subsidiaries own,
operate and fund the acquisition of electric and gas transmission and
distribution systems in foreign countries, and are referred to as "GPU
Electric." GPU International, Inc. and GPU Power, Inc. and their subsidiaries
develop, own and operate generation facilities in the United States and foreign
countries and are referred to as the "GPUI Group." Other subsidiaries of GPU,
Inc. include GPU Advanced Resources, Inc. (GPU AR), which is involved in retail
energy sales; GPU Telcom Services, Inc. (GPU Telcom), which is engaged in
telecommunications-related businesses; and GPU Service, Inc. (GPUS), which
provides legal, accounting, financial and other services to the GPU companies.
All of these companies considered together are referred to as "GPU."
The matters discussed in Management's Discussion and Analysis of
Financial Condition and Results of Operations contain certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Statements made that are not historical facts are forward-looking and,
accordingly, involve estimates, forecasts, assumptions, risks and uncertainties
that could cause actual results or outcomes to differ materially from those
expressed in the forward-looking statements. Although such forward-looking
statements have been based on reasonable assumptions, there is no assurance that
the expected results will be achieved. Some of the factors that could cause
actual results to differ materially include, but are not limited to: the effects
of regulatory decisions; changes in law and other governmental actions and
initiatives; the impact of deregulation and increased competition in the
industry; industry restructuring; expected outcomes of legal proceedings; the
completion of generation asset divestiture; energy prices and availability; and
uncertainties involved with foreign operations including political risks and
foreign currency fluctuations.
3
<PAGE>
<TABLE>
GPU RESULTS OF OPERATIONS
-------------------------
EARNINGS PER SHARE CONTRIBUTION:
<CAPTION>
(on a diluted basis) 1999 1998 Change 1998 1997 Change
--------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Operations:
GPU Energy companies * $ 3.51 $ 2.90 $ 0.61 $ 2.90 $ 3.21 $(0.31)
GPU Electric 0.38 0.44 (0.06) 0.44 0.75 (0.31)
GPUI Group 0.15 0.11 0.04 0.11 (0.13) 0.24
GPU AR (0.04) (0.01) (0.03) (0.01) (0.04) 0.03
GPU, Inc. (Corporate) (0.14) (0.09) (0.05) (0.09) (0.12) 0.03
----- ----- ----- ----- ----- -----
Total operations 3.86 3.35 0.51 3.35 3.67 (0.32)
Non-recurring items:
GPU Energy companies (0.25) (0.52) 0.27 (0.52) - (0.52)
GPU Electric
0.05 - 0.05 - (0.90) 0.90
---- ----- ----- ----- ----- -----
Total $ 3.66 $ 2.83 $ 0.83 $ 2.83 $ 2.77 $ 0.06
===== ===== ===== ===== ===== =====
</TABLE>
* Includes GPU Telcom
GPU's 1999 earnings were $459.0 million, or $3.66 per share, compared
with earnings of $360.1 million, or $2.83 per share, for 1998. GPU's return on
average common equity was 13.0% in 1999, compared to 10.7% in 1998. Both periods
reflect non-recurring items.
Excluding the following non-recurring items, earnings for 1999 would have
been $484.1 million, or $3.86 per share: the net gain of $36.1 million
after-tax, or $0.29 per share, for the sales of the GPU Energy companies'
generating facilities related to wholesale operations; the non-recurring charge
of $68 million after-tax, or $0.54 per share, resulting from a Summary
Restructuring Order (Summary Order) issued to JCP&L by the New Jersey Board of
Public Utilities (NJBPU); and the gain on the sale of the Midlands Electricity
plc (Midlands) supply business of $6.8 million after-tax, or $0.05 per share.
Excluding the effect of the Pennsylvania Public Utility Commission's (PaPUC)
rate actions, earnings for 1998 would have been $425.9 million, or $3.35 per
share. Return on average common equity for 1999 and 1998 on this basis would
have been 13.7% and 12.4%, respectively.
The $0.51 per share earnings increase in 1999 versus 1998, excluding
non-recurring items, was due to increased earnings from the GPU Energy companies
primarily as a result of higher sales to other utilities, lower operation and
maintenance (O&M) expense and lower depreciation expense. Also contributing to
the increase was higher profits from operations at Midlands. Partially
offsetting these increases were lower generation sales to customers by the GPU
Energy companies as a result of some customers choosing alternate suppliers; and
the absence of gains realized in 1998 on the sale of GPU Electric's interest in
Solaris Power (Solaris) and the sale of AllGas Energy stock.
In 1997, a non-recurring charge of $109.3 million, or $0.90 per share,
was taken for a windfall profits tax assessed on privatized utilities by the
Government of the United Kingdom. Excluding the impact of non-recurring items in
both years, GPU's earnings for 1998 would have been $425.9 million, compared to
$444.4 million in 1997, and earnings per share for 1998 would have been $3.35,
compared to $3.67 in 1997. Return on average common equity for 1998 and 1997 on
this basis would have been 12.4% and 14%, respectively.
4
<PAGE>
The 1998 earnings per share decrease on this basis was due to lower
income from the GPU Energy companies, and increased shares outstanding due to
the sale of GPU, Inc. common stock in February 1998. The GPU Energy companies'
earnings reduction for the period was due to increased O&M expenses primarily
related to the implementation of a new company-wide computer software system and
restructuring costs related to staff reductions, partially offset by higher
electric sales. After adjusting for the related impacts of the windfall profits
tax, GPU Electric's income contribution increased for the year and partially
offset the GPU Energy companies' decrease.
OPERATING REVENUES:
- -------------------
Operating revenues increased $508.3 million to $4.8 billion in 1999, and
increased $105.4 million to $4.2 billion in 1998. The components of the changes
are as follows:
Changes (in millions)
---------------------
1999 1998
---- ----
GPU Energy companies:
Kilowatt-hour (KWH) revenues $(570.8) $ 30.9
Energy and restructuring-related
revenues 220.2 49.8
Obligation to refund revenues (58.6) (56.4)
Competitive transition charge
(CTC) revenues 138.7 -
GPU Telcom revenues (9.7) 16.1
Other revenues 12.7 (130.9)
----- ------
Total GPU Energy companies (267.5) (90.5)
GPU Electric 683.5 151.6
GPUI Group 18.6 34.7
GPU AR 73.7 9.6
----- -----
Total increase $ 508.3 $ 105.4
===== =====
GPU Energy companies
Kilowatt-hour revenues
- ----------------------
1999
The decrease was primarily due to lower generation-related revenues of
approximately $430 million as a result of some Pennsylvania customers choosing
another electric energy supplier and a decrease of approximately $325 million in
nonutility generation (NUG) revenues for Met-Ed and Penelec (which did not have
an impact on earnings since NUG-related revenues are now being collected through
the CTC effective January 1, 1999). Partially offsetting these decreases were
increased sales to other utilities of approximately $160 million, the absence of
an earnings cap adjustment (since JCP&L was not in an over earnings position in
1999) which reduced JCP&L's 1998 revenues and higher weather-related sales.
1998
The increase in KWH revenues was primarily due to an increase in
residential and commercial customer usage, partially offset by lower
weather-related sales to residential and commercial customers, and the absence
in 1998 of the step increase in unbilled revenue recorded by Met-Ed.
5
<PAGE>
Energy and restructuring-related revenues (JCP&L only)
- ------------------------------------------------------
1999 and 1998
The 1999 increase was primarily due to a change in the estimate for
unbilled revenue and the inclusion of revenues, effective August 1, 1999, for
the recovery of stranded costs due to restructuring in New Jersey. Changes in
energy and restructuring-related revenues do not affect earnings as they are
offset by corresponding changes in expense. The 1998 increase was due primarily
to increased sales to other utilities and higher residential and commercial
customer sales.
Obligation to refund revenues to customers
- ------------------------------------------
1999
The decrease was primarily due to the NJBPU's Summary Order issued to
JCP&L which requires JCP&L to refund customers 5% from rates in effect as of
April 30, 1997. As a result, JCP&L recorded a reduction to operating revenues of
$115 million. Partially offsetting the effect of the decrease was the absence of
rate reductions to operating revenues of $56.4 million, recorded in 1998, as a
result of PaPUC Restructuring Orders for Met-Ed and Penelec.
1998
In 1998, as a result of amended PaPUC Restructuring Orders, Met-Ed and
Penelec recorded reductions to operating revenues of $56.4 million to reflect
their obligation to make refunds to customers from 1998 revenues (2.5% for
Met-Ed customers and 3% for Penelec customers).
Competitive transition charge (CTC) revenues (Met-Ed and Penelec only)
- ----------------------------------------------------------------------
1999
CTC revenues represent Pennsylvania stranded cost recoveries permitted by
the 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.
Other revenues
- --------------
1999
The increase was due primarily to increased transmission revenues at
Met-Ed and Penelec as a result of customer shopping in Pennsylvania.
1998
The 1998 decrease was primarily due to lower revenue taxes as a result of
New Jersey tax legislation that eliminated the gross receipts and franchise tax
on utility bills and replaced it with a sales tax, a corporate business tax and
a transitional energy facilities assessment, effective January 1, 1998. This
decrease did not have an impact on earnings.
GPU Electric
1999
The increase in revenues was primarily due to the inclusion of revenues
from: Midlands (of which the remaining 50% was acquired in July 1999), $503.9
million; Empresa Distribuidora Electrica Regional, S.A. (Emdersa) (acquired in
March 1999), $136 million; and GPU GasNet (acquired in June 1999), $31.3
million. For additional information, see Note 7, Acquisitions.
6
<PAGE>
1998
The increase in revenues was due mainly to including the full year effect
of GPU PowerNet (acquired in November 1997).
GPUI Group
1999
The increase was primarily due to an increase in Empresa Guaracachi S.A.
(EGSA) energy and capacity revenues of $2.4 million, and the full year effect of
consolidating Onondaga Cogen, L.P. (Onondaga) of $11 million.
1998
The increase in revenues was due mainly to including the full year effect
of Lake Cogen, Ltd. (Lake), and the effect of including Onondaga beginning in
August 1998.
GPU AR
1999
The increase was primarily due to an increase in energy sales to
customers who chose GPU AR as their electric energy supplier as part of retail
customer choice in Pennsylvania. Some of GPU AR's customers are located in the
GPU Energy companies' service territories.
1998
GPU AR's 1998 revenues were derived from energy sales to customers who
chose it as their energy supplier as part of the retail access pilot program in
Pennsylvania.
OPERATING INCOME:
- -----------------
Operating income increased $112.8 million to $1.01 billion in 1999, and
increased $25.3 million to $896.1 million in 1998. The components of the changes
are as follows:
Changes (in millions)
---------------------
1999 1998
---- ----
GPU Energy companies $ (30.2) $ (74.7)
GPU Electric 143.9 90.4
GPUI Group 11.5 2.0
GPU AR (3.6) 3.8
GPU, Inc. (8.8) 3.8
----- -----
Total increase $ 112.8 $ 25.3
===== =====
GPU Energy companies
1999
The decrease was due to lower revenues as discussed above (see Operating
Revenues section for additional information). Also contributing to the decrease
was a pre-tax reserve of $25 million for Met-Ed and Penelec related to the
regulatory uncertainty of the full recoverability of stranded costs in Phase II
of the Pennsylvania restructuring proceedings. Partially offsetting this
decrease was lower O&M expenses primarily due to the sale of Penelec's interest
in the Homer City Station (Homer City), lower depreciation expense due to the
effect of the impairment write-down of the Oyster Creek (Oyster
7
<PAGE>
Creek) nuclear generating station and Three Mile Island Unit 1 (TMI-1) nuclear
generating facility in 1999 and 1998, respectively; and the sale of Homer City.
1998
The decrease was due primarily to lower revenues as discussed above (see
Operating Revenues section for additional information). Also contributing to the
decrease was higher O&M expenses primarily due to the implementation of a new
company-wide computer software system, costs related to staff reductions and the
full year inclusion of O&M expenses for GPU Telcom. The decrease also included
additional amortization expense related to JCP&L's Final Settlement representing
the portion of JCP&L's return on equity which exceeded the maximum amount
allowed and must be applied against JCP&L's stranded cost pool.
GPU Electric
1999
The increase was due primarily to the consolidation of Midlands since the
acquisition of the remaining 50% ownership in 1999, and the inclusion of Emdersa
and GPU GasNet from their acquisition dates in 1999.
1998
The increase was due to higher revenues as discussed above, partially
offset by an increase in O&M expenses primarily due to the full year effect of
including GPU PowerNet.
GPUI Group
1999
The increase was primarily due to higher revenues as discussed above, and
the full year effect of consolidating Onondaga.
1998
The increase was primarily due to higher revenues as discussed above,
mostly offset by an increase in O&M expenses primarily due to the full year
effect of including Lake, as well as the effect of including Onondaga beginning
August 1998.
GPU AR
1999
The decrease was primarily due to increased prices for power purchases
due to the hot summer of 1999, partially offset by higher revenues as discussed
above.
1998
The increase was primarily due to higher revenues as discussed above,
partially offset by increased power purchases.
OTHER INCOME AND DEDUCTIONS:
- ----------------------------
Other income and deductions increased $54.5 million to $175.8 million in
1999, and increased $142.7 million to $121.3 million in 1998. The components of
the changes are as follows:
8
<PAGE>
Changes (in millions)
---------------------
1999 1998
---- ----
GPU Energy companies $ 78.8 $(13.4)
GPU Electric (25.6) 114.4
GPUI Group 0.4 42.1
GPU AR 0.1 0.1
GPU, Inc. 0.8 (0.5)
---- -----
Total increase $ 54.5 $142.7
==== =====
GPU Energy companies
1999
The increase was primarily due to the recognition of net gains of $61.3
million pre-tax, as a result of the sale of substantially all the GPU Energy
companies' electric generating stations. Also contributing to the increase was
the absence of a charge for start-up payments for the establishment of an
environmental fund for Met-Ed and Penelec; and the absence of a charge to
terminate a contract with one of Met-Ed's wholesale customers, both in 1998.
1998
The decrease was primarily due to a charge taken by Met-Ed and Penelec for
start-up payments for the establishment of a sustainable energy fund as a result
of the PaPUC's Restructuring Orders; and a charge by Met-Ed for the Middletown
settlement.
GPU Electric
1999
The decrease was primarily due to a pre-tax loss of $8.5 million for the
write-down, to market value, of the investment in certain marketable securities
due to GPU Electric's pending sale of this investment; and the absence of a
pre-tax gain of $45 million realized in 1998 from the sale of Solaris.
Offsetting the decrease was the pre-tax gain on the sale of the Midlands supply
business of $10.5 million and increased earnings from Midlands' operations prior
to the acquisition from Cinergy of the remaining 50%. Also contributing to the
offset was the gain on the sale of the Enersis Group generation facility in
Portugal.
1998
The increase was primarily due to the absence of a $109.3 million charge
taken in 1997 for a windfall profits tax imposed on Midlands by the Government
of the United Kingdom. Also contributing to the increase was the pre-tax gain of
$45 million realized from GPU Electric's sale of its interest in Solaris.
GPUI Group
1999
In 1999, the GPUI Group sold its interests in two cogeneration projects
and its shares of Niagara Mohawk Power Corporation stock (that it received as
part of the 1998 master restructuring agreement for the Onondaga cogeneration
project) for a total pre-tax gain of $12 million. Offsetting this increase was
the recording of an impairment of $6.5 million, in 1999, related to the
investment in the Lake cogeneration project and the absence of a pre-tax gain
from the 1998 sale of a 50% interest in the Mid-Georgia cogeneration project
9
<PAGE>
of $9.1 million, which is offset by $2.5 million of deferred revenues recognized
in income in 1999.
1998
The increase was due primarily to the pre-tax gain of $9.1 million
realized from the sale of half its interest in the Mid-Georgia cogeneration
plant and higher investment income of $21.5 million.
INTEREST CHARGES AND PREFERRED DIVIDENDS:
- -----------------------------------------
Interest charges and preferred dividends increased $93.3 million to $482.5
million in 1999, and increased $69.9 million to $389.2 million in 1998. The
components of the changes are as follows:
Changes (in millions)
---------------------
1999 1998
---- ----
GPU Energy companies $(21.1) $ (7.1)
GPU Electric 114.6 76.3
GPUI Group 1.5 (0.1)
GPU, Inc. (1.7) 0.8
---- -----
Total increase $ 93.3 $ 69.9
==== =====
GPU Energy companies
1999
The decrease was primarily due to the following: in 1999 Met-Ed and
Penelec redeemed all their company-obligated mandatorily redeemable preferred
securities and cumulative preferred stock (the redemption of preferred stock
resulted in losses of $0.5 million and $0.7 million, respectively, for Met-Ed
and Penelec); and Penelec redeemed $600 million of first mortgage bonds (FMBs).
Also in 1999, JCP&L redeemed $30 million of cumulative preferred stock (which
resulted in a loss of $0.8 million). Partially offsetting these decreases was
increased interest expense associated with Penelec's issuance of $350 million of
senior notes in 1999.
1998
In 1998, JCP&L redeemed $15 million stated value of cumulative preferred
stock.
GPU Electric
1999
The increase was primarily due to higher debt levels from the 1999
acquisitions of Emdersa, GPU GasNet and Midlands (the remaining 50%), which
resulted in additional interest expense of $8 million, $21.3 million and $66.8
million, respectively.
1998
The increase was due primarily to debt associated with the GPU PowerNet
acquisition in November 1997.
10
<PAGE>
EXTRAORDINARY ITEM:
- -------------------
1998
The extraordinary loss was due to the impact of the PaPUC Restructuring
Orders received by Met-Ed and Penelec. For additional information, see Note 6,
Accounting for Extraordinary and Non-recurring Items.
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 December 31,
1999. At December 31, 1999, GPU, Inc. has remaining authorization to finance
approximately $245 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 has ownership interests in electric and gas transmission and
distribution businesses in England, Australia and Argentina. Through its
ownership in Midlands, GPU Electric also has investments in operating generating
facilities located in foreign countries totaling 4,244 megawatts (MW) (of which
GPU Electric's equity interest represents 1,163 MW) of capacity. At December 31,
1999, GPU, Inc.'s aggregate investment in GPU Electric was $1.06 billion. GPU,
Inc. has also guaranteed up to an additional $1.04 billion of outstanding GPU
Electric obligations.
In July 1999, GPU Electric acquired Cinergy's 50% ownership interest in
Avon Energy Partners Holdings (Avon), which owns Midlands, for (pound)452.5
million (approximately US $714 million). As a result of this transaction, GPU
Electric assumed debt of US $1 billion. GPU and Cinergy had jointly formed Avon
in 1996 to acquire Midlands, an English regional electric company serving 2.3
million customers.
In June 1999, National Power plc acquired all the assets and liabilities
of Midlands' supply business, including obligations under Midlands' power
purchase agreements, for $300 million ($150 million for GPU's share) plus an
adjustment for working capital. As a result, in 1999 GPU recorded an after-tax
gain on the sale of $6.8 million.
In June 1999, GPU Electric acquired Transmission Pipelines Australia
(TPA), a natural gas transmission business, from the State of Victoria,
Australia for A$1.025 billion (approximately US $675 million). TPA (which has
since been renamed GPU GasNet) was sold as part of Victoria's privatization of
the natural gas industry. The GPU GasNet system encompasses 1,105 miles of
transmission pipelines, and consists of two separate networks serving
approximately 1.3 million residential customers and about 40,000 industrial and
commercial customers throughout Victoria.
In March 1999, GPU Electric acquired Emdersa for $375 million. Emdersa
owns three electric distribution companies that serve three provinces in
northwest Argentina. As a result of this transaction, GPU Electric assumed debt
of US $76 million.
11
<PAGE>
For additional information on GPU's acquisitions, see Note 7,
Acquisitions.
GPU has initiated plans to raise at least US $500 million through the
sale of assets and use the proceeds to reduce debt, provide funding for
additional repurchases of its common stock and invest in growth initiatives. In
December 1999, GPU announced that it would seek proposals to purchase at least
50% of GPU's ownership in GPU PowerNet and GPU GasNet.
Management expects that future foreign acquisitions, if made, would
likely be small in size and would serve to expand capabilities to grow the
non-regulated businesses or to provide critical mass to the current portfolio of
holdings. For additional information, see COMPETITIVE ENVIRONMENT AND RATE
MATTERS section of Management's Discussion and Analysis.
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 December 31, 1999, GPU, Inc.'s
aggregate investment in the GPUI Group was $232 million. GPU, Inc. has also
guaranteed up to an additional $29.9 million of GPUI Group obligations.
PLANNED ACQUISITION OF MYR GROUP
--------------------------------
In December 1999, GPU, Inc. and MYR Group Inc. (MYR) entered into an
agreement under which GPU would acquire the utility infrastructure construction
firm for $215 million cash, or $30.10 per share of MYR common stock. Following
the transaction MYR would become a wholly-owned subsidiary of GPU, Inc. The
acquisition, which is subject to approval by the SEC and other conditions, is
expected to be completed by the first quarter of 2000. For additional
information, see Note 7, Acquisitions.
Market Risk Sensitive Instruments
---------------------------------
GPU Electric uses interest rate swap agreements to manage the risk of
increases in variable interest rates. All of the agreements effectively convert
variable rate debt, including commercial paper, to fixed rate debt. None of
these swap agreements are held for trading purposes. During 1999, GPU PowerNet
began a program of refinancing much of its floating rate bank borrowings with
fixed rate publicly issued debt. As a result, certain swaps associated with the
floating rate bank borrowings were marked to market. As of December 31, 1999,
most of these positions were terminated, which resulted in swap breakage and
mark to market costs of A$16.8 million (approximately US $10.9 million). The
following summarizes the principal characteristics of swap agreements in effect
as of December 31, 1999:
12
<PAGE>
<TABLE>
(in thousands)
<CAPTION>
Fixed Variable
Notional Fair Termination Pay/Receive Interest Interest Rate
Amount Value(a) Date Characteristic Rate at 12/31/99
------ -------- -------- -------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
GPU PowerNet A$ 39,250 A$ 423 10/1/00 fixed/variable 4.75% 5.22%
A$ 26,000 A$ 270 10/1/00 fixed/variable 4.79% 5.22%
A$ 42,250 A$ 429 10/1/00 fixed/variable 4.81% 5.22%
A$ 26,000 A$ 281 10/3/00 fixed/variable 4.77% 5.15%
A$ 26,000 A$ 273 10/3/00 fixed/variable 4.80% 5.15%
A$ 212,000 A$ (383) 11/6/00 fixed/variable 6.14% 5.15-5.56%
A$ 481,250 A$ 2,835 11/6/02 fixed/variable 6.56% 5.15-5.56%
A$ 385,000 A$ 3,246 11/8/04 fixed/variable 6.82% 5.15-5.56%
A$ 14,172 A$ 98 11/6/07 fixed/variable 7.15% 5.22-5.41%
--------- ---------
A$1,251,922 A$ 7,472
--------- ---------
GPU GasNet A$ 112,500 A$ 194 6/2/00 fixed/variable 5.37% 5.56%
A$ 375,000 A$ 7,800 6/3/02 fixed/variable 5.90% 5.56%
A$ 225,000 A$ 10,248 6/2/06 fixed/variable 6.33% 5.56%
--------- ---------
A$ 712,500 A$ 18,242
========= ---------
Midlands (pound) 65,000 (pound) 545 9/11/01 fixed/variable 5.98% 5.98%
(pound) 60,000 (pound) 452 9/14/01 fixed/variable 6.02% 5.98%
--------- -------
(pound) 125,000 (pound) 997
========= ==========
</TABLE>
Exchange rates at December 31, 1999 were as follows: A$1.5244/US$ and
(pound)0.6191/US$.
(a) Represents the amount GPU Electric would (pay)/receive to terminate the
swap agreements as of December 31, 1999 (prior to their scheduled
termination dates).
The amount of debt obligations covered by swap agreements and the
expected variable interest rates of such debt, for each of the next five years,
is as follows:
<TABLE>
(in thousands) GPU PowerNet GPU GasNet Midlands
----------------------------------------------------------------------------
<CAPTION>
Expected Expected Expected
Average Variable Average Variable Average Variable
Debt Interest Debt Interest Debt Interest
Year Covered Rates Covered Rates Covered Rates
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2000 A$1,176,714 6.4-6.5% A$646,875 5.8-6.3% (pound)125,000 7.15%
2001 A$ 880,423 7.2-7.5% A$600,000 7.2-7.5% (pound) 88,542 6.91%
2002 A$ 800,214 7.4-7.6% A$381,250 7.4-7.9% - -
2003 A$ 399,173 7.4-7.6% A$225,000 7.4-7.7% - -
2004 A$ 335,006 7.5-7.8% A$ 93,750 7.5-7.9% - -
</TABLE>
The expected variable interest rates included above, for the years 2000
through 2004, were provided by the financial institutions with which the swap
agreements were executed, and were derived from their proprietary models based
upon recognized financial principles.
At December 31, 1999, these agreements covered approximately $1.3 billion
of debt, including commercial paper, and are scheduled to expire on various
dates through November 2007. For the year ended December 31, 1999, fixed rate
interest expense exceeded variable rate interest by approximately $20.7 million.
13
<PAGE>
<TABLE>
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. 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. The following summarizes the
characteristics of the currency swap agreements as of December 31, 1999:
<CAPTION>
Fixed Fixed
Currency USD Sterling Sterling USD USD
Swap Notional Notional Termination Interest Interest Fair
Type Value Value Date Rate Rate Value(a)
-------- --------- --------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$/(pound) $350,000 (pound)212,122 12/11/02 7.66% 6.73% (2,838)
$/(pound) $100,000 (pound) 60,606 12/11/07 7.75% 7.05% (4,776)
$/(pound) $150,000 (pound) 90,909 12/11/07 7.70% 7.05% (7,604)
$/(pound) $250,000 (pound)153,374 03/04/08 6.94% 6.46% (14,036)
</TABLE>
(a) Represents the amount GPU Electric would (pay)/receive to terminate the
swap agreements as of December 31, 1999 (prior to their scheduled
termination dates).
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Capital Expenditures and Investments*
- ------------------------------------
(in millions)
------------------------------------------
2000** 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
GPU Energy companies $349 $ 291 $328 $ 356 $404 $462
GPU Electric 213 1,809 59 1,800 516 -
GPUI Group 5 32 81 112 58 165
GPU, Inc. 215 - - - - -
------------------------------------------
Total $782 $2,132 $468 $2,268 $978 $627
=== ===== === ===== === ===
* Includes acquisitions, net of cash acquired.
** Estimate includes $215 million for the anticipated acquisition of
MYR.
GPU Energy companies
The GPU Energy companies' capital spending was $291 million in 1999, and
was used primarily to expand and improve existing transmission and distribution
(T&D) facilities, for new customer connections and to implement an integrated
information system. In 2000, capital expenditures for the GPU Energy companies
are estimated to be $349 million, primarily for ongoing T&D system development.
Expenditures for maturing long-term debt were $83 million in 1999, and are
expected to total $101 million in 2000, and $51 million in 2001. Management
estimates that a substantial portion of the GPU Energy companies' 2000 capital
outlays will be satisfied through internally generated funds.
GPU Electric
GPU Electric's capital spending was $1.8 billion in 1999 and primarily
represents the cost of acquiring Emdersa, GPU GasNet and the remaining 50% of
Midlands, and also includes $128.6 million of improvements to GPU PowerNet,
Emdersa and Midlands' facilities. For 2000, infrastructure-related capital
expenditures are forecasted to be $213 million. In 1999, expenditures for
14
<PAGE>
maturing long-term debt were $453 million, and are expected to total $475
million in 2000 and $1 billion in 2001. Capital outlays for 2000 will be
satisfied through both internally generated funds and external financings.
GPUI Group
The GPUI Group's capital spending was $32 million in 1999 and was used
primarily for construction activities at one of the GPUI Group's South American
investments. For 2000, capital expenditures are forecasted to be $6 million. In
1999, expenditures for maturing long-term debt were $28 million, and are
expected to total $5 million in 2000 and $7 million in 2001. Capital outlays for
2000 will be satisfied through both internally generated funds and external
financings.
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
December 31, 1999, GPU, Inc. has repurchased 6.4 million shares of common stock
at an average price of $35.25 per share.
GPU has various credit facilities in place, the most significant of which
are discussed below. These credit facilities generally provide GPU bank loans at
negotiable market rates.
GPU, Inc. and the GPU Energy companies have available $450 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. From these sources,
GPU, Inc. has regulatory authority to have $250 million outstanding at any one
time. JCP&L, Met-Ed and Penelec are limited by their charters or SEC
authorization to $265 million, $150 million and $150 million, respectively, of
short-term debt outstanding at any one time.
GPU, Inc. has SEC approval to issue and sell up to $300 million of
unsecured debentures through 2001, the proceeds from which could be utilized to
repay short-term debt or to finance additional investments. Further significant
investments by GPU Electric and/or the GPUI Group, or otherwise, may require
GPU, Inc. to issue additional debt and/or common stock.
GPU Energy companies
Met-Ed and Penelec have regulatory approval to issue through December 31,
2000 senior notes and preferred securities in aggregate amounts of $150 million
and $275 million, respectively, of which up to $25 million for each company may
consist of preferred securities. JCP&L has regulatory approval to issue through
December 31, 2000, senior notes and preferred securities in the aggregate amount
of $300 million. Met-Ed and JCP&L will be issuing secured senior notes
(collateralized by 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.
15
<PAGE>
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. Following the initial issuance of senior notes, the GPU Energy
companies would not issue any additional FMBs other than as collateral for the
senior notes. The senior note indentures prohibit (subject to certain
exceptions) the GPU Energy companies from issuing any debt which is senior to
the senior notes.
The GPU Energy companies' bond indentures include provisions that limit
the amount of FMBs the companies may issue. The GPU Energy companies' interest
coverage ratios are currently in excess of indenture restrictions. JCP&L's
certificate of incorporation includes provisions that limit the amount of
preferred stock it may issue. JCP&L's preferred dividend coverage ratio is
currently in compliance with the charter restrictions.
In 1999, Met-Ed and Penelec redeemed all of their outstanding shares of
cumulative preferred stock for $12.5 million and $17.4 million, respectively. As
a result, a reacquisition loss of $1.3 million was charged to income ($0.6
million and $0.7 million for Met-Ed and Penelec, respectively). Also in 1999,
Met-Ed and Penelec redeemed all of their outstanding shares of
Subsidiary-obligated mandatorily redeemable preferred securities for $100
million and $105 million, respectively.
In 1999, JCP&L redeemed $30 million stated value of cumulative preferred
stock pursuant to mandatory and optional sinking fund provisions. As a result, a
reacquisition loss of $0.8 million was charged to income.
In 1999, Penelec redeemed $600 million of FMBs with proceeds from the sale
of its interest in Homer City and issued $350 million of unsecured senior notes,
the proceeds from which were used to redeem or repurchase other outstanding
securities, reduce short-term borrowings, fund its construction program and for
other corporate purposes.
In 1999, Met-Ed and Penelec each issued $100 million of trust preferred
securities, at 7.35% and 7.34%, respectively.
GPU Electric
GPU Capital has a $1 billion 364-day senior revolving credit agreement
due in December 2000 supporting the issuance of commercial paper for its $1
billion commercial paper program established to fund GPU Electric acquisitions.
GPU, Inc. has guaranteed GPU Capital's obligations under this program. At
December 31, 1999, $768 million was outstanding under the commercial paper
program, of which $370 million is included in long-term debt on the Consolidated
Balance Sheets since it is management's intent to reissue this amount of the
commercial paper on a long-term basis.
In 1999, GPU Capital sold $373 million of commercial paper to refinance
all its outstanding borrowings related to the 1996 acquisition of a 50% interest
in Midlands. In addition, in 1999, GPU Capital sold $50 million of commercial
paper to partially fund the acquisition of Cinergy's 50% ownership of Midlands.
The Emdersa and GPU GasNet acquisitions, in 1999, were also partially funded by
commercial paper sales of $323 million and $180 million, respectively.
16
<PAGE>
Also in 1999, GPU Capital borrowed A$750 million (approximately US $495
million) under a senior credit facility to fund the acquisition of GPU GasNet
and (pound)245 million (approximately US $382 million) under a term loan to fund
its acquisition of the remaining 50% interest in Midlands.
GPU Australia Holdings, Inc. has $270 million available under its senior
revolving credit facility due in November 2002. This facility, in combination
with other GPU, Inc. credit facilities, serves as credit support for GPU
Australia Holdings' $350 million commercial paper program. GPU, Inc. has
guaranteed GPU Australia Holdings' obligations under this program. GPU Australia
Holdings has $182 million outstanding under its commercial paper program as of
December 31, 1999. In 1999, GPU Australia Holdings refinanced $350 million of
outstanding long-term debt associated with the GPU PowerNet acquisition, with
$345 million of commercial paper under this program.
Austran Holdings, Inc. (Austran), a wholly-owned indirect subsidiary of
GPU Electric, has a A$500 million (approximately US $328 million) commercial
paper program to refinance the maturing portion of the senior debt credit
facility used to finance the GPU PowerNet acquisition. GPU PowerNet has
guaranteed Austran's obligations under this program. As of December 31, 1999,
Austran had outstanding approximately A$420 million (approximately US $275
million) under this program.
In 1999, Austran refinanced A$220 million (approximately US $142 million)
of GPU PowerNet acquisition debt with proceeds from an Australian Dollar medium
term note issuance. In connection with this debt refinancing program, a loss of
A$20.3 million (approximately US $13.3 million) related to certain interest rate
swap positions was reflected in GPU's 1999 earnings. In addition, Austran issued
A$50 million (approximately US $32 million) of variable rate and A$120 million
(approximately US $77 million) of fixed rate medium term notes, proceeds of
which were used to refinance acquisition debt.
Midlands maintains a (pound)200 million (approximately US $323 million)
syndicated revolving credit facility with a bank for working capital purposes,
which matures May 2001. At December 31, 1999, (pound)87 million (approximately
US $140 million) was outstanding under this facility.
GPUI Group
GPU International has a revolving credit agreement providing for
borrowings through December 2000 of up to $30 million outstanding at any one
time, of which up to $15 million may be utilized to provide letters of credit.
GPU, Inc. has guaranteed GPU International's obligations under this agreement.
At December 31, 1999, no borrowings or letters of credit were outstanding under
this facility.
Capitalization
- --------------
Each of the GPU companies' target capitalization ratios is designed to
provide credit quality ratings that permit capital market access at reasonable
costs. The target capitalization ratios vary by subsidiary depending upon their
business and financial risk. GPU's actual capitalization ratios at December 31
for the years indicated, were as follows:
17
<PAGE>
1999 1998 1997
---- ---- ----
Common equity 30% 40% 35%
Preferred securities 4 6 6
Debt 66 54 59
--- --- ---
Total 100% 100% 100%
=== === ===
The increase in the debt ratio in 1999 resulted mainly from GPU Electric's
acquisitions of the following: the 50% of Midlands it did not already own; GPU
GasNet; and Emdersa. Since GPU Electric now owns 100% of Midlands and must
consolidate the entity, certain debt, which was previously excluded from its
balance sheet under the equity method of accounting, must now be included.
In 1999, the quarterly dividend on GPU, Inc.'s common stock was increased
by 2.9% to an annualized rate of $2.12 per share. GPU, Inc.'s dividend payout
rate in 1999 was 55% of earnings (excluding the non-recurring items). Management
will continue to review GPU, Inc.'s dividend policy to determine how to best
serve the long-term interests of shareholders.
At December 31, 1999, Met-Ed and Penelec had retained earnings available
to pay common stock dividends of $10 million and $49 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. Met-Ed and Penelec have requested SEC approval
to declare and pay common dividends from their capital surplus, 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
December 31, 1999, the common equity ratios of Met-Ed, Penelec and GPU, Inc.
were 43.7%, 44.4% and 30.2%, respectively.
Year 2000 Issue
- ---------------
GPU has been addressing the Year 2000 issue by undertaking comprehensive
reviews of its computers, software and equipment with embedded systems such as
microcontrollers (together, "Year 2000 Components"), and of its business
relationships with third parties, including key customers, lenders, trading
partners, vendors, suppliers and service providers. GPU's Year 2000 project has
not caused any material delay in the GPU information technology services group
performing other planned projects.
As of January 31, 2000, GPU believes that its Year 2000 program was
effective since no significant Year 2000 issues were identified. GPU will
continue to monitor its systems generally through March 31, 2000.
Costs
The GPU Energy companies expect to spend a total of $42.3 million on the
Year 2000 issue, as summarized below: $8.1 million represents the avoided costs
of having to upgrade certain legacy systems, which were replaced by a new
integrated information system; $7.4 million represents what would have been
spent in any event for maintenance and cyclical replacement plans; $13.9 million
represents the reallocation of resources to the Year 2000 project; and $12.9
million represents the incremental or out-of-pocket costs for the Year 2000
project. The GPU Energy companies are funding these costs from their operations.
18
<PAGE>
Through December 31, 1999, the GPU Energy companies have spent a total of
approximately $41.8 million on the Year 2000 issue, of which $21.2 million was
spent in 1999.
GPU Electric expects to spend a total of $14 million on the Year 2000
issue. Through December 31, 1999, GPU Electric has spent a total of
approximately $13.1 million on the Year 2000 issue, of which $9.3 million was
spent in 1999.
The total cost associated with the GPUI Group and GPU AR achieving Year
2000 readiness was not material to GPU's business operations or financial
position.
Milestones
GPU established Inventory, Assessment, Remediation, Testing and
Monitoring of its mission-critical Year 2000 Components as the primary phases
for its Year 2000 program. All stages of the Year 2000 program have been
completed with the exception of Monitoring, which will be completed by March 31,
2000.
Third Party Qualification
Due to the interdependence of computer systems and the reliance on other
organizations for materials, supplies or services, GPU contacted key customers,
lenders, trading partners, vendors, suppliers and service providers to assess
whether they adequately addressed the Year 2000 issue.
With respect to computer software and equipment with embedded systems,
the GPU Energy companies analyzed where they are dependent upon third parties
and identified several critical areas: (1) the Pennsylvania-New Jersey-Maryland
(PJM) Interconnection; (2) electric generation suppliers, such as cogeneration
operators and NUGs; (3) Electronic Data Interchange (EDI) with trading partners;
(4) Electronic Funds Transfer (EFT) with financial institutions; (5) vendors;
and (6) customers.
As of January 31, 2000, GPU believes that its planning concerning the
Year 2000 readiness of critical third parties was effective. As of that date, no
significant Year 2000 issues have been identified.
Scenarios and Contingencies
As of January 31, 2000, GPU believes that its Year 2000 preparations were
effective relative to its mission-critical Year 2000 Components and has
established contingency plans to deal promptly with problems that may arise
during the monitoring phase of its Year 2000 program. GPU does not anticipate
any "most reasonably likely worst case Year 2000 scenarios" that would cause a
material adverse effect on its results of operations, liquidity or financial
condition.
COMPETITIVE ENVIRONMENT AND RATE MATTERS
----------------------------------------
GPU Business Plan
- -----------------
Currently, and increasingly in the future, the GPU Energy companies
expect they will have to serve customers in markets where there will be capped
19
<PAGE>
rates for varying periods and their ability to seek rate increases will be more
limited. In addition, inflation could adversely affect GPU since these increased
costs may not be recoverable in an environment where there are capped rates.
Since the GPU Energy companies have, to a large extent, exited the generation
business, they will have to supply energy to customers who do not chose an
alternate supplier largely from contracted and open market purchases. Management
has identified and addressed market risks associated with these purchases
through implementation of an energy risk management program. However, there can
be no assurance that the GPU Energy companies will be able to supply electricity
to customers at costs which will be recoverable by the respective companies.
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) by increasing operating efficiency and by making investments of
$40 million to $50 million to improve the reliability of its domestic utility
operations.
The GPU Energy companies are targeting reductions of $30 million in 2000
and an additional $40 million in 2001. 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. Midlands plans cost reductions of US $25 million in 2000 and US
$5 million in 2001. Cost reductions will be achieved by eliminating activities
not provided for in its new regulated rate level, which will take effect in the
Spring of 2000, and by realizing productivity benefits from its new systems and
organization. Furthermore, GPU plans to raise at least $500 million in cash from
its current investment portfolio by reducing GPU's ownership in non-core and
under-performing assets.
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 largely divested their generation business, there
will be increased market risks associated with providing generation service
since the GPU Energy companies will have to supply energy to non-shopping
customers from contracted and open market purchases. Under its order, JCP&L is
permitted to recover reasonably and prudently incurred costs associated with
providing basic generation service. The PaPUC's restructuring orders, however,
generally do not allow Met-Ed and Penelec to recover their energy costs in
excess of established rate caps which are in effect for varying periods. While
management has implemented an energy risk management program, there can be no
assurance that the GPU Energy companies will be able to supply electricity to
customers that do not choose an alternate supplier at costs which will be
recoverable by the respective companies.
Following the sales in 1999 of the GPU Energy companies' generating
facilities, GPU has 200 MW of capacity and related energy from Yards Creek
Pumped Storage Facility (Yards Creek) remaining to meet customer needs (see
Generation Asset Divestiture for a discussion of the pending sale of Oyster
Creek) and an additional 704 MW of nuclear, combustion turbine and hydroelectric
generation, the sales of which are pending. The GPU Energy
20
<PAGE>
companies also have contracts with NUG facilities totaling 1,606 MW and JCP&L
has agreements with other utilities to provide for up to 584 MW (reduced to 400
MW on January 1, 2000) of capacity and related energy. The GPU Energy companies
have agreed to purchase all of the capacity and energy from TMI-1 through
December 31, 2001 and from Oyster Creek (following its sale) through March 31,
2003. In addition, the GPU Energy companies have the right to call the capacity
of the Homer City station (942 MW) through May 31, 2001 and the capacity of the
generating stations sold to Sithe Energies (Sithe)(4,117 MW) through May 31,
2002. The GPU Energy companies' remaining capacity and energy needs will be met
by short- to intermediate-term commitments (one month to three years) during
times of expected high energy price volatility and reliance on spot market
purchases during other periods.
Provider of Last Resort
- -----------------------
Under the PaPUC Restructuring Orders, Met-Ed and Penelec customers have
been permitted to shop for their generation supplier since January 1, 1999. A
PaPUC approved competitive bid process was 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 1999, Met-Ed and
Penelec issued requests for bids to provide competitive bidding for default
energy supply service for 20% of their customers, beginning in June 2000, as
required by the PaPUC. In February 2000, GPU Energy announced that no bids were
received in response to its offer and, as a result, it would be increasing its
forward purchasing of electric power to accommodate the 20% of customers for
whom it will now continue to be the default supplier. GPU estimates that these
additional energy purchases will reduce its 2000 earnings per share by $0.04 to
$0.08, but expects to mitigate this impact through additional common stock
repurchases. GPU Energy is also developing a comprehensive solution for default
energy supply service in Pennsylvania, which it plans to submit to the PaPUC.
Management's best estimates for PLR load are based upon regional economic
data, normal weather (20 year average), forecasts of retail customer shopping,
and implementation of CDS. As of December 31, 1999 a hypothetical 10% increase
in the cost of energy not already under contract to serve the estimated PLR load
would result in an estimated $9 million decrease in pre-tax earnings during
2000.
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. The responsibility for BGS thereafter
will be bid out. JCP&L's BGS rates are pre-determined for the period through
July 31, 2003. Bidders will bid for the right to provide BGS during the year
commencing August 1, 2002 at the pre-established BGS rates. 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
- -----------------------------
The GPU Energy companies manage the risks associated with the purchases
and sales of electric energy and natural gas which result from its obligation
21
<PAGE>
to provide electricity as PLR service in Pennsylvania and BGS in New Jersey.
This also involves managing the purchase and sale of installed capacity and
ancillary services to minimize business risk associated with its reliability
obligation in the PJM Interconnection, LLC (PJM).
The focus for the Pennsylvania operating companies is to avoid large
earnings volatility due to fixed price sales to Pennsylvania customers, while
cost stability for New Jersey customers is the goal for JCP&L to minimize
deferred balances for BGS. The GPU Energy companies will transact in
supply/hedging market instruments for hedging purposes only. Supply/risk
management transactions will be made based on the objective of decreasing both
price and volume uncertainty.
Market Risk - Electricity
- -------------------------
The GPU Energy companies electricity supply profile generally reflects a
shortage of economic on-peak electricity, resulting in a net short position
(load in excess of supply). Consequently, 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 NYMEX PJM electricity
futures and similar instruments as they become widely available. This portfolio
includes transactions of various durations ranging from one hour to greater than
one year.
The GPU Energy companies' electricity market risks can be price-related,
volume-related, or cost-related as follows:
- - Price-related risk refers to the price exposure associated with having to
purchase amounts of electricity, installed capacity, and ancillary
services for load requirements from the PJM interchange spot market. To
the extent the GPU Energy companies must rely on the PJM pool to satisfy
load requirements, financial exposure exists for the difference between
the PJM energy and installed capacity spot market prices and the rates
paid by customers.
- - Volume-related risk refers to the uncertainty associated with the amount
of load the GPU Energy companies are required to serve. Deregulation of
the electric utility industry has resulted in the ability of their
customers to purchase energy from other electric suppliers. This customer
shopping, combined with deviations in weather, which affects customer
energy usage, can affect the GPU Energy companies' position.
- - Cost recovery-related risk refers to the financial risk associated with
the potential prudency audits of the NJBPU that are part of JCP&L's
deferred energy clause. Cost recovery-related risk also refers to the
prudency risk associated with future NUG cost recovery under the
restructuring orders approved by the PaPUC and the NJBPU which require
continued mitigation of above market NUG costs.
Market Risk - Natural Gas
- -------------------------
As part of its 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. Under this obligation, the GPU
22
<PAGE>
Energy companies must manage both natural gas volume and price risk in a manner
that will satisfy potential prudency audits of the NJBPU. Prudently incurred
costs associated with natural gas commodity and transportation for these NUGs
are included in JCP&L's deferred energy clause.
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
deferred energy clause.
Generation Asset Divestiture
- ----------------------------
As discussed below, in 1999, the GPU Energy companies completed the sales
of TMI-1 and substantially all their fossil-fuel and hydroelectric generating
stations.
Penelec sold its 50% interest in Homer City to a subsidiary of Edison
Mission Energy for approximately $900 million. In addition, Penelec's 20%
undivided ownership interest in the Seneca Pumped Storage Facility was sold to
Cleveland Electric Illuminating Company for $43 million.
The GPU Energy companies completed the sales of substantially all their
remaining fossil fuel and hydroelectric generating facilities to Sithe for
approximately $1.6 billion (JCP&L's 50% interest in Yards Creek is not included
in the sale and the sales of the 66 MW Forked River combustion turbines and 19
MW York Haven hydroelectric station were postponed). The GPU Energy companies
have agreed to assume up to $20 million of employee severance costs for
employees not hired by Sithe. The net proceeds from the sales will be used to
fund future stranded costs, invest in the reliability of the GPU Energy
companies' T&D network, reduce outstanding debt, and repurchase GPU, Inc. common
stock. For additional information, see Note 6, Accounting for Extraordinary and
Non-recurring items.
These sales have resulted in an after-tax gain of $37.2 million, or $0.30
per share, during 1999 for the portion of the gains related to wholesale
operations and the deferral as a regulatory liability of the remaining gain of
$1.3 billion pending Phase II of the Pennsylvania restructuring proceeding and a
separate review by the NJBPU.
The GPU Energy companies sold TMI-1 to AmerGen Energy Company, LLC
(AmerGen), a joint venture of PECO Energy and British Energy, for a total
purchase price of approximately $100 million. AmerGen will pay approximately $77
million of the purchase price which is allocable to nuclear fuel, in five annual
installments, beginning in December 2000, and is obligated to make certain
contingent payments to the GPU Energy companies of up to $80 million,
23
<PAGE>
depending on the level of energy prices through 2010. The GPU Energy companies
have transferred $320 million to AmerGen for decommissioning, and AmerGen has
assumed all liability and obligation for decommissioning TMI-1. This sale did
not have a significant impact on 1999 earnings (a loss of $1.1 million, or $0.01
per share, was recorded related to wholesale operations) since TMI-1 had been
written down to its fair market value in 1998. The majority of the amount
written down and the majority of the remaining loss from the sale resulted in
the deferral of $528.3 million as a regulatory asset and a charge to 1998 income
of $10 million.
In October 1999, JCP&L agreed to sell Oyster Creek to AmerGen for $10
million. As part of the terms of the transaction, AmerGen will assume full
responsibility for decommissioning the plant. JCP&L will transfer at closing
$430 million of decommissioning trust funds as well as funds for the station's
outage cost, including the fuel reload for the next refueling outage scheduled
for the Fall of 2000. AmerGen will repay these outage costs (estimated at $88
million) to JCP&L in nine equal annual installments without interest, beginning
one year after the closing. The sale is subject to various conditions including
the receipt of satisfactory federal and state regulatory approvals and favorable
rulings by the Internal Revenue Service.
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. JCP&L is awaiting a
more detailed order from the NJBPU. This Summary Order provides for, among other
things, the following:
- customer choice of electric generation supplier for all consumers
beginning August 1, 1999 with utilities accepting
customer selection of suppliers in October 1999;
- a 5% rate reduction commencing August 1, 1999; additional reductions
of 1% in 2000 and 2% in 2001; and an additional net 3% reduction in
2002 inclusive of a 5% rate refund from rates in effect as of April
30, 1997, partially offset by a 2% increase in the Market Transition
Charge (MTC). The total rate reduction of 11% will remain in effect
through July 2003;
- the removal from regulation of the costs associated with providing
electric generation service. JCP&L must provide BGS through July 31,
2002 to retail customers who do not choose an alternative generation
supplier, after which BGS will be bid out;
- the average shopping credits will range from 5.14 cents per KWH in
1999 to 5.40 cents in 2003;
- an average distribution rate of 3.35 cents per KWH;
- the ability to recover stranded costs;
- the ability to securitize approximately $400 million of stranded
costs associated with Oyster Creek (see below for additional
information);
24
<PAGE>
- effective August 1, 1999, JCP&L is no longer subject to an earnings
cap;
- the establishment of a non-bypassable societal benefits charge to
recover costs associated with nuclear plant decommissioning,
demand-side management, manufactured gas plant remediation, universal
service fund and consumer education; and
- the NJBPU will conduct an annual review and assessment of the
reasonableness and prudency of costs incurred by JCP&L in the
procurement of energy and capacity needed to serve BGS load as well
as of NUG and utility power purchase agreement stranded costs.
In addition, JCP&L will implement a non-bypassable MTC through which JCP&L will
collect:
- above-market costs associated with long-term NUG and utility power
purchase agreements;
- any under-recovered deferred costs as of August 1, 1999 resulting
from JCP&L's previous levelized energy adjustment clause;
- early retirement and severance-related costs of $130 million over 11
years should Oyster Creek be retired from service in 2000; and
- the amortization of Oyster Creek sunk costs, pending securitization.
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. 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 the
up-front decommissioning and outage payments included in the Oyster Creek sale
agreement.
Pennsylvania Restructuring
In 1996, Pennsylvania adopted comprehensive legislation (Customer Choice
Act) which provides for the restructuring of the electric utility industry. In
October 1998, the PaPUC issued amended Restructuring Orders, approving
Settlement Agreements entered into by Met-Ed and Penelec. An appeal by one
intervenor in the restructuring proceedings is pending before the Pennsylvania
Supreme Court. There can be no assurance as to the outcome of this appeal.
The results of Met-Ed and Penelec's sale of their generating facilities
(see Generation Asset Divestiture section) will be addressed in Phase II of the
Pennsylvania restructuring proceeding, which is expected to begin in early 2000.
In 1999, Penelec deposited a portion of the proceeds from its generation asset
sale into a NUG Trust, which has a balance at December 31, 1999 of $266.7
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. There can be no assurance as to the outcome of these matters.
25
<PAGE>
Federal Regulation
In November 1997, the Federal Energy Regulatory Commission (FERC) issued
an order to the PJM Power Pool which, among other things, directed the GPU
Energy companies to implement a single-system transmission rate, effective April
1, 1998. The implementation of the single-system rate has not affected total
transmission revenues; however, it has increased the pricing for transmission
service in Met-Ed and Penelec's service territories and reduced the pricing for
transmission service in JCP&L's service territory.
The GPU Energy companies have requested the FERC to reconsider its ruling
requiring a single-system transmission rate. The Restructuring Orders for Met-Ed
and Penelec provide for a transmission and distribution rate cap exception to
recover the increase in the transmission rate from Met-Ed and Penelec's retail
customers in the event the FERC denies the request for reconsideration of the
single-system transmission rate. The FERC's ruling may also have an effect on
JCP&L's distribution rates. There can be no assurance as to the outcome of this
matter.
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).
In April 1999, the Clinton administration introduced the Comprehensive
Electricity Competition Act, which proposes a flexible mandate for customer
choice by January 1, 2003, reliability standards, environmental provisions, and
the repeal of both PURPA and PUHCA. The flexible mandate allows states to opt
out of the mandate if they believe consumers would be better served by an
alternative policy.
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 which agreements have
remaining terms of up to 21 years. As of December 31, 1999, facilities covered
by these agreements having 1,606 MW of capacity were in service.
The NJBPU Summary Order and PaPUC Restructuring Orders provide the GPU
Energy companies assurance of full recovery of their NUG costs (including
above-market NUG costs and certain buyout costs). Accordingly, the GPU Energy
companies have recorded a liability of $3.2 billion on the Consolidated Balance
Sheets for above-market NUG costs which is fully offset by Regulatory assets,
net. In addition, JCP&L recorded a liability of $64 million for above-market
utility power purchase agreements with a corresponding offset to Regulatory
assets, net, since there is assurance of full recovery. The GPU Energy companies
are continuing efforts to reduce the above-market costs of these agreements and
will, where beneficial, attempt to renegotiate the prices of the agreements,
offer contract buyouts and attempt to convert must-run agreements to
dispatchable agreements. There can be no assurance as to the extent to which
these efforts will be successful. For additional information, see the
Competition and the Changing Regulatory Environment section of Note 12 of the
Notes to Consolidated Financial Statements.
26
<PAGE>
In 1998, Met-Ed entered into a buyout agreement with Solar Turbines, Inc.
(Solar), contingent upon Met-Ed obtaining a final and non-appealable PaPUC order
allowing for full recovery of the buyout payment through retail rates. In
October 1999, Met-Ed paid Solar $51.3 million under an amended agreement which
obligates Solar to refund to Met-Ed these amounts if the PaPUC rescinds its
current approval of the buyout which was received as part of Met-Ed's
Restructuring Order.
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.
GPU records environmental liabilities (on an undiscounted basis) where it
is probable that a loss has been incurred and the amount of the loss can be
reasonably estimated, and adjusts these liabilities as required to reflect
changes in circumstances. At December 31, 1999, the GPU Energy companies have
liabilities recorded on their balance sheets for environmental remediation
totaling $66 million.
For more information, see the Environmental Matters section of Note 12 of
the Notes to Consolidated Financial Statements.
LEGAL MATTERS - TMI-2 ACCIDENT CLAIMS
-------------------------------------
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.
In 1996, the District Court granted a motion for summary judgment filed
by GPU, Inc. and the GPU Energy companies, and dismissed the ten initial "test
cases," which had been selected for a test case trial as well as all of the
remaining 2,100 pending claims. The Court ruled that there was no evidence which
created a genuine issue of material fact warranting submission of plaintiffs'
claims to a jury. The plaintiffs appealed the District Court's ruling to the
Court of Appeals for the Third Circuit. On November 2, 1999, the Third Circuit
affirmed the District Court's dismissal of the ten "test cases," but set aside
the dismissal of the additional pending claims, remanding them to the District
Court for further proceedings. In remanding these claims, the Third Circuit held
that the District Court had erred in extending its summary judgment decision to
the other plaintiffs and imposing on these plaintiffs the District Court's
finding that radiation exposures below 10 rems were too speculative to establish
a causal link to cancer. The Court of Appeals stated that the non-test case
plaintiffs should be permitted
27
<PAGE>
to present their own individual evidence that exposure to radiation from the
accident caused their cancers.
GPU, Inc. and the GPU Energy companies believe that the Third Circuit has
misinterpreted the record before the District Court, as it applies to the
non-test case plaintiffs and on November 16, 1999, filed petitions seeking a
rehearing and reconsideration of the Court's decision regarding these remaining
claims. The "test case" plaintiffs also requested a rehearing of the Court's
decision upholding the dismissal of their claims. In January 2000, the Court of
Appeals denied both petitions. The "test case" plaintiffs have stated that they
intend to seek Supreme Court review of the District Court's decision. There can
be no assurance as to the outcome of this litigation.
GPU, Inc. and the GPU Energy companies believe that any liability to
which they might be subject by reason of the TMI-2 accident will not exceed
their financial protection under the Price-Anderson Act.
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.
In accordance with the Statement of Financial Accounting Standards No.
121 (FAS 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," impairment tests performed by the GPU
Energy companies on the net book values of their remaining generation facilities
determined that the net investment in Oyster Creek was impaired. As of December
31, 1999, this resulted in a write-down of $678 million to reflect Oyster
Creek's fair market value. The total impairment amount of Oyster Creek has been
reestablished as a regulatory asset since the Summary Order provides for its
recovery in the restructuring process.
28
<PAGE>
Statement of Financial Accounting Standards No. 133 (FAS 133), "Accounting
for Derivative Instruments and Hedging Activities," establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. FAS 133
requires that companies recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
GPU will be required to include its derivative transactions on its balance sheet
at fair value, and recognize the subsequent changes in fair value as either
gains or losses in earnings or report them as a component of other comprehensive
income, depending upon the intended use and designation of the derivative as a
hedge. FAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. GPU will adopt FAS 133 in the first quarter of 2001 and is
in the process of evaluating the impact of the implementation of this statement.
GPU's use of derivative instruments is intended to manage the risk of interest
rate, foreign currency and commodity price fluctuations and may include such
transactions as electricity and natural gas forward and futures contracts,
foreign currency swaps, interest rate swaps and options. GPU does not intend to
hold or issue derivative instruments for trading purposes.
29
<PAGE>
STATEMENT OF MANAGEMENT
The management of GPU, Inc. (GPU or the Company) is responsible for the
information and representations contained in the consolidated financial
statements and other sections of this annual report. The consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles. In preparing the consolidated financial statements, management makes
informed judgments and estimates of the expected effects of events and
transactions that are currently being reported.
To fulfill its responsibilities for the reliability of the consolidated
financial statements, management has established and maintains a system of
internal control. This system provides for appropriate division of
responsibilities and written policies and procedures. These policies and
procedures, which include a Code of Business Conduct Policy to foster a strong
ethical climate, are updated as necessary and communicated to employees
throughout the GPU companies as deemed appropriate. Management continually
monitors the system of internal control for compliance.
GPU maintains an internal auditing program that independently assesses the
effectiveness of the internal control system and reports findings and recommends
possible improvements to management and the Audit Committee of the Board of
Directors. In addition, as part of its audit of GPU's consolidated financial
statements, PricewaterhouseCoopers LLP, the Company's independent accountants,
considers the internal control structure in determining the nature, timing, and
extent of audit procedures to be applied. Management has considered the internal
auditors' and PricewaterhouseCoopers' recommendations concerning the system of
internal control and has taken actions that it believed to be cost-effective in
the circumstances to respond appropriately to these recommendations. While there
are inherent limitations in the effectiveness of any system of internal control,
management believes that, as of December 31, 1999, the Company's system of
internal control provides reasonable assurance as to the integrity and
reliability of the consolidated financial statements, the protection of assets
from unauthorized use or disposition and the prevention and detection of
fraudulent financial reporting.
The Audit Committee, which consists solely of outside directors of the
Company, assists the Board of Directors in fulfilling the Board's fiduciary
responsibilities to the extent that such responsibilities relate to the
accounting policies, procedures and controls, auditing and the quality and
integrity of the financial reporting of GPU and its subsidiaries. The Audit
Committee meets with management and internal auditors at least four times a year
to review the discharge by each of their responsibilities. For a portion of each
meeting, the Audit Committee meets individually with the independent accountants
and with the internal auditors, without management present, to discuss internal
control, auditing and financial reporting matters.
/s/ Fred D. Hafer
-----------------
Fred D. Hafer
Chief Executive Officer
/s/ Bruce L. Levy /s/ Peter E. Maricondo
- ------------------------- -----------------------
Bruce L. Levy Peter E. Maricondo
Chief Financial Officer Chief Accounting Officer
30
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of GPU, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, comprehensive income, retained
earnings and cash flows present fairly, in all material respects, the financial
position of GPU, Inc. and Subsidiary Companies at December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 10, 2000
31
<PAGE>
<TABLE>
GPU, Inc. and Subsidiary Companies
CONSOLIDATED BALANCE SHEETS
<CAPTION>
(in thousands)
December 31, 1999 1998
- -------------------------------------------------------------------------------
ASSETS
Utility Plant:
<S> <C> <C>
Transmission, distribution and general plant $11,240,218 $ 7,579,455
Generation plant 526,228 3,445,984
---------- ----------
Utility plant in service (Notes 6 & 7) 11,766,446 11,025,439
Accumulated depreciation (3,929,963) (4,460,341)
---------- ----------
Net utility plant in service (Note 1) 7,836,483 6,565,098
Construction work in progress 170,317 94,005
Other, net 18,128 145,792
---------- ----------
Net utility plant 8,024,928 6,804,895
---------- ----------
Other Property and Investments:
Equity investments 85,756 658,974
Goodwill, net (Note 1) 2,615,301 545,262
Nuclear decommissioning trusts, at market (Note 12) 636,284 716,274
Nuclear fuel disposal trust, at market 119,293 116,871
Other, net 837,415 262,562
---------- ----------
Total other property and investments 4,294,049 2,299,943
---------- ----------
Current Assets:
Cash and temporary cash investments 471,548 72,755
Special deposits 42,687 62,673
Accounts receivable:
Customers, net 445,745 286,278
Other 238,840 126,088
Unbilled revenues (Note 1) 152,263 144,076
Materials and supplies, at average cost or less:
Construction and maintenance 100,807 155,827
Fuel 208 42,697
Investments held for sale 26,946 48,473
Deferred income taxes (Note 8) 72,249 47,521
Prepayments 161,602 76,021
---------- ----------
Total current assets 1,712,895 1,062,409
---------- ----------
Deferred Debits and Other Assets:
Regulatory assets, net (Notes 1 & 12) 4,712,654 3,940,829
Deferred income taxes (Note 8) 2,528,393 2,004,278
Other 445,163 175,755
---------- ----------
Total deferred debits and other assets 7,686,210 6,120,862
---------- ----------
Total Assets $21,718,082 $16,288,109
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
32
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
(in thousands)
December 31, 1999 1998
- -------------------------------------------------------------------------------
LIABILITIES AND CAPITALIZATION
Capitalization:
<S> <C> <C>
Common stock $ 331,958 $ 331,958
Capital surplus 1,011,721 1,011,310
Retained earnings 2,426,350 2,230,425
Accumulated other comprehensive income/(loss) (6,341) (31,304)
---------- ---------
Total 3,763,688 3,542,389
Reacquired common stock, at cost (298,735) (77,741)
---------- ----------
Total common stockholders' equity (Note 5) 3,464,953 3,464,648
Cumulative preferred stock: (Note 4)
With mandatory redemption 73,167 86,500
Without mandatory redemption 12,649 66,478
Subsidiary-obligated mandatorily redeemable
preferred securities (Note 4) 125,000 330,000
Trust preferred securities (Note 4) 200,000 -
Long-term debt (Note 3) 5,850,596 3,825,584
---------- ----------
Total capitalization 9,726,365 7,773,210
---------- ----------
Current Liabilities:
Securities due within one year (Notes 3 & 4) 581,147 563,683
Notes payable (Note 2) 1,171,869 368,607
Bank overdraft (Note 1) 224,585 -
Obligations under capital leases (Note 11) 48,165 126,480
Accounts payable 489,075 394,815
Taxes accrued 309,509 92,339
Interest accrued 76,246 81,931
Deferred credits (Note 1) - 2,411
Other 732,110 377,594
---------- ----------
Total current liabilities 3,632,706 2,007,860
---------- ----------
Deferred Credits and Other Liabilities:
Deferred income taxes (Note 8) 3,563,078 3,044,947
Unamortized investment tax credits 61,364 114,308
Three Mile Island Unit 2 future costs (Note 12) 496,944 483,515
Power purchase contract loss liability (Note 12) 3,300,878 1,803,820
Other 936,747 1,060,449
---------- ---------
Total deferred credits and other liabilities 8,359,011 6,507,039
---------- ---------
Commitments and Contingencies (Note 12)
Total Liabilities and Capitalization $21,718,082 16,288,109
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
33
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
(in thousands, except per share data)
For The Years Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues (Note 1) $4,757,124 $4,248,792 $4,143,379
--------- --------- ---------
Operating Expenses:
Fuel 304,621 407,105 400,329
Power purchased and interchanged 1,253,228 1,122,841 1,046,906
Deferred costs, net (Note 1) (38,108) (25,542) 6,043
Other operation and maintenance (Note 9) 1,495,402 1,106,913 993,739
Depreciation and amortization (Note 1) 542,939 522,094 467,714
Taxes, other than income taxes (Note 9) 190,212 219,302 357,913
--------- --------- ---------
Total operating expenses 3,748,294 3,352,713 3,272,644
--------- --------- ---------
Operating Income 1,008,830 896,079 870,735
--------- --------- ---------
Other Income and Deductions:
Allowance for other funds used during construction 432 916 75
Equity in undistributed earnings of affiliates, net 89,746 72,012 (27,100)
Other income, net 85,616 48,366 5,585
--------- --------- ---------
Total other income and deductions 175,794 121,294 (21,440)
--------- --------- ---------
Income Before Interest Charges
and Preferred Dividends 1,184,624 1,017,373 849,295
--------- --------- ---------
Interest Charges and Preferred Dividends:
Long-term debt and notes payable 432,368 345,172 275,296
Trust preferred securities 8,345 - -
Subsidiary-obligated mandatorily
redeemable preferred securities 24,627 28,888 28,888
Other interest 10,048 8,277 8,121
Allowance for borrowed funds used
during construction (3,897) (4,348) (5,508)
Preferred stock dividends of subsidiaries,
inclusive of $2,116 loss on reacquisitions in 1999 11,006 11,243 12,524
--------- --------- ---------
Total interest charges and preferred dividends 482,497 389,232 319,321
--------- --------- ---------
Income Before Income Taxes and Minority Interest 702,127 628,141 529,974
Income taxes (Note 8) 239,623 240,089 193,536
Minority interest net income 3,490 2,171 1,337
--------- --------- ---------
Income Before Extraordinary Item 459,014 385,881 335,101
Extraordinary item, net of income tax
benefit of $16,300 (Note 6) - (25,755) -
--------- --------- ---------
Net Income $ 459,014 $ 360,126 $ 335,101
========= ========= =========
Basic - Earnings Per Average Common Share
Before Extraordinary Item $ 3.66 $ 3.03 $ 2.78
Extraordinary Item - (0.20) -
--------- --------- ---------
Earnings Per Average Common Share $ 3.66 $ 2.83 $ 2.78
========= ========= =========
Average Common Shares Outstanding 125,368 127,093 120,722
========= ========= =========
Diluted - Earnings Per Average Common Share
Before Extraordinary Item $ 3.66 $ 3.03 $ 2.77
Extraordinary Item - (0.20) -
--------- --------- ---------
Earnings Per Average Common Share $ 3.66 $ 2.83 $ 2.77
========= ========= =========
Average Common Shares Outstanding 125,570 127,312 121,002
========= ========= =========
Cash Dividends Paid Per Share $ 2.105 $ 2.045 $ 1.985
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
34
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<CAPTION>
(in thousands)
For The Years Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $459,014 $360,126 $335,101
------- ------- -------
Other comprehensive income/(loss), net of tax: (Note 5)
Net unrealized gain on investments 5,838 8,987 6,374
Foreign currency translation 13,859 (9,461) (48,929)
Minimum pension liability 5,266 (1,534) (1,495)
------- ------- -------
Total other comprehensive income/(loss) 24,963 (2,008) (44,050)
------- ------- -------
Comprehensive income $483,977 $358,118 $291,051
======= ======= =======
</TABLE>
GPU, Inc. and Subsidiary Companies
<TABLE>
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
<CAPTION>
(in thousands)
For The Years Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $2,230,425 $2,140,712 $2,054,222
Net income 459,014 360,126 335,101
Cash dividends declared on common stock (263,089) (263,561) (241,517)
Other adjustments, net - (6,852) (7,094)
--------- --------- ---------
Balance at end of year $2,426,350 $2,230,425 $2,140,712
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
35
<PAGE>
GPU, Inc. and Subsidiary Companies
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
(in thousands)
For The Years Ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net income $ 459,014 $ 360,126 $ 335,101
Extraordinary item (net of income tax
benefit of $16,300) - 25,755 -
--------- --------- ---------
Income before extraordinary item 459,014 385,881 335,101
Adjustments to reconcile income to cash provided:
Depreciation and amortization 568,832 552,795 487,962
Amortization of property under capital leases 47,584 49,913 50,108
NJBPU/PaPUC restructuring rate orders 115,000 68,500 -
Gain on sale of investments, net (64,019) (43,548) -
Equity in undistributed (earnings)/losses of
affiliates, net of distributions received (62,170) (44,621) 69,862
Deferred income taxes and investment tax
credits, net (717,768) (165,860) (29,248)
Deferred costs, net (37,841) (24,482) 8,193
Changes in working capital:
Receivables (84,282) 91,285 (76,178)
Materials and supplies 81,297 704 4,803
Special deposits and prepayments 42,247 (18,514) 28,371
Payables and accrued liabilities (22,972) (18,645) 49,025
Nonutility generation contract buyout costs (94,034) (54,018) (56,550)
Other, net (79,636) 13,476 (27,186)
--------- --------- ---------
Net cash provided by operating activities 151,252 792,866 844,263
--------- --------- ---------
Investing Activities:
Acquisitions, net of cash acquired (1,670,739) - (1,798,338)
Capital expenditures and investments (460,952) (468,223) (470,299)
Proceeds from sale of investments 2,581,151 160,244 -
Contributions to nonutility generation trusts (266,701) - -
Contributions to decommissioning trusts (168,657) (51,039) (40,283)
Other, net 61,560 (37,876) 34,500
--------- --------- ---------
Net cash provided/(required)
by investing activities 75,662 (396,894) (2,274,420)
--------- --------- ---------
Financing Activities:
Issuance of long-term debt 1,787,094 749,724 1,893,219
Retirement of long-term debt (1,883,850) (1,036,110) (184,015)
Increase/(Decrease) in notes payable, net 882,352 (62,292) 87,667
Issuance of trust preferred securities 193,070 - -
Redemption of subsidiary-obligated mandatorily
redeemable preferred securities (205,383) - -
Redemption of preferred stock of subsidiaries (60,944) (15,000) (20,000)
Capital lease principal payments (51,040) (50,663) (49,560)
Issuance of common stock - 269,448 -
Reacquisition of common stock (225,821) - -
Dividends paid on common stock (264,448) (258,058) (239,597)
--------- --------- ---------
Net cash provided/(required)
by financing activities 171,030 (402,951) 1,487,714
--------- --------- ---------
Effect of exchange rate changes on cash 849 (5,365) (4,062)
--------- --------- ---------
Net increase/(decrease) in cash and temporary cash
investments from above activities 398,793 (12,344) 53,495
Cash and temporary cash investments, beginning of year 72,755 85,099 31,604
--------- --------- ---------
Cash and temporary cash investments, end of year $ 471,548 $ 72,755 $ 85,099
========= ========= =========
Supplemental Disclosure:
Interest and preferred dividends paid $ 459,496 $ 370,303 $ 307,064
========= ========= =========
Income taxes paid $ 702,355 $ 333,994 $ 229,373
========= ========= =========
New capital lease obligations incurred $ 37,662 $ 37,793 $ 41,898
========= ========= =========
Common stock dividends declared but not paid $ 64,557 $ 65,917 $ 60,414
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
36
<PAGE>
GPU, Inc. and Subsidiary Companies
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GPU, Inc. owns all the outstanding common stock of three domestic
electric utilities -- Jersey Central Power & Light Company (JCP&L), Metropolitan
Edison Company (Met-Ed) and Pennsylvania Electric Company (Penelec). The
customer service function, transmission and distribution operations and the
operations of the remaining non-nuclear generating facilities of these electric
utilities are conducting business under the name GPU Energy. JCP&L, Met-Ed and
Penelec considered together are referred to as the "GPU Energy companies." The
nuclear generation operations of GPU Energy are conducted by GPU Nuclear, Inc.
(GPUN). GPU Capital, Inc. and GPU Electric, Inc. and their subsidiaries own,
operate and fund the acquisition of electric and gas transmission and
distribution systems in foreign countries, and are referred to as "GPU
Electric." GPU International, Inc. and GPU Power, Inc. and their subsidiaries
develop, own and operate generation facilities in the United States and foreign
countries and are referred to as the "GPUI Group." Other subsidiaries of GPU,
Inc. include GPU Advanced Resources, Inc. (GPU AR), which is involved in retail
energy sales; GPU Telcom Services, Inc. (GPU Telcom), which is engaged in
telecommunications-related businesses; and GPU Service, Inc. (GPUS), which
provides legal, accounting, financial and other services to the GPU companies.
All of these companies considered together are referred to as "GPU."
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenues and expenses during the reporting period. Actual
results could differ from those estimates.
SYSTEM OF ACCOUNTS
------------------
Certain reclassifications of prior years' data have been made to conform
with the current presentation. The GPU Energy companies' accounting records are
maintained in accordance with the Uniform System of Accounts prescribed by the
Federal Energy Regulatory Commission (FERC) and adopted by the Pennsylvania
Public Utility Commission (PaPUC) and the New Jersey Board of Public Utilities
(NJBPU). GPU's accounting records also comply with the Securities and Exchange
Commission's (SEC) rules and regulations.
CONSOLIDATION
-------------
The GPU consolidated financial statements include the accounts of its
wholly-owned subsidiaries and any affiliates in which it has a controlling
financial interest (generally evidenced by a greater than 50% ownership
interest). All significant intercompany transactions and accounts are eliminated
in consolidation. GPU also uses the equity method of accounting for investments
in affiliates in which it has the ability to exercise significant influence.
37
<PAGE>
Effective in the third quarter of 1999, GPU began accounting for its
Midlands Electricity plc (Midlands) investment as a consolidated entity due to
GPU's purchase from Cinergy Corp. (Cinergy) of the remaining 50% ownership
interest in Midlands which GPU did not own. As a result of this change, GPU's
remaining equity investments are no longer presented in the Notes to
Consolidated Financial Statements since these investments as of December 31,
1999 are considered immaterial to GPU's results of operations and financial
condition.
REGULATORY ACCOUNTING
---------------------
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. The GPU Energy companies' transmission and
distribution operations are currently accounted for under the provisions of FAS
71. In accordance with FAS 71, GPU has deferred certain costs pursuant to
actions of the NJBPU and PaPUC and is recovering or expects to recover such
costs in regulated rates charged to customers. Regulatory assets and liabilities
are reflected net in the Deferred Debits and Other Assets section of the
Consolidated Balance Sheets. For additional information about regulatory assets
and liabilities, see Note 12, Commitments and Contingencies.
With the receipt of the NJBPU Summary Restructuring Order (Summary
Order) in 1999 and the PaPUC Restructuring Orders (Restructuring Orders) in
1998, GPU determined that the GPU Energy companies' electric generation
operations no longer met the criteria for the continued application of FAS 71,
and therefore adopted, for that portion of its business, the provisions of
Statement of Financial Accounting Standards No. 101 (FAS 101), "Regulated
Enterprises - Accounting for the Discontinuation of Application of FASB
Statement No. 71" and Emerging Issues Task Force Issue 97-4 (EITF)(Issue 97-4),
Deregulation of the Pricing of Electricity - Issues Related to the Application
of FASB Statement No. 71 "Accounting for the Effects of Certain Types of
Regulation" and No. 101 "Regulated Enterprises - Accounting for the
Discontinuation of Application of FASB Statement No. 71."
CURRENCY TRANSLATION
--------------------
In accordance with Statement of Financial Accounting Standards No. 52
(FAS 52), "Foreign Currency Translation," balance sheet accounts of foreign
operations are translated from foreign currencies into US dollars at year-end
rates, while income statement accounts are translated at the average month-end
exchange rates for the relevant period. The resulting translation adjustments
are included in Accumulated other comprehensive income/(loss), net of deferred
taxes, on the Consolidated Balance Sheets. Gains and losses resulting from
foreign currency transactions are included in Net Income.
38
<PAGE>
REVENUES
--------
GPU recognizes operating revenues for services rendered to the end of
the relevant accounting period. GPU Electric and the GPU Energy companies'
electric operating revenues also include an estimate for unbilled revenues.
DEFERRED COSTS
--------------
JCP&L recovers its prudently incurred generation-related costs through a
Market Transition Charge (MTC) and Basic Generation Service (BGS) charge, and
defers any differences between actual costs and amounts recovered from customers
through rates. Met-Ed and Penelec use deferred accounting for the above-market
portion of nonutility generation (NUG) costs which are collected through the
Competitive Transition Charge (CTC).
UTILITY PLANT
-------------
At December 31, 1999 and 1998, the GPU Energy companies' generation
plants are valued at the lower of cost or market. All other utility plant and
additions are valued at cost. The assets of acquired companies are carried at
their fair value as of the acquisition date, less accumulated depreciation.
DEPRECIATION
------------
GPU generally provides for depreciation at annual rates determined and
revised periodically, on the basis of studies, to be sufficient to depreciate
the original cost of depreciable property over estimated remaining service
lives, which are generally longer than those employed for tax purposes. These
rates, on an aggregate composite basis, resulted in annual rates of 2.96%, 3.43%
and 3.34% for the years 1999, 1998 and 1997, respectively. GPU GasNet uses the
volumetric depreciation method to amortize the cost of its gas pipeline.
AMORTIZATION POLICIES
---------------------
Accounting for TMI-2 and Forked River Investments:
- -------------------------------------------------
At December 31, 1999, $61 million is included in Regulatory assets, net
on the Consolidated Balance Sheets for JCP&L's investment in Three Mile Island
Unit 2 (TMI-2). JCP&L is collecting annual revenues for the amortization of
TMI-2 of $9.6 million. This level of revenue will be sufficient to recover the
remaining investment by 2008. Met-Ed and Penelec have collected all of their
TMI-2 investment attributable to retail customers. At December 31, 1999, $56
million is included in Regulatory assets, net on the Consolidated Balance Sheets
for JCP&L's Forked River project. JCP&L is collecting annual revenues for the
amortization of this project of $11.2 million, which will be sufficient to
recover its remaining investment by 2006. Because JCP&L has not been provided
revenues for a return on the unamortized balances of the damaged TMI-2 facility
and the cancelled Forked River project, these investments are being carried at
their discounted present values.
39
<PAGE>
Nuclear Fuel:
- ------------
The GPU Energy companies amortize nuclear fuel on a unit-of-production
basis. Rates are determined and periodically revised to amortize the cost of the
fuel over its useful life.
At December 31, 1999 and 1998, the liability of the GPU Energy companies
for future contributions to the Federal Decontamination and Decommissioning Fund
for the cleanup of uranium enrichment plants operated by the Federal Government
amounted to $25 million and $28 million, respectively, and was primarily
reflected in Deferred Credits and Other Liabilities-Other. Annual contributions,
which began in 1993, are being made over a 15-year period. JCP&L is recovering
these costs from customers through its BGS and MTC rates while Met-Ed and
Penelec anticipate recovery in Phase II of their restructuring proceedings which
are expected to begin in early 2000.
Goodwill:
- --------
Goodwill, resulting from GPU's purchase of various businesses, is
recorded on the Consolidated Balance Sheets and amortized to expense, on a
straight-line basis, over its useful life not to exceed 40 years. Goodwill
amortization expense amounted to $51.6 million, $14 million and $2.8 million for
the years ended December 31, 1999, 1998 and 1997, respectively. In addition,
GPU's investments accounted for under the equity method or cost method include
goodwill (net of amortization) totaling $21 million and $18.5 million as of
December 31, 1999 and 1998, respectively, which is amortized on a straight-line
basis over 20 years. Amortization expense on this goodwill (which is reflected
on the Consolidated Statements of Income in Other Income and Deductions)
amounted to $1.9 million, $1.6 million and $3.6 million for the years ended
December 31, 1999, 1998 and 1997, respectively. GPU periodically reviews
undiscounted projections of future cash flows from operations to assess whether
any potential intangible impairment exists on its goodwill. For additional
information of goodwill resulting from acquisitions, see Note 7, Acquisitions.
NUCLEAR FUEL DISPOSAL FEE
-------------------------
The GPU Energy companies are providing for estimated future disposal
costs for spent nuclear fuel at the Oyster Creek nuclear generating station
(Oyster Creek) and Three Mile Island Unit 1 (TMI-1) in accordance with the
Nuclear Waste Policy Act of 1982. The GPU Energy companies entered into
contracts in 1983 with the US Department of Energy (DOE) for the disposal of
spent nuclear fuel. The total liability under these contracts, including
interest, at December 31, 1999, all of which relates to spent nuclear fuel from
nuclear generation through April 1983, amounted to $198 million, and is
reflected in Deferred Credits and Other Liabilities - Other. As the actual
liability is substantially in excess of the amount recovered to date from
ratepayers, the GPU Energy companies have reflected such excess in Regulatory
assets, net. The distribution rates presently charged to customers provide for
the collection of these costs, plus interest, over a remaining period of seven
years for JCP&L. Met-Ed and Penelec are recovering these costs through their
respective CTC.
40
<PAGE>
The GPU Energy companies' current rates provide for the recovery of
costs for spent nuclear fuel disposal costs resulting from nuclear generation
subsequent to April 1983. The GPU Energy companies are making quarterly payments
to the DOE based on one mill per kilowatt-hour. These remittances have ceased
for TMI-1 and will cease for Oyster Creek when that facility is sold. For a
discussion of the DOE's current inability to begin acceptance of spent nuclear
fuel from the GPU Energy companies and other standard contract holders, see Note
12, Commitments and Contingencies.
INCOME TAXES
------------
GPU files a consolidated federal income tax return. All participants are
jointly and severally liable for the full amount of any tax, including penalties
and interest, which may be assessed against the group.
Deferred income taxes, which result primarily from purchase accounting
adjustments, liberalized depreciation methods, deferred costs, decommissioning
funds and discounted Forked River and TMI-2 investments, reflect the impact of
temporary differences between the amounts of assets and liabilities recognized
for financial reporting purposes and the amounts recognized for tax purposes.
Investment tax credits (ITC) are amortized over the estimated service lives of
the related facilities.
CARRYING AMOUNTS OF FINANCIAL INSTRUMENTS
-----------------------------------------
The carrying amounts of Temporary cash investments, Special deposits,
Securities due within one year and Notes payable on the Consolidated Balance
Sheets approximate fair value due to the short period to maturity. The carrying
amounts of the Nuclear decommissioning trusts and Nuclear fuel disposal trust,
whose assets are invested in cash equivalents and debt and equity securities,
also approximate fair value.
DERIVATIVE INSTRUMENTS
----------------------
GPU's use of derivative instruments is intended primarily to manage the
risk of interest rate, foreign currency and commodity price fluctuations. GPU
does not intend to hold or issue derivative instruments for trading purposes.
Commodity Derivatives:
- ---------------------
The GPU Energy companies use futures contracts to manage the risk of
fluctuations in the market price of electricity and natural gas. These contracts
qualify for hedge accounting treatment under current accounting rules since
price movements of the commodity derivatives are highly correlated with the
underlying hedged commodities and the transactions are designated as hedges at
inception. Accordingly, under the deferral method of accounting, gains and
losses related to commodity derivatives are recognized in Power purchased and
interchanged in the Consolidated Statements of Income when the hedged
transaction closes or if the commodity derivative is no longer sufficiently
correlated. Prior to income or loss recognition, deferred gains and losses
relating to these transactions are recorded in Current Assets or Current
Liabilities in the Consolidated Balance Sheets.
41
<PAGE>
Interest Rate Swap Agreements:
- -----------------------------
GPU Electric uses interest rate swap agreements to manage the risk of
increases in variable interest rates. At December 31, 1999, these agreements
covered approximately $1.3 billion of debt, including commercial paper, and were
scheduled to expire on various dates through November 2007. Differences between
amounts paid and received under interest rate swaps are recorded as adjustments
to the interest expense of the underlying debt since the swaps are related to
specific assets, liabilities or anticipated transactions. All of the agreements
effectively convert variable rate debt, including commercial paper, to fixed
rate debt. For the year ended December 31, 1999, fixed rate interest expense
incurred in connection with the swap agreements exceeded the variable rate
interest expense that would have been incurred had the swaps not been in place
by approximately $20.7 million.
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. At
December 31, 1999, these currency swap agreements covered (pound)517 million (US
$850 million) of debt. Interest expense would have been (pound)16.6 million (US
$26.9 million) as compared to (pound)18.2 million (US $29.5 million) for the
year ended December 31, 1999 had these agreements not been in place.
Indexed Swap Agreement:
- ----------------------
As part of an amended power purchase agreement with Niagara Mohawk Power
Corporation (NIMO), Onondaga Cogeneration L.P. (Onondaga), a GPU International
subsidiary, entered into a 10-year indexed swap agreement in 1998 which is
intended to provide Onondaga a fixed revenue stream. At December 31, 1999 and
1998, the indexed swap agreement is valued at $55.1 million and $62.4 million,
respectively and is 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.
The indexed swap is being amortized to expense over the life of the swap
agreement. As a result of the anticipated expiration of a related power put
agreement between Onondaga and NIMO, GPU International expects to recognize in
income the unamortized balance of the indexed swap agreement, mostly offset by a
plant impairment, resulting in a slight gain in 2000.
ENVIRONMENTAL LIABILITIES
-------------------------
GPU may be subject to loss contingencies resulting from environmental
laws and regulations, which include obligations to mitigate the effects on the
environment of the disposal or release of certain hazardous wastes and
substances at various sites. GPU records liabilities (on an undiscounted basis)
for hazardous waste sites where it is probable that a loss has been incurred and
the amount of the loss can be reasonably estimated and adjusts these liabilities
as required to reflect changes in circumstances.
42
<PAGE>
STATEMENTS OF CASH FLOWS
------------------------
For the purpose of the consolidated statements of cash flows, temporary
investments include all unrestricted liquid assets, such as cash deposits and
debt securities, with maturities generally of three months or less. Cash flows
are reported using the US dollar equivalent of the functional currencies in
effect at the time of the cash transaction. The effect of exchange rate changes
on cash balances held in foreign currencies are reported as a separate line item
on the Consolidated Statements of Cash Flows.
Avon and Midlands have a formal agreement with a United Kingdom bank,
under which they maintain available cash balances in a number of subsidiary bank
accounts and an overdraft in the main Midlands operating account. The overdraft
balance was $224.6 million as of December 31, 1999, while total cash at Midlands
was $274.6 million. Since Midlands manages the overdraft balance in such a way
that it does not exceed the available cash balances in the other associated
accounts, no interest or fees are paid under this arrangement. In effect,
Midlands uses the overdraft facility to utilize the available cash in the other
bank accounts. The overdraft position and the offsetting cash balances subject
to this arrangement are shown on the Consolidated Balance Sheets in Bank
overdraft and Cash and temporary cash investments, respectively.
2. SHORT-TERM BORROWING ARRANGEMENTS
At December 31, 1999 and 1998, short-term debt outstanding consisted of
$1.2 billion and $369 million, respectively. GPU's weighted average interest
rate on the short-term borrowings was 6.5% and 6.4% at December 31, 1999 and
1998, respectively.
GPU has various credit facilities in place, the most significant of which
are discussed below. These credit facilities generally provide GPU bank loans at
negotiable market rates. In addition, commitment fees or facility fees are
determined by market rates at the time the facility is put in place, and can
change based on the borrower's current bond rating.
GPU, Inc. and GPU Energy companies
GPU, Inc. and the GPU Energy companies have available $450 million of
short-term borrowing facilities, which includes 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. From these sources,
GPU, Inc. has regulatory authority to have $250 million outstanding at any one
time. JCP&L, Met-Ed and Penelec are limited by their charters or SEC
authorization to $265 million, $150 million and $150 million, respectively, of
short-term debt outstanding at any one time. As of December 31, 1999, GPU, Inc.
and the GPU Energy companies had $123.5 million and $53.6 million, respectively,
of short-term debt outstanding.
43
<PAGE>
GPU Electric
GPU Capital has a $1 billion 364-day senior revolving credit agreement
due in December 2000 supporting the issuance of commercial paper for its $1
billion commercial paper program established to fund GPU Electric acquisitions.
GPU, Inc. has guaranteed GPU Capital's obligations under this program. At
December 31, 1999, $768 million was outstanding under the commercial paper
program, of which $370 million is included in long-term debt on the Consolidated
Balance Sheets since it is management's intent to reissue this amount of the
commercial paper on a long-term basis. For additional information, see Note 3
Long-Term Debt.
GPU Australia Holdings, Inc. has $270 million available under its senior
revolving credit facility due in November 2002. This facility, in combination
with other GPU, Inc. credit facilities, serves as credit support for GPU
Australia Holdings' $350 million commercial paper program. GPU, Inc. has
guaranteed GPU Australia Holdings' obligations under this program. At December
31, 1999, $182 million was outstanding under the commercial paper program.
Austran Holdings, Inc. (Austran), a wholly-owned indirect subsidiary of
GPU Electric, has a A$500 million (approximately US $328 million) commercial
paper program to refinance the maturing portion of the senior debt credit
facility used to finance the PowerNet Victoria (GPU PowerNet) acquisition. GPU
PowerNet has guaranteed Austran's obligations under this program. At December
31, 1999, A$420 million (approximately US $275 million) was outstanding under
this program.
Midlands maintains a (pound)200 million (approximately US $323 million)
syndicated revolving credit facility with a bank for working capital purposes,
which matures May 2001. At December 31, 1999, (pound)87 million (approximately
US $140 million) was outstanding under this facility.
GPUI Group
GPU International has a revolving credit agreement providing for
borrowings through December 2000 of up to $30 million outstanding at any one
time, of which up to $15 million may be utilized to provide letters of credit.
GPU, Inc. has guaranteed GPU International's obligations under this agreement.
At December 31, 1999, no borrowings or letters of credit were outstanding under
this facility.
3. LONG-TERM DEBT
At December 31, 1999, long-term debt outstanding consisted of the
following:
44
<PAGE>
(in millions)
Total Due
Interest Debt Within
Maturities Rates Outstanding One Year
---------- ----- ----------- --------
GPU Energy companies & GPUS:
First mortgage bonds 2000-2027 5.35-9.48% $1,783 (1) $ 90
Senior notes 2004-2019 5.75-6.63% 350 -
Other long-term debt 2000-2039 6.76-7.69% 34 -
GPU Electric:
Bank loans 2000-2014 4.16-13% 2,483 475
Bonds 2002-2008 7.38-7.46% 1,092 -
Commercial paper/Medium
term notes 2000-2002 6.3 -7.65% 633 (2) -
GPUI Group 2000-2022 4.5 -7% 46 5
----- -----
Total $6,421 $ 570
===== =====
(1) Amount is less unamortized net discount of $4.6 million.
(2) Amount includes $370 million of commercial paper, which is included in
long-term debt on the Consolidated Balance Sheets since it is
management's intent to reissue this amount on a long-term basis.
For the years 2000, 2001, 2002, 2003 and 2004, GPU has long-term debt
maturities of $570 million, $1.1 billion, $1.2 billion, $260 million and $343
million, respectively. Substantially all of the utility plant owned by the GPU
Energy companies is subject to the liens of their respective mortgages.
The fair value of long-term debt is estimated based on the quoted market
prices for the same or similar issues or on the current rates offered to GPU for
debt of the same remaining maturities and credit qualities. The estimated fair
value of GPU's long-term debt, including amounts due within one year, as of
December 31, 1999 and 1998 is as follows:
(in millions)
Carrying Fair
Amount Value
------ -----
1999 $6,421 $6,312
1998 $4,387 $4,455
At December 31, 1999, GPU Electric had long-term debt outstanding of
approximately $470 million, which was guaranteed by GPU, Inc. The guaranteed
amount consisted of $370 million under the GPU Capital $1 billion commercial
paper program and up to $100 million under the (pound)245 million credit
facility used to partially fund GPU's acquisition of Cinergy's 50% interest in
Midlands.
45
<PAGE>
4. PREFERRED SECURITIES
Cumulative Preferred Stock:
- --------------------------
At December 31, 1999, JCP&L had the following cumulative preferred stock
outstanding:
Stated Value Shares Stated Value
Series per Share Outstanding (in thousands)
- ------ --------- ----------- --------------
With mandatory redemption:
7.52% $100 340,000 $ 34,000
8.65% $100 500,000 50,000
--------- -------
Total 840,000 84,000
=========
Amounts due within one year (10,833)
-------
Total $ 73,167
=======
Without mandatory redemption:
4% $100 125,000 $ 12,500
=========
Premium 149
-------
Total $ 12,649
=======
The fair value of the preferred stock with mandatory redemption,
including amounts due within one year at December 31, 1999 and 1998, was $86.5
million and $94.7 million, respectively. The 7.52% and 8.65% Series are callable
at various prices above their stated values beginning in 2002 and 2000,
respectively. The 7.52% Series is to be redeemed ratably over twenty years,
beginning in 1998. The 8.65% Series is to be redeemed ratably over six years
beginning in 2000. The shares with mandatory redemption have redemption
requirements of $10.8 million for each year of the next five years.
The 4% Series is callable at a price above its stated value. At December
31, 1999, JCP&L could call this series for $13.3 million.
In 1999, Met-Ed and Penelec redeemed all of their outstanding shares of
cumulative preferred stock for $12.5 million and $17.4 million, respectively. As
a result, a reacquisition loss of $1.3 million was charged to income.
During 1999, JCP&L redeemed all of its outstanding shares of 7.88%
cumulative preferred stock with a stated value of $25 million and $5 million
stated value of its 7.52% cumulative preferred stock pursuant to mandatory and
optional sinking fund provisions. As a result, a reacquisition loss of $0.8
million was charged to income. During 1998, JCP&L redeemed $5 million stated
value of its 7.52% cumulative preferred stock and $10 million stated value of
its 8.48% cumulative preferred stock pursuant to mandatory and optional sinking
fund provisions. JCP&L's total redemption cost for 1999 and 1998 was $30.9
million and $15 million, respectively.
Subsidiary-Obligated Mandatorily Redeemable Preferred Securities:
- ----------------------------------------------------------------
JCP&L Capital, L.P., Met-Ed Capital, L.P. and Penelec Capital, L.P. are
special-purpose partnerships in which a subsidiary of
JCP&L, Met-Ed and
46
<PAGE>
Penelec, respectively, is the sole general partner. In 1995, JCP&L
Capital, L.P. issued $125 million at 8.56% (5 million shares at $25 per share)
of mandatorily redeemable preferred securities (MIPS) and in 1994, Met-Ed
Capital, L.P. and Penelec Capital, L.P. issued $100 million at 9% (4 million
shares at $25 per share) and $105 million at 8.75% (4.2 million shares at $25 er
share), respectively, of MIPS. The proceeds were loaned to JCP&L, Met-Ed and
Penelec, respectively, which, in turn, issued their deferrable interest
subordinated debentures to the partnerships. In 1999, Met-Ed and Penelec
redeemed all of their outstanding shares of MIPS for $100 million and $105
million, respectively. At December 31, 1999, JCP&L's outstanding shares of MIPS
had a fair value of $120.6 million.
The MIPS of JCP&L Capital, L.P. mature in 2044 and are redeemable at the
option of JCP&L beginning in May of 2000 at 100% of their principal amount, or
earlier under certain limited circumstances, including the loss of the federal
tax deduction for interest paid on the subordinated debentures. JCP&L has fully
and unconditionally guaranteed payment of distributions, to the extent there is
sufficient cash on hand to permit such payments and legally available funds, and
payments on liquidation or redemption of its Preferred Securities. Distributions
on the MIPS (and interest on the subordinated debentures) may be deferred for up
to 60 months, but JCP&L, may not pay dividends on, or redeem or acquire, any of
its cumulative preferred or common stock until deferred payments on its
subordinated debentures are paid in full.
Trust Preferred Securities:
- --------------------------
In 1999, $100 million of trust preferred securities were issued on behalf
of each of Met-Ed and Penelec at 7.35% and 7.34%, respectively. The trust
preferred securities were issued by Met-Ed Capital Trust and Penelec Capital
Trust and represent a beneficial interest in the trust equal to a cumulative
preferred limited partnership interest in Met-Ed Capital II, L.P. and Penelec
Capital II, L.P. The preferred securities are the sole assets of the trust and
the only revenues of the trust will be distributions on the trust preferred
securities. Each trust security has entitled the holder to receive quarterly
cash distributions. Met-Ed and Penelec unconditionally guaranteed the payments
by Met-Ed Capital II, L.P. and Penelec Capital II, L.P., respectively.
The fair value of the Met-Ed and Penelec trust preferred securities at
December 31, 1999 was $81 million and $80.8 million, respectively.
5. STOCKHOLDERS' EQUITY
The following table presents information relating to the common stock
($2.50 par value) of GPU, Inc.:
47
<PAGE>
1999 1998 1997
---- ---- ----
Authorized shares 350,000,000 350,000,000 350,000,000
Issued shares 132,783,338 132,783,338 125,783,338
Reacquired shares 10,977,798 4,787,657 4,950,727
Outstanding shares 121,805,540 127,995,681 120,832,611
Outstanding restricted units 283,602 268,360 247,955
Outstanding stock options 394,750 335,950 -
In 1999, GPU, Inc. reacquired 6.4 million shares of common stock at a
total cost of $225.8 million.
Pursuant to the 1990 Employee Stock Plan (as restated to reflect
amendments through June 3, 1999), awards may be granted in the form of incentive
stock options, nonqualified stock options, restricted shares of common stock,
restricted units and stock appreciation rights, which may accompany options. In
1999, 1998 and 1997, GPU, Inc. issued restricted units to officers representing
rights to receive shares of common stock, on a one-for-one basis, at the end of
the restriction period. The number of shares eventually issued will depend upon
the degree to which GPU's performance goals have been met for the restriction
period and could range from 0% to 200% of the originally awarded units plus
additional units resulting from reinvested dividend equivalents. In 1999, GPU,
Inc. granted stock options to its officers to purchase 90,600, 1,000 and 1,000
shares at $42.9375, $34.50 and $34.6875 per share, respectively. In 1998, GPU,
Inc. granted stock options to its officers to purchase 305,950 and 30,000 shares
at $36.625 per share and $44.25 per share, respectively. All options have an
exercise price equal to the fair market value of GPU, Inc. common stock on the
grant date. Options are exercisable in accordance with the terms set forth in
the Stock Option Agreement. In 1999 and 1998, no options were exercised.
Since 1997, pursuant to the Deferred Stock Unit Plan for Outside
Directors, restricted units were issued to outside directors representing rights
to receive shares of GPU, Inc. common stock, on a one-for-one basis. All
restricted units are considered common stock equivalents and, accordingly, are
reflected in the computation of diluted earnings per share shown on the
Consolidated Statements of Income. The restricted units accrue dividend
equivalents on a quarterly basis, which are reinvested in additional restricted
units.
In 1999, 1998 and 1997, through the above-mentioned plans, officers and
outside directors were awarded 56,994, 53,260 and 64,941 restricted units,
respectively. In 1999, 1998 and 1997, also through those plans, GPU, Inc. issued
a total of 20,215, 20,611 and 54,491 shares of common stock, respectively, from
previously reacquired shares.
In 1996, GPU adopted the disclosure requirements of Statement of Financial
Accounting Standards No. 123 (FAS 123), "Accounting for Stock-Based
Compensation," which establishes a fair value-based method of accounting for
employee stock-based compensation. As permitted by FAS 123 GPU continues to
follow the intrinsic value method set forth in APB Opinion No. 25, "Accounting
for Stock Issued to Employees" and disclose the pro forma effects on net
48
<PAGE>
income (loss) had the fair value of the options been expensed. The pro forma
effects on net income resulting from the application of the fair value-based
method of accounting defined in FAS 123 are immaterial.
Accumulated Other Comprehensive Income/(Loss):
- ----------------------------------------------
In 1997, GPU adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income." At December 31, 1999 and 1998, GPU had on the
Consolidated Balance Sheets the following amounts in Accumulated other
comprehensive income/(loss):
(in thousands)
1999 1998
---- ----
Net unrealized gains on investments $ 34,183 $ 28,345
Foreign currency translation (40,518) (54,377)
Minimum pension liability ( 6) (5,272)
------- ------
Accumulated other comprehensive income/(loss) $( 6,341) $(31,304)
====== ======
The components of the change in accumulated other comprehensive
income/(loss), and the related tax effects, for the years 1999, 1998 and 1997
are as follows:
(in thousands)
Amount Income Tax Amount
Before (Expense) Net of
Taxes Benefit Taxes
1999
Net unrealized gains on investments $12,516 $ (4,680) $ 7,836
Adjustment for amounts included in income (1,998) - (1,998)
------ ------- ------
Net change in accumulated other
comprehensive income 10,518 (4,680) 5,838
------ ------- ------
Foreign currency translation adjustments 19,735 (6,907) 12,828
Adjustment for amounts included in income 1,586 (555) 1,031
------ ------- ------
Net change in accumulated other
comprehensive income 21,321 (7,462) 13,859
------ ------- ------
Minimum pension liability 8,957 (3,691) 5,266
------ ------- ------
Total change in accumulated other
comprehensive income/(loss) $40,796 $(15,833) $24,963
====== ======= ======
1998
Net unrealized gains on investments $ 13,235 $(4,248) $ 8,987
------- ------ -------
Foreign currency translation adjustments (23,295) 8,233 (15,062)
Adjustment for amounts included in income 8,737 (3,136) 5,601
------- ------ -------
Net change in accumulated other
comprehensive income (14,558) 5,097 (9,461)
------- ------ -------
Minimum pension liability (2,605) 1,071 (1,534)
------- ------ -------
Total change in accumulated other
comprehensive income/(loss) $ (3,928) $ 1,920 $ (2,008)
======= ====== =======
49
<PAGE>
1997
- ----
Net unrealized gains on investments $ 10,895 $(4,521) $ 6,374
Foreign currency translation adjustments (73,115) 24,186 (48,929)
Minimum pension liability (2,541) 1,046 (1,495)
------- ------ -------
Total change in accumulated other
comprehensive income/(loss) $(64,761) $20,711 $(44,050)
======= ====== =======
6. ACCOUNTING FOR EXTRAORDINARY AND NON-RECURRING ITEMS
JCP&L Restructuring Write-off:
- -----------------------------
In 1999, the NJBPU issued a Summary Order regarding JCP&L's unbundling,
stranded cost and restructuring filings. Accordingly, in 1999 JCP&L discontinued
the application of FAS 71 and adopted the provisions of FAS 101 and EITF 97-4
with respect to its electric generation operations. The transmission and
distribution operations of JCP&L continue to be subject to the provisions of FAS
71.
In 1999, JCP&L recorded a reduction in operating revenues of $115
million relating to the Summary Order which resulted in an after-tax charge to
earnings of $68 million, or $0.54 per share. This reduction reflects JCP&L's
obligation to refund to customers 5% from rates in effect as of April 30, 1997.
The refund will be made to customers from August 1, 2002 through July 31, 2003.
Since JCP&L is no longer subject to FAS 71 for the generation portion of
its business, GPU performed an impairment test on Oyster Creek in accordance
with Statement of Financial Accounting Standards No. 121 (FAS 121) "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." This test determined that JCP&L's net investment in Oyster Creek, including
plant, nuclear fuel and materials and supplies inventories, was impaired. This
investment was written down by a total of $678 million (pre-tax) in 1999 to
reflect the plant's fair market value. This impairment, which was recorded as an
extraordinary deduction, was reversed and reestablished as a regulatory asset
since the Summary Order provides for rate recovery.
Generation Asset Divestiture:
- ----------------------------
As discussed below, in 1999, the GPU Energy companies completed the sales
of TMI-1 and substantially all of their fossil-fuel and hydroelectric stations.
The GPU Energy companies sold TMI-1 to AmerGen Energy Company, LLC
(AmerGen), a joint venture of PECO Energy and British Energy, for a total
purchase price of approximately $100 million. The sale did not have a
significant impact on 1999 earnings since TMI-1 had been written down to its
fair market value in 1998. The majority of the amount written down and the
majority of the remaining loss from the sale resulted in the deferral of $528.3
million as a regulatory asset pending separate and further reviews by
50
<PAGE>
the NJBPU and the PaPUC (Phase II of the Pennsylvania restructuring
proceedings).
The GPU Energy companies completed the sales of substantially all their
fossil fuel and hydroelectric generating facilities to Sithe Energies (Sithe)
for approximately $1.6 billion (JCP&L's 50% interest in Yards Creek was not
included in the sale and the sales of the 66 MW Forked River combustion turbines
and 19 MW York Haven hydroelectric station were postponed). The sale resulted in
the recording of an after-tax gain of $13.4 million in 1999 for the portion of
the gain related to wholesale operations and the deferral of the remaining
pre-tax gain of $706.5 million as a regulatory liability pending separate and
further reviews by the NJBPU and the PaPUC.
Penelec sold its 20% interest in the Seneca Pumped Storage Hydroelectric
Generating Station to The Cleveland Electric Illuminating Company for $43
million. The sale resulted in the recording of an after-tax gain of $1.2 million
in 1999 for the portion of the gain related to wholesale operations and the
deferral of the remaining pre-tax gain of $30.2 million as a regulatory
liability pending further review by the PaPUC.
Penelec sold its 50% interest in the Homer City Station to a subsidiary of
Edison Mission Energy for approximately $900 million. As a result, Penelec
recorded an after-tax gain of $22.6 million in 1999 for the portion of the gain
related to wholesale operations and deferred as a regulatory liability the
remaining pre-tax gain of $590.7 million pending further review by the PaPUC.
Midlands sold its electric supply business to National Power plc for
approximately $300 million. As a result, in 1999 GPU recorded an after-tax gain
on the sale of $6.8 million.
For information on JCP&L's pending sale of Oyster Creek, see Note 12,
Commitments and Contingencies.
Pennsylvania Restructuring Write-offs:
- -------------------------------------
In 1998, Met-Ed and Penelec received PaPUC Restructuring Orders which,
among other things, essentially removed from regulation the costs associated
with providing electric generation service to Pennsylvania consumers, effective
January 1, 1999. Accordingly, in 1998 Met-Ed and Penelec discontinued the
application of FAS 71 and adopted the provisions of FAS 101 and EITF Issue 97-4
with respect to their electric generation operations. The transmission and
distribution operations of Met-Ed and Penelec continue to be subject to the
provisions of FAS 71.
As a result of the Restructuring Orders, Met-Ed and Penelec recorded an
extraordinary charge of $25.8 million (after-tax) or $0.20 per share and a
non-recurring charge of $40 million (after-tax), or $0.32 per share, for
customer refunds of 1998 revenues and for the establishment of a sustainable
energy fund.
In accordance with FAS 121, impairment tests were performed and determined
that the net investment in TMI-1 was impaired at December 31, 1998,
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<PAGE>
resulting in a write-down of $518 million (pre-tax) to reflect TMI-1's fair
market value. Of the amount written down for TMI-1, $508 million was
reestablished as a regulatory asset because management believes it is probable
of recovery in the restructuring process and $10 million (the FERC
jurisdictional portion) was charged to expense as an extraordinary item in 1998.
Windfall Profits Tax Write-off:
- ------------------------------
In 1997, the Government of the United Kingdom imposed a windfall profits
tax on privatized utilities, including Midlands. As a result, a one-time charge
to income of $109.3 million, or $0.90 per share, was taken in 1997.
7. ACQUISITIONS
Empresa Distribuidora Electrica Regional, S.A.
----------------------------------------------
In March 1999, GPU Electric acquired Empresa Distribuidora Electrica
Regional, S.A. (Emdersa) for US $375 million. The fair value of the assets
acquired totaled approximately $320 million and the amount of liabilities
assumed totaled approximately $153 million, including debt of $76 million.
Emdersa owns three electric distribution companies that serve three provinces in
northwest Argentina.
The acquisition was financed through the issuance of commercial paper by
GPU Capital, guaranteed by GPU, Inc., and a $50 million capital contribution
from GPU, Inc.
The acquisition has been accounted for under the purchase method of
accounting. The total acquisition cost exceeded the estimated value of net
assets by approximately $208 million. This excess is considered goodwill and is
being amortized on a straight-line basis over 40 years.
Transmission Pipelines Australia
--------------------------------
In June 1999, GPU Electric acquired Transmission Pipelines Australia
(TPA), a natural gas transmission business, from the State of Victoria,
Australia for A$1.025 billion (approximately US $675 million). TPA has been
renamed GPU GasNet. The fair value of the assets acquired totaled approximately
US $704 million and the amount of liabilities assumed totaled approximately US
$116 million.
The acquisition was financed through: (1) an A$750 million
(approximately US $495 million) senior credit facility, which is non-recourse to
GPU, Inc.; and (2) an equity contribution from GPU Capital of A$275 million
(approximately US $180 million) provided through the issuance of commercial
paper guaranteed by GPU, Inc.
52
<PAGE>
The acquisition has been accounted for under the purchase method. The
total acquisition cost exceeded the estimated value of net assets acquired by
approximately $88 million. This excess is considered goodwill and is being
amortized on a straight-line basis over 40 years.
Midlands Electricity plc
------------------------
In July 1999, GPU Electric acquired Cinergy's 50% ownership interest in
Avon, which owns Midlands, for (pound)452.5 million (approximately US $714
million). GPU and Cinergy had jointly formed Avon in 1996 to acquire Midlands.
The fair value of the assets acquired totaled approximately US $2.1 billion and
the liabilities totaled approximately US $1.5 billion, including debt of US $1
billion.
GPU Electric financed the acquisition through a combination of equity
and debt. The equity was funded from: (1) a US $250 million contribution from
GPU, Inc., and (2) the issuance of US $50 million of commercial paper by GPU
Capital, which is guaranteed by GPU, Inc. The debt has been provided through a
two-year (pound)245 million (approximately US $382 million) credit agreement
entered into by EI UK Holdings, of which GPU, Inc. has guaranteed approximately
US $100 million.
As a result of GPU's purchase of Cinergy's 50% ownership in Midlands,
effective in the third quarter of 1999, GPU began accounting for Midlands as a
consolidated entity, rather than under the equity method of accounting as was
previously the practice. Consequently, Goodwill, net on the Consolidated Balance
Sheet increased by approximately $1.8 billion in the third quarter of 1999. Of
this amount, $1.7 billion relates to the previous 1996 acquisition of Midlands
by GPU and Cinergy and approximately $119 million represents goodwill resulting
from GPU's purchase of Cinergy's 50% share of Midlands. The goodwill is being
amortized on a straight-line basis over 40 years.
Concurrent with GPU's July 1999 acquisition of the 50% of Midlands 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, Midlands had recorded a liability of
$28.6 million related to previous cost reduction plans. GPU retained $25.7
million of this liability, related to contractual termination and other
severance benefits for 276 employees identified in a 1999 business process
reengineering project. GPU identified an additional 355 employees (234 in
Engineering Services, 38 in metering, 21 in Network Services and 62 from other
specific functions) to be terminated as part of the plan and recorded an
additional liability of $39.3 million. A net charge of $18.2 million for GPU's
50% share of these adjustments is included in expense and the other 50% was
recorded as a purchase accounting adjustment.
As of December 31, 1999, $7.2 million of severance benefits had been
paid to 172 of these employees. The remaining severance liability of $29.5
million for the remaining 459 employees is included in Other current
liabilities, and $28.3 million to be funded out of pension plan assets is
included as a pension
53
<PAGE>
liability. Management expects the plan will be substantially completed by
June 2000.
The following unaudited pro forma consolidated results of operations for
the years 1999 and 1998 presents information assuming Emdersa, GPU GasNet and
the 50% of Midlands GPU did not already own were acquired January 1, 1998. The
pro forma amounts include certain adjustments, primarily to recognize interest
expense, amortization of goodwill and depreciation of assets having stepped-up
bases, and are not necessarily indicative of the actual results that would have
been realized had the acquisitions occurred on the assumed date of January 1,
1998, nor are they necessarily indicative of future results. The pro forma
operating results are for information purposes only and are as follows:
1999 1998
- --------------------------------------------------------------------------------
(in thousands, except As As
per share data) Reported Pro Forma* Reported Pro Forma*
- --------------------------------------------------------------------------------
Revenues $ 4,757,124 $ 6,030,514 $ 4,248,792 $ 6,901,012
Income before extra-
ordinary item $ 459,014 $ 493,449 $ 385,881 $ 441,776
Net income $ 459,014 $ 493,449 $ 360,126 $ 416,021
Basic and Diluted earnings
per share before
extraordinary item $ 3.66 $ 3.94 $ 3.03 $ 3.47
Basic and Diluted earnings
per share $ 3.66 $ 3.94 $ 2.83 $ 3.27
* Unaudited
GPU PowerNet
------------
In 1997, GPU Electric acquired the business of GPU PowerNet from the State
of Victoria, Australia for A$2.6 billion (approximately US $1.9 billion). The
fair value of the assets acquired totaled approximately US $2 billion and the
amount of liabilities assumed totaled approximately US $142.9 million. GPU
PowerNet owns and operates the high-voltage electricity transmission system in
the State of Victoria serving an area of approximately 87,900 square miles and a
population of approximately 4.5 million.
The acquisition was financed through: (1) a senior debt credit facility of
A$1.9 billion (approximately US $1.4 billion), which is non-recourse to GPU,
Inc.; (2) a five-year US $450 million bank credit agreement which is guaranteed
by GPU, Inc.; and (3) an equity contribution from GPU, Inc. of US $50 million.
The acquisition was accounted for under the purchase method of accounting.
The total acquisition costs exceeded the estimated value of net assets by A$877
million (approximately US $537 million). This excess is considered goodwill and
is being amortized on a straight-line basis over 40 years.
54
<PAGE>
GPU PowerNet has been included in GPU's consolidated financial statements
since its purchase on November 6, 1997. The unaudited consolidated pro forma
information for 1997, assuming debt financing and an acquisition date of January
1, 1997, is as follows: operating revenues of $4.32 billion; net income of $327
million; basic earnings per share of $2.71 and; diluted earnings per share of
$2.70. The pro forma results, which are for information purposes only, are not
necessarily indicative of the actual results that would have been realized had
the acquisition occurred on the assumed date of January 1, 1997, nor are they
necessarily indicative of future results.
Planned Acquisition of MYR Group Inc.
-------------------------------------
In December 1999, GPU, Inc., and MYR Group Inc. (MYR) entered into an
agreement under which GPU has agreed to acquire the utility infrastructure
construction firm for $215 million cash, or $30.10 per share of MYR common
stock. Following the acquisition, MYR would become a wholly-owned subsidiary of
GPU, Inc. The acquisition, which is subject to approval by the SEC and other
conditions, is expected to be completed in the first quarter of 2000. The
acquisition will be initially financed through short-term debt and will be
accounted for under the purchase method of accounting.
8. INCOME TAXES
As of December 31, 1999 and 1998, Regulatory assets, net, on the
Consolidated Balance Sheets reflected $296 million and $450 million,
respectively, of Income taxes recoverable through future rates (primarily
related to liberalized depreciation), and Income taxes refundable through future
rates of $28 million and $53 million, respectively (related to unamortized ITC).
These net regulatory assets are substantially due to the recognition of amounts
not previously recorded with the adoption of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," in 1993.
A summary of the components of deferred taxes as of December 31, 1999 and
1998 follows:
55
<PAGE>
<TABLE>
(in millions)
<CAPTION>
Deferred Tax Assets Deferred Tax Liabilities
------------------- ------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Current: Current:
Unbilled revenue $ 12 $ 31 Revenue taxes $ 5 $ 8
Deferred energy - - Deferred energy 3 4
----- -----
Other 60 16 Total $ 8 $ 12
------ ----- ===== =====
Total $ 72 $ 47
====== =====
Noncurrent: Noncurrent:
Unamortized ITC $ 36 $ 70 Liberalized
Decommissioning 77 151 Depreciation:
Contributions in aid Previously flowed
of construction 28 26 through $ 222 $ 202
Cumulative transla- Future revenue
tion adjustment 22 29 requirements 147 155
----- -----
Above-market NUGs 798 748 Subtotal 369 357
Customer transition Liberalized
charge 533 534 depreciation 659 719
Revenue subject to Customer transition
refund 47 23 charge 1,451 1,684
Generation revenue Net loss on
requirements 47 44 generation asset
sales 218 -
Net gain on Other 866 285
----- -----
generation asset
sales 499 - Total $3,563 $3,045
===== =====
Other 441 379
----- -----
Total $2,528 $2,004
===== =====
</TABLE>
The reconciliations of net income to book income subject to tax and of
the federal statutory rate to combined federal and state effective tax rates are
as follows:
(in millions)
1999 1998 1997
---- ---- ----
Net income $459 $360 $335
Preferred stock dividends 9 11 13
Loss on preferred stock reacquisition 2 - -
Income tax expense 294 250 234
--- --- ---
Book income subject to tax $764* $621* $582*
=== === ===
Federal statutory rate 35% 35% 35%
State tax, net of federal benefit 5 5 4
Amortization of ITC (6) (1) (2)
Other, net 4 1 3
--- --- ---
Effective income tax rate 38% 40% 40%
=== === ===
* Includes pre-tax foreign operations income of $331 million, $238 million
and $34 million, of which $85 million, $88 million and $20 million,
respectively for 1999, 1998 and 1997, are included in Equity in
undistributed earnings/(loss) of affiliates in the Consolidated Statements
of Income.
56
<PAGE>
Federal and state income tax expense is comprised of the following:
(in millions)
1999 1998 1997
---- ---- ----
Provisions for taxes currently payable:
Domestic $ 775 $290 $206
Foreign 60 22 40
---- --- ---
Total provision for taxes $ 835 $312 $246
Deferred income taxes:
Liberalized depreciation $(252) $ 2 $ 14
Foreign deferred taxes 80 31 4
Unbilled revenues 19 - (8)
Gain/(loss) on sale of property (406) - -
Decommissioning 87 (19) (5)
PA Restructuring (FAS 71) 61 (15) -
Global settlement 2 (8) -
Pension expense/Voluntary Enhanced
Retirement Programs (1) (8) (10)
Nonutility generation contract buyout costs (14) (11) 5
Provision for rate refunds (47) (10) -
OPEBs 2 (12) 5
Other (25) (3) (7)
--- ---- ---
Deferred income taxes, net (494) (53) (2)
---- --- ---
Amortization of ITC, net (47) (9) (10)
---- --- ---
Income tax expense $ 294 $250 $234
==== === ===
The foreign taxes in the above table for 1999, 1998 and 1997, include $53
million ($16 million Current; $37 million Deferred), $27 million ($10 million
Current; $17 million Deferred) and $41 million ($37 million Current; $4 million
Deferred) in foreign tax expense which is netted in Equity in undistributed
earnings/(loss) of affiliates in the Consolidated Statements of Income. Included
in the ITC Amortization is the recognition of $36 million of ITC benefit
resulting from the sale of generation plants.
The Internal Revenue Service (IRS) has completed its examinations of GPU's
federal income tax returns through 1995.
9. SUPPLEMENTARY INCOME STATEMENT INFORMATION
Maintenance expense and other taxes charged to operating expenses
consisted of the following:
(in millions)
1999 1998 1997
---- ---- ----
Maintenance $210 $202 $216
=== === ===
Other taxes:
New Jersey Transitional Energy
Facility Assessment $ 59 $ 67 -
New Jersey unit tax - - $211
Pennsylvania state gross receipts 54 79 81
Real estate and personal property 39 23 27
Value Added and Stamp taxes (U.K.) 6 - -
Other 33 50 39
--- --- ---
Total $191 $219 $358
=== === ===
57
<PAGE>
10. EMPLOYEE BENEFITS
Pension Plans and Other Postretirement Benefits:
- -----------------------------------------------
GPU maintains defined benefit pension plans covering substantially all
employees. GPU also provides certain retiree health care and life insurance
benefits for substantially all US employees who reach retirement age while
working for GPU. The following tables provide a reconciliation of the changes in
the plans' benefit obligation and fair value of assets for the years ended
December 31, 1999 and 1998, a statement of the funded status of the plans, the
amounts recognized in the Consolidated Balance Sheets as of December 31, 1999
and 1998 and the weighted average assumptions used in the measurement of the
benefit obligation. The pension benefit disclosure amounts for the year 1999
reflect the acquisition of the remaining 50% of Midlands stock by GPU in July of
that year. Accordingly, the July 1999 benefit obligation and fair value of plan
assets balances for Midlands are shown next to the line items entitled
"Acquisitions" and the post-acquisition amounts occurring in the second half of
1999 are included in the tables.
<TABLE>
Other
Postretirement
(in millions) Pension Benefits Benefits
---------------- --------------
<CAPTION>
1999 1998 1999 1998
---- ---- ---- ----
Change in benefit obligation:
Benefit obligation
<S> <C> <C> <C> <C>
at January 1: $ 1,897.0 $ 1,791.7 $ 790.5 $ 798.0
Acquisitions 1,502.5 - - -
Service cost 46.2 36.1 15.9 16.4
Interest cost 158.0 121.6 52.2 54.4
Plan amendments 2.5 9.6 - (6.0)
Actuarial (gain)/loss and
Other items (182.8) 26.2 (36.9) (55.7)
Currency exchange (4.0) - - -
Benefits paid (171.0) (123.9) (39.8) (30.2)
Curtailments and settlements (139.4) 6.8 (44.8) 12.5
Termination benefits 48.8 28.9 - 1.1
-------- -------- ------- -------
Benefit obligation
at December 31: $ 3,157.8 $ 1,897.0 $ 737.1 $ 790.5
======== ======== ======= =======
Change in plan assets:
Fair value of plan assets
at January 1: $ 2,258.8 $ 2,033.3 $ 507.1 $ 403.0
Acquisitions 1,710.2 - - -
Actual return on plan assets 579.4 342.9 61.0 78.9
Employer contributions 1.8 6.5 15.0 55.4
Benefits paid (171.0) (123.9) (39.8) (30.2)
Currency exchange (5.8) - - -
Settlement and other items (30.0) - - -
-------- -------- ------- -------
Fair value of plan assets
at December 31: $ 4,343.4 $ 2,258.8 $ 543.3 507.1
======== ======== ======= =======
</TABLE>
58
<PAGE>
<TABLE>
Other
Postretirement
(in millions) Pension Benefits Benefits
<CAPTION>
---------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Funded Status:
Funded status at December 31: $ 1,185.6 $ 361.8 $ (193.8) $ (283.4)
Unrecognized net actuarial
(gain)/loss (953.0) (439.5) (54.2) (37.8)
Unrecognized prior service cost 21.5 27.6 2.9 4.3
Unrecognized net transition
(asset)/obligation (1.4) (1.9) 143.3 210.7
-------- -------- ------- -------
Net amount recognized $ 252.7 $ (52.0) $ (101.8) $ (106.2)
======== ======== ======= =======
Amounts recognized in the Consolidated
Balance Sheet at December 31:
Prepaid benefit cost $ 297.2 $ 42.0 $ 24.2 $ 43.8
Accrued benefit liability (45.3) (103.0) (126.0) (150.0)
Intangible asset 0.8 - - -
Accumulated other comprehensive
income - 5.3 - -
Deferred income taxes - 3.7 - -
-------- -------- ------- -----
Net amount recognized $ 252.7 $ (52.0) $ (101.8) $ (106.2)
======== ======== ======= =======
Weighted average assumptions as
of December 31:
Discount rate 7.0% 6.75% 7.5% 6.75%
Expected return on plan assets 8.1% 8.5% 8.5% 8.5%
Rate of compensation increase 4.7% 4.5% - -
</TABLE>
The following tables provide the components of net periodic pension and other
postretirement benefit costs. As previously discussed, the 1999 net periodic
pension cost reflects post-acquisition amounts related to Midlands for the
second half of the year.
(in millions)
Pension Plans: 1999 1998 1997
---- ---- ----
Service cost $ 46.2 $ 36.1 $ 31.1
Interest cost 158.0 121.6 122.2
Expected return on plan assets (198.0) (140.1) (131.5)
Amortization of transition (asset)/obligation (0.5) (0.5) (0.5)
Other amortization 2.1 1.1 0.2
----- ----- -----
Net periodic pension cost $ 7.8 $ 18.2 $ 21.5
===== ===== =====
In 1999, the effect of increasing the discount rate assumption for the US
pension plans from 6.75% to 7.5% resulted in a $162 million decrease in the
benefit obligation as of December 31, 1999. In 1998, the effect of decreasing
the discount rate assumption from 7% to 6.75% was partially offset by the effect
of decreasing the salary scale assumption from 5% to 4.5% and resulted in a $35
million increase in the benefit obligation as of December 31, 1998.
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<PAGE>
The above net periodic pension cost amount for 1999 excludes pre-tax
credits of $31 million, of which $30 million was deferred for return to
customers, resulting from employee terminations related to generation asset
divestiture. The above net periodic pension cost amount for 1998 excludes
pre-tax charges of $30 million, of which $22 million was deferred pending future
rate recovery, resulting from early retirement programs in 1998.
(in millions)
Other Postretirement Benefits: 1999 1998 1997
---- ---- ----
Service cost $ 15.9 $ 16.4 $ 10.7
Interest cost 52.2 54.4 51.7
Expected return on plan assets (37.5) (29.5) (23.7)
Amortization of transition (asset)/obligation 14.6 15.8 16.8
Other amortization 1.6 5.0 2.3
----- ----- -----
Net periodic postretirement benefit cost 46.8 62.1 57.8
Deferred for future recovery - - (13.0)
----- ----- -----
Postretirement benefit cost, net of deferrals $ 46.8 $ 62.1 $ 44.8
===== ===== =====
In 1999, the effect of increasing the assumption associated with
medical inflation rates was partially offset by the effect of increasing the
discount rate assumption from 6.75% to 7.5% and resulted in a $45 million
increase in the benefit obligation as of December 31, 1999. In 1998, the effect
of decreasing the assumption relating to the long-term medical cost of managed
care plans was partially offset by the effect of decreasing the discount rate
assumption from 7% to 6.75% and resulted in a $40 million decrease in the
benefit obligation as of December 31, 1998. The benefit obligation was
determined by application of the terms of the medical and life insurance plans,
including the effects of established maximums on covered costs, together with
relevant actuarial assumptions and health-care cost trend rates of 10% for those
not eligible for Medicare and 11% for those eligible for Medicare, then
decreasing gradually to 6% in 2010 and thereafter. These costs also reflect the
implementation of an annual cost-cap of 6% for individuals who retire after
December 31, 1995 and reach age 65. The effect of a 1% change in these assumed
cost trend rates would increase or decrease the benefit obligation by $39.2
million or $36.9 million, respectively. In addition, such a 1% change would
increase or decrease the aggregate service and interest cost components of net
periodic postretirement health-care cost by $3.5 million or $3.4 million,
respectively.
The above net periodic postretirement benefit cost amount for 1999
excludes pre-tax charges of $3 million, which was deferred pending future rate
recovery, resulting from employee terminations related to generation asset
divestiture. The above net periodic postretirement benefit cost amount for 1998
excludes pre-tax charges of $20 million, of which $12 million was deferred
pending future rate recovery, resulting from early retirement programs in 1998.
In JCP&L's 1993 base rate proceeding, the NJBPU allowed JCP&L to collect
$3 million annually for incremental postretirement benefit costs, charged to
expense, and recognized as a result of FAS 106. Based on the final order, and in
accordance with EITF Issue 92-12, "Accounting for OPEB Costs by Rate-
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<PAGE>
Regulated Enterprises," JCP&L has deferred the amounts above that level. A 1997
Stipulation of Final Settlement (Final Settlement) allows JCP&L to recover and
amortize the deferred balance at December 31, 1997 over a fifteen-year period.
In addition, the Final Settlement allows JCP&L to recover current amounts
accrued pursuant to FAS 106, including amortization of the transition
obligation. Met-Ed has deferred the incremental postretirement benefit costs
associated with the adoption of FAS 106 and in accordance with EITF Issue 92-12,
as authorized by the PaPUC in its 1993 base rate order. In accordance with EITF
Issue 92-12, effective January 1998, Met-Ed has ceased deferring these costs.
The approximately one-third generation-related portion of the deferred balance
at December 31, 1997 is to be recovered in rates over a twelve-year period
pursuant to the PaPUC's Restructuring Orders. The remaining two-thirds for the
transmission and distribution-related portion is to be amortized over a
fourteen-year period beginning January 1999, pursuant to the Restructuring
Orders. In 1994, Penelec determined that its FAS 106 costs, including costs
deferred since January 1993, were not probable of recovery and charged those
deferred costs to expense.
Savings Plans:
- -------------
GPU also maintains savings plans for substantially all US employees. These
plans provide for employee contributions up to specified limits and various
levels of employer matching contributions. The matching contributions for GPU
for 1999, 1998 and 1997 were $14 million, $13.6 million and $12.6 million,
respectively.
11. LEASES
GPU Energy companies
The GPU Energy companies' capital leases consist primarily of leases for
nuclear fuel. Nuclear fuel capital lease obligations at December 31, 1999 and
1998 totaled $48 million and $126 million, respectively.
Prior to the sale of TMI-1 to AmerGen in December 1999, the GPU Energy
companies had nuclear fuel lease agreements with nonaffiliated fuel trusts for
the plant. Upon the sale of TMI-1, the related fuel leases were terminated and
all outstanding amounts due under the related credit facility were paid. The
Oyster Creek fuel lease agreement will be terminated upon the sale of Oyster
Creek to AmerGen. Lease expense consists of an amount designed to amortize the
cost of the nuclear fuel as consumed plus interest costs. For the years ended
December 31, 1999, 1998 and 1997, these amounts were $53 million, $54 million
and $49 million, respectively.
Met-Ed and JCP&L have sold and leased back a portion of their respective
ownership interests in the Merrill Creek Reservoir project . The annual minimum
lease payments under these operating leases, which have remaining terms of 33
years, range from approximately $3.6 million to $6.7 million over the next five
years, net of reimbursements from sublessees. Met-Ed believes that its Merrill
Creek lease payments will be a recoverable stranded cost in Phase II rate
proceedings pending before the PaPUC. JCP&L is recovering its
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<PAGE>
Merrill Creek lease payments, net of reimbursements, through distribution rates.
GPUI Group
A subsidiary of GPU International sold and leased back an electric
cogeneration facility for an initial term of eleven years (facility lease) for
which GPU, Inc. has guaranteed payments of up to $8.1 million. In addition, a
20-year site lease was entered into commencing in 1993. The leases are accounted
for as operating leases and rent expense is recorded on a straight-line basis
over the initial 11-year term of the facility lease. Rent expense at December
31, 1999 and 1998 totaled $12.3 million and $11.3 million, respectively. The
minimum lease payments for 2000, 2001, 2002, 2003 and 2004 are $13.4 million,
$14.1 million, $14.8 million, $15.8 million and $12 million, respectively.
12. COMMITMENTS AND CONTINGENCIES
COMPETITION AND THE CHANGING REGULATORY ENVIRONMENT
---------------------------------------------------
Generation Asset Divestiture:
- ----------------------------
In 1999, the GPU Energy companies completed the sales of TMI-1 and
substantially all of their fossil and hydroelectric generating stations. For
additional information on the completed sales, see Note 6, Accounting for
Extraordinary and Non-recurring Items.
In October 1999, JCP&L agreed to sell Oyster Creek to AmerGen for $10
million and reimbursement of the cost (estimated at $88 million) of the next
scheduled refueling outage. This transaction is subject to the receipt of
various federal and state regulatory approvals.
JCP&L and Public Service Electric & Gas Company (PSE&G) each hold a 50%
undivided ownership interest in Yards Creek Pumped Storage Facility (Yards
Creek). In December 1998, JCP&L filed a petition with the 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 December 31, 1999 book value of $22 million. There can be no assurance as to
the outcome of this matter.
Stranded Costs and Regulatory Restructuring Orders:
- --------------------------------------------------
With the current market price of electricity being below the cost of some
utility-owned generation and power purchase commitments, and the ability of
customers to choose their energy suppliers, certain costs, which generally would
be recoverable in a regulated environment, may not be recoverable in a
competitive environment. These costs are generally referred to as stranded
costs.
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<PAGE>
In 1998, the PaPUC issued Restructuring Orders to Met-Ed and Penelec
which, among other things, provide for Met-Ed and Penelec's recovery of a
substantial portion of what otherwise would have become stranded costs, and
provide for a Phase II proceeding following the completion of their generation
divestitures to make a final determination of the extent of that stranded cost
recovery. An appeal by one intervenor in the restructuring proceedings is
pending before the Pennsylvania Supreme Court. There can be no assurance as to
the outcome of this appeal.
In April 1999, JCP&L entered into a settlement agreement with several
parties to its stranded cost and rate unbundling proceedings, pending before the
NJBPU. In May 1999, the NJBPU issued a Summary Order, approving the settlement
with certain modifications. Among other things, the Summary Order provides for
full recovery of JCP&L's stranded costs. The Summary Order did not address the
pending sale of Oyster Creek, because at the time the Summary Order was issued,
it was uncertain whether the plant would be sold or retired early. As a result
of the NJBPU's actions, in the second quarter of 1999, JCP&L recorded a
reduction in operating revenues of $115 million reflecting JCP&L's obligation to
make refunds to customers. JCP&L is awaiting a final order from the NJBPU. For
additional information, see Note 6, Accounting for Extraordinary and
Non-recurring Items.
Under the NJBPU and the PaPUC restructuring orders, the GPU Energy
companies are required to provide generation service to customers who do not
choose an alternate supplier. As noted above, the GPU Energy companies have sold
or agreed to sell substantially all of their generation assets. Consequently,
there will be increased market risks associated with providing generation
service since the GPU Energy companies will have to supply energy almost
entirely from contracted and open market purchases. Under the Summary Order,
JCP&L is permitted to recover reasonable and prudently incurred costs associated
with providing basic generation service and to defer the portion of these costs
that cannot be recovered currently. The PaPUC's Restructuring Orders, however,
generally do not allow Met-Ed and Penelec to recover their costs, including
their energy costs in excess of established rate caps. An inability of the GPU
Energy companies to supply electricity to customers who do not choose an
alternate supplier at a cost recoverable under their capped rates, would have an
adverse effect, which may be material, on GPU's results of operations.
Generation Agreements:
- ---------------------
The emerging competitive generation market has created uncertainty
regarding the forecasting of the GPU Energy companies' energy supply needs,
which has caused the GPU Energy companies to seek shorter-term agreements
offering more flexibility. The GPU Energy companies' supply plan focuses on
short- to intermediate-term commitments (one month to three years) covering
times of expected high energy price volatility (that is, peak demand periods)
and reliance on spot market purchases during other periods.
As of December 31, 1999, 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
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<PAGE>
and the timing of the pending Oyster Creek sale, are estimated to be $709
million in 2000, $565 million in 2001, $328 million in 2002, $144 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 NUGs for the purchase of energy and
capacity which have remaining terms of up to 21 years. The rates under virtually
all of the GPU Energy companies' NUG agreements are substantially in excess of
current and projected prices from alternative sources. The projected cost of
energy from new generation supply sources has also decreased due to improvements
in power plant technologies and lower forecasted fuel prices. The following
table shows actual payments from 1997 through December 31, 1999, and estimated
payments thereafter through 2004.
Payments Under NUG Agreements
-----------------------------
(in millions)
Total JCP&L Met-Ed Penelec
----- ----- ------ -------
1997 759 384 172 203
1998 788 403 174 211
1999 774 388 167 219
2000 794 405 157 232
2001 778 410 154 214
2002 799 422 158 219
2003 802 413 163 226
2004 808 407 168 233
The NJBPU Summary Order and PaPUC Restructuring Orders provide the GPU
Energy companies assurance of full recovery of their NUG costs (including
above-market NUG costs and certain buyout costs). Accordingly, the GPU Energy
companies have recorded, on a present value basis, a liability for above-market
NUG costs of $3.2 billion on the Consolidated Balance Sheets which is fully
offset by Regulatory assets, net. In addition, JCP&L recorded a liability of $64
million for above-market utility power purchase agreements with a corresponding
offset to Regulatory assets, net, since there is also assurance of full recovery
of these costs. The GPU Energy companies are continuing efforts to reduce the
above-market costs of these agreements and will, where beneficial, attempt to
renegotiate the prices of the agreements, offer contract buyouts and attempt to
convert must-run agreements to dispatchable agreements. There can be no
assurance as to the extent to which these efforts will be successful.
In 1997, the NJBPU approved a Stipulation of Final Settlement which, among
other things, 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 MTC, but has not altered the
interim nature of such recovery, pending a final
64
<PAGE>
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 FAS 71, and adopted the provisions of FAS 101, and EITF Issue
97-4 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 December 31, 1999 and December
31, 1998 Consolidated Balance Sheets in accordance with the provisions of FAS 71
and EITF Issue 97-4 were as follows:
(in thousands)
---------------------
1999 1998
----------- --------
Market transition charge (MTC) / basic
generation service (NJ) $2,358,844 $ -
Competitive transition charge (CTC) (PA) 803,064 1,023,815
Reserve for generation divestiture 536,904 1,527,985
Power purchase contract loss not in CTC (PA) 369,290 369,290
Costs recoverable through distribution rates (NJ) 296,841 -
Income taxes recoverable through future rates, net 280,268 396,937
Three Mile Island Unit 2 (TMI-2)
decommissioning costs 100,794 119,571
Societal benefits charge (NJ) 116,941 -
Other postretirement benefits 25,335 73,770
Nonutility generation contract buyout costs - 123,208
Unamortized property losses (NJ) - 80,287
Net investment in TMI-2 (NJ) - 65,787
Environmental remediation (NJ) - 50,214
Above market NUG deferral costs (252,348) (16,067)
Other, net 76,721 126,032
--------- ---------
Total regulatory assets, net $4,712,654 $3,940,829
========= =========
Statement of Financial Accounting Standards No. 133 (FAS 133), "Accounting
for Derivative Instruments and Hedging Activities," establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. FAS 133
requires that companies recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
GPU will be required to include its derivative transactions on its balance sheet
at fair value, and recognize the subsequent changes in fair value as either
gains or losses in earnings or report them as a component of other comprehensive
income, depending upon the intended use and designation of the derivative as a
hedge. FAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. GPU will adopt FAS 133 in the first quarter of 2001 and is
in the process of evaluating the impact of the implementation of this statement.
GPU's use of derivative instruments is intended to manage the risk of interest
rate, foreign currency and commodity price fluctuations and may include such
transactions as
65
<PAGE>
electricity and natural gas forward and futures contracts, foreign currency
swaps, interest rate swaps and options. GPU does not intend to hold or issue
derivative instruments for trading purposes.
NUCLEAR FACILITIES
------------------
Investments:
- -----------
In December 1999, the GPU Energy companies sold TMI-1 to AmerGen for
approximately $100 million. In addition, JCP&L has agreed to sell Oyster Creek
to AmerGen for $10 million and reimbursement of the cost (estimated at $88
million) of the next refueling outage. TMI-2, which was damaged during a 1979
accident, is jointly owned by JCP&L, Met-Ed and Penelec in the percentages of
25%, 50% and 25%. JCP&L's net investment in TMI-2 at December 31, 1999 and 1998
was $61 million and $66 million, respectively. JCP&L is collecting revenues for
TMI-2 on a basis which provides for the recovery of its remaining investment in
the plant by 2008. Met-Ed and Penelec's remaining investments in TMI-2 were
written off in 1998 after receiving the PaPUC's Restructuring Orders.
Costs associated with the operation, maintenance and retirement of nuclear
plants have continued to be significant and less predictable than costs
associated with other sources of generation, in large part due to changing
regulatory requirements, safety standards, availability of nuclear waste
disposal facilities and experience gained in the construction and operation of
nuclear facilities. Also, not all risks associated with the ownership or
operation of nuclear facilities may be adequately insured or insurable.
Consequently, the recovery of costs associated with nuclear projects, including
replacement power, any unamortized investment at the end of each plant's useful
life (whether scheduled or premature), the carrying costs of that investment and
retirement costs, is not assured.
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
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<PAGE>
secondary level, the GPU Energy companies are subject to a retrospective premium
charge of up to $5 million per reactor, or a total of $15 million.
In 1995, the US Court of Appeals for the Third Circuit ruled that the
Price-Anderson Act provides coverage under its primary and secondary levels for
punitive as well as compensatory damages, but that punitive damages could not be
recovered against the Federal Government under the third level of financial
protection. In so doing, the Court of Appeals referred to the "finite fund" (the
$560 million of financial protection under the Price-Anderson Act) to which
plaintiffs must resort to get compensatory as well as punitive damages.
The Court of Appeals also ruled that the standard of care owed by the
defendants to a plaintiff was determined by the specific level of radiation
which was released into the environment, as measured at the site boundary,
rather than as measured at the specific site where the plaintiff was located at
the time of the accident (as the defendants proposed). The Court of Appeals also
held that each plaintiff still must demonstrate exposure to radiation released
during the TMI-2 accident and that such exposure had resulted in injuries. In
1996, the US Supreme Court denied petitions filed by GPU, Inc. and the GPU
Energy companies to review the Court of Appeals' rulings.
In 1996, the District Court granted a motion for summary judgment filed
by GPU, Inc. and the GPU Energy companies, and dismissed the ten initial "test
cases," which had been selected for a test case trial as well as all of the
remaining 2,100 pending claims. The Court ruled that there was no evidence which
created a genuine issue of material fact warranting submission of plaintiffs'
claims to a jury. The plaintiffs appealed the District Court's ruling to the
Court of Appeals for the Third Circuit. In November 1999, the Third Circuit
affirmed the District Court's dismissal of the ten "test cases," but set aside
the dismissal of the additional pending claims, remanding them to the District
Court for further proceedings. In remanding these claims, the Third Circuit held
that the District Court had erred in extending its summary judgment decision to
the other plaintiffs and imposing on these plaintiffs the District Court's
finding that radiation exposures below 10 rems were too speculative to establish
a causal link to cancer. The Court of Appeals stated that the non-test case
plaintiffs should be permitted to present their own individual evidence that
exposure to radiation from the accident caused their cancers.
GPU, Inc. and the GPU Energy companies believe that the Third Circuit has
misinterpreted the record before the District Court as it applies to the
non-test case plaintiffs, and in November 1999, filed petitions seeking a
rehearing and reconsideration of the Court's decision regarding the remaining
claims. The "test case" plaintiffs also requested a rehearing of the Court's
decision upholding the dismissal of their claims. In January 2000, the Court of
Appeals denied both petitions. The "test case" plaintiffs have stated that they
intend to seek, and GPU, Inc. and the GPU Energy companies are considering
whether to seek, Supreme Court review of the District Court's decision. There
can be no assurance as to the outcome of this litigation.
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<PAGE>
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 DOE.
In 1995, a consultant to GPUN performed site-specific studies of TMI-2
and Oyster Creek (updated in 1998), that considered various decommissioning
methods and estimated the cost of decommissioning the radiological portions and
the cost of removal of the nonradiological portions of each plant, using the
prompt removal/dismantlement method. GPUN management has reviewed the
methodology and assumptions used in these studies, is in agreement with them,
and believes the results are reasonable. Under NRC regulations, JCP&L is making
periodic payments to complete the funding for Oyster Creek retirement costs by
the end of the plant's license term of 2009. The TMI-2 funding completion date
is 2014, consistent with TMI-2's remaining in long-term storage. The NRC may
require an acceleration of the decommissioning funding for Oyster Creek if the
pending sale is not completed and the plant is retired early. The retirement
cost estimates under the 1995 site-specific studies, assuming decommissioning of
TMI-2 and Oyster Creek in 2014 and 2009, respectively, are as follows (in 1999
dollars):
(in millions)
Oyster
TMI-2 Creek
----- -----
Radiological decommissioning $435 $591
Nonradiological cost of removal 34* 32
--- ---
Total $469 $623
=== ===
* Net of $12.6 million spent as of December 31, 1999.
Each of the GPU Energy companies is responsible for retirement costs in
proportion to its respective ownership percentage. The ultimate cost of retiring
the GPU Energy companies' nuclear facilities may be different from the cost
estimates contained in these site-specific studies. Also, the cost estimates
contained in these site-specific studies are significantly greater than the
decommissioning funding targets established by the NRC.
The 1995 Oyster Creek site-specific study was updated in 1998 in response
to the previously announced potential early closure of the plant in 2000. An
early shutdown would increase the retirement costs shown above to $632 million
($600 million for radiological decommissioning and $32 million for
nonradiological cost of removal). Both estimates include substantial spending
for an on-site dry storage facility for spent nuclear fuel and significant costs
for storing the fuel until the DOE complies with the Nuclear Waste Policy Act of
1982. For additional information, see OTHER COMMITMENTS AND CONTINGENCIES
section.
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Upon the sale of TMI-1, AmerGen assumed all TMI-1 decommissioning
liabilities and the GPU Energy companies transferred $320 million to AmerGen for
decommissioning.
The agreements to sell Oyster Creek to AmerGen provide, among other
things, that upon financial closing, JCP&L will transfer $430 million in
decommissioning trust funds to AmerGen, which will assume all liability for
decommissioning Oyster Creek.
The GPU Energy companies charge to depreciation expense and accrue
retirement costs based on amounts being collected from customers. Customer
collections are contributed to external trust funds. These deposits, including
the related earnings, are classified as Nuclear decommissioning trusts, at
market on the Consolidated Balance Sheets.
The NJBPU has granted JCP&L annual revenues for Oyster Creek retirement
costs of $22.5 million based on the 1995 site-specific study. In August 2000,
the recovery of Oyster Creek retirement cost escalates to $34.4 million annually
if the plant is retired in 2000.
In the Restructuring Orders, the PaPUC granted Met-Ed and Penelec
recovery of TMI-1 decommissioning costs of $103.4 million and $67.8 million,
respectively, as part of the CTC. These amounts, which are computed on a present
value basis, are based on the 1995 site-specific study and will be adjusted in
Phase II of Met-Ed and Penelec's restructuring proceedings, once the net
proceeds from the generation asset divestiture are determined.
In the event JCP&L does not complete the pending sale of Oyster Creek,
management believes that any retirement costs, in excess of those currently
recognized for ratemaking purposes, should be recoverable from customers.
The estimated liabilities for TMI-2 future retirement costs (reflected as
Three Mile Island Unit 2 future costs on the Consolidated Balance Sheets) as of
December 31, 1999 and December 31, 1998 are $497 million and $484 million,
respectively. These amounts are based upon the 1995 site-specific study
estimates (in 1999 and 1998 dollars, respectively) discussed above and an
estimate for remaining incremental monitored storage costs of $27 million as of
December 31, 1999 and $29 million as of December 31, 1998, as a result of
TMI-2's entering long-term monitored storage in 1993. The GPU Energy companies
are incurring annual incremental monitored storage costs of approximately $1.8
million.
Offsetting the $497 million liability at December 31, 1999 is $193
million which management believes is probable of recovery from customers and
included in Regulatory assets, net on the Consolidated Balance Sheets, and $355
million in trust funds for TMI-2 and included in Nuclear decommissioning trusts,
at market on the Consolidated Balance Sheets. Earnings on trust fund deposits
are included in amounts shown on the Consolidated Balance Sheets under
Regulatory assets, net. TMI-2 decommissioning costs charged to depreciation
expense in 1999 amounted to $14.3 million.
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The NJBPU has granted JCP&L revenues for TMI-2 retirement costs based on
the 1995 site-specific estimates. In addition, JCP&L is recovering its share of
TMI-2 incremental monitored storage costs. The PaPUC Restructuring Orders
granted Met-Ed and Penelec recovery of TMI-2 decommissioning costs as part of
the CTC, but also allowed Met-Ed and Penelec to defer as a regulatory asset
those amounts that are above the level provided for in the CTC.
At December 31, 1999, the accident-related portion of TMI-2 radiological
decommissioning costs is considered to be $77 million, which is based on the
1995 site-specific study estimate (in 1999 dollars). In connection with rate
case resolutions at the time, JCP&L, Met-Ed and Penelec have made contributions
to irrevocable external trusts relating to their shares of the accident-related
portions of the decommissioning liability in the amounts of $15 million, $40
million and $20 million, respectively. These contributions were not recoverable
from customers and have been expensed. The GPU Energy companies will not pursue
recovery from customers for any amounts contributed in excess of the $77 million
accident-related portion referred to above.
JCP&L intends to seek recovery for any increases in TMI-2 retirement
costs, and Met-Ed and Penelec intend to seek recovery for any increases in the
nonaccident-related portion of such costs, but recognize that recovery cannot be
assured.
INSURANCE
---------
GPU has insurance (subject to retentions and deductibles) for its
operations and facilities including coverage for property damage, liability to
employees and third parties, and loss of use and occupancy (primarily
incremental replacement power costs). There is no assurance that GPU will
maintain all existing insurance coverages. Losses or liabilities that are not
completely insured, unless allowed to be recovered through ratemaking, could
have a material adverse effect on the financial position of GPU.
The decontamination liability, premature decommissioning and property
damage insurance coverage for Oyster Creek totals $2.75 billion. In addition,
GPU has purchased property and decontamination insurance coverage for TMI-2
totaling $150 million. In accordance with NRC regulations, these insurance
policies generally require that proceeds first be used for stabilization of the
reactors and then to pay for decontamination and debris removal expenses. Any
remaining amounts available under the policies may then be used for repair and
restoration costs and decommissioning costs. Consequently, there can be no
assurance that in the event of a nuclear incident, property damage insurance
proceeds would be available for the repair and restoration of that station.
The Price-Anderson Act limits GPU's liability to third parties for a
nuclear incident at Oyster Creek to approximately $9.5 billion. Coverage for the
first $200 million of such liability is provided by private insurance. The
remaining coverage, or secondary financial protection, is provided by
retrospective premiums payable by all nuclear reactor owners. Under secondary
financial protection, a nuclear incident at any licensed nuclear power reactor
in the country, including Oyster Creek, could result in an assessment of up to
$88 million per incident, subject to an annual maximum payment of $10 million
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<PAGE>
per incident per reactor. Although TMI-2 is exempt from this assessment, the
plant is still covered by the provisions of the Price-Anderson Act. In addition
to the retrospective premiums payable under the Price-Anderson Act, the GPU
Energy companies are also subject to retrospective premium assessments of up to
$10.5 million for insurance policies currently in effect applicable to nuclear
operations and facilities. The GPU Energy companies are also subject to other
retrospective premium assessments related to policies applicable to TMI-1 prior
to the sale of the plant to AmerGen.
JCP&L has insurance coverage for incremental replacement power costs
should an accident-related outage at Oyster Creek occur. Coverage would commence
after a 12-week waiting period at $2.1 million per week for 52 weeks, decreasing
to 80% of such amount for the next 110 weeks.
ENVIRONMENTAL MATTERS
---------------------
As a result of existing and proposed legislation and regulations, and
ongoing legal proceedings dealing with environmental matters, including but not
limited to acid rain, water quality, ambient air quality, global warming,
electromagnetic fields, and storage and disposal of hazardous and/or toxic
wastes, GPU may be required to incur substantial additional costs to construct
new equipment, modify or replace existing and proposed equipment, remediate,
decommission or cleanup waste disposal and other sites currently or formerly
used by it, including formerly owned manufactured gas plants (MGP), coal mine
refuse piles and generation facilities.
GPU has been formally notified by the EPA and state environmental
authorities that it is among the potentially responsible parties (PRPs) who may
be jointly and severally liable to pay for the costs associated with the
investigation and remediation at 11 hazardous and/or toxic waste sites.
In addition, certain of the GPU companies have been requested to
participate in the remediation or supply information to the EPA and state
environmental authorities on several other sites for which they have not been
formally named as PRPs, although the EPA and state authorities may nevertheless
consider them as PRPs. Certain of the GPU companies have also been named in
lawsuits requesting damages (which are material in amount) for hazardous and/or
toxic substances allegedly released into the environment. The ultimate cost of
remediation will depend upon changing circumstances as site investigations
continue, including (a) the existing technology required for site cleanup, (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, which merged with Dover in 1960.
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Chesapeake is currently performing the cleanup at the Site. According to the
complaint, the EPA is seeking (1) enforcement of the Order against GPU; (2)
recovery of its past response costs, (3) a declaratory judgment that GPU is
liable for any remaining cleanup costs of the Site and (4) statutory penalties
for noncompliance with the Order. The EPA has stated that it has incurred
approximately $1 million of past response costs as of December 31, 1999. The EPA
estimates the total Site cleanup costs at approximately $4.2 million.
Consultants to Chesapeake have estimated the remaining remediation groundwater
costs at approximately $10.5 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. At
December 31, 1999, if the statutory maximum is applied, the total amount of
penalties would be approximately $34 million. GPU believes that it has
meritorious defenses as to why no penalty should be assessed or if a penalty is
assessed, why it should be at a lower daily rate. Chesapeake has also sued GPU,
Inc. for contribution to the cleanup of the Dover Site. The US District Court
for the District of Delaware has consolidated the case filed by Chesapeake with
the case filed by the EPA and discovery is proceeding. There can be no assurance
as to the outcome of these proceedings.
In connection with the sale of its Seward Generation Station to Sithe,
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 of approximately $6
million at December 31, 1999.
JCP&L has entered into agreements with the New Jersey Department of
Environmental Protection for the investigation and remediation of 17 formerly
owned MGP sites. JCP&L has also entered into various cost-sharing agreements
with other utilities for most of the sites. As of December 31, 1999, JCP&L has
spent approximately $36 million in connection with the cleanup of these sites.
In addition, JCP&L has recorded an estimated environmental liability of $52
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 $52 million due to significant uncertainties,
including changes in acceptable remediation methods and technologies. In
addition, federal and state law provides for payment by responsible parties for
damage to natural resources.
In 1997, 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. At December 31, 1999, JCP&L had
recorded on its Consolidated Balance Sheet a regulatory asset of $44 million.
JCP&L is continuing to pursue reimbursement from its insurance carriers for
remediation costs already spent and for future estimated costs. In 1994, JCP&L
commenced litigation in the New Jersey Superior Court against
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several of its insurance carriers, relative to these MGP sites, and has settled
with all but one of those insurance companies.
OTHER COMMITMENTS AND CONTINGENCIES
-----------------------------------
Class Action Litigation:
- -----------------------
GPU Energy
In July 1999, New Jersey experienced a severe heat storm that resulted in
major power outages and temporary service interruptions including in JCP&L's
service territory. As a result, the NJBPU has initiated an investigation into
the reliability of the transmission and distribution systems of all New Jersey
utilities and their response to power outages. In addition, two class action
lawsuits have been commenced in New Jersey Superior Court against GPU, Inc. and
the GPU Energy companies, 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, but in January
2000 the Appellate Division agreed to review the Court's decision. 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 who have reserved their
rights to contest coverage under GPU's insurance policies for losses which GPU
may incur. There can be no assurance as to the outcome of these matters.
GPU Electric
As a result of the fire and explosion in September 1998, at the Longford
natural gas plant in Victoria, Australia, three class actions have been brought
in Australian Federal Court against Esso Australia Limited and its affiliate
(Esso), the owner and operator of the plant, for losses suffered due to the lack
of natural gas supply and related damages. Plaintiffs claim that Esso was, among
other things, negligent in designing, maintaining and operating the Longford
plant and also assert claims under various Australian fair trade practices laws.
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 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 has also named GPU
GasNet as a third party defendant. Under the acquisition agreement with the
State, GPU GasNet has indemnified TPA and the State against third party claims.
Esso is seeking contribution and indemnity from the third party defendants for
any damages for which Esso may be found liable. In addition, Esso has asserted
several separate claims against the State and the former State-owned entities
for damages, and contends that GPU GasNet assumed TPA's liabilities as part of
the State's privatization process.
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GPU GasNet and TPAA have filed answers denying liability, which could be
material and have moved to dismiss portions of Esso's claims. GPU GasNet and
TPAA have also notified their insurance carriers of this action. The insurers
have reserved their rights to deny coverage. There can be no assurance as to the
outcome of this matter.
Investments and Guarantees:
- --------------------------
GPU, Inc.
GPU, Inc. has made significant investments in foreign businesses and
facilities through its subsidiaries, GPU Electric and the GPUI Group. At
December 31, 1999, GPU, Inc.'s investment in GPU Electric and the GPUI Group was
$1.06 billion and $232 million, respectively. As of that date, GPU, Inc. has
also guaranteed an additional $1.04 billion and $29.9 million (including $8.7
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
Midlands has a 40% ownership interest in a 586 MW power project in
Pakistan (the Uch Power Project), which was originally scheduled to begin
commercial operation in late 1998, but testing and commercial operation have
been delayed.
In June 1999, certain Project lenders issued notices of default to the
Project sponsors (including Midlands) for, among other things, failure to pay
principal and interest under various loan agreements. In November 1999, the
Project sponsors and lenders reached an agreement under which repayment of the
construction loan will be extended, principal and interest payments deferred,
and the sponsors will fund the completion of the plant through the remaining
equity contribution commitments. Midlands' investment in the Uch Power Project
at December 31, 1999 was approximately $43 million, and its share of the
projected completion costs represents an additional $8 million commitment.
Cinergy has agreed to fund up to an aggregate of $20 million of the required
capital contributions and/or certain future "cash losses" which could be
incurred on the Uch Power Project. Cinergy has reimbursed Midlands $3 million of
capital contributions as of December 31, 1999, leaving a remaining commitment of
up to $17 million. Testing of the plant has begun and the start of commercial
operations is now anticipated in 2000. There can be no assurance as to the
outcome of this matter.
As part of the sale of the Midlands' supply business and the purchase of
the 50% of Midlands GPU did not already own, certain long-term obligations under
natural gas supply contracts were retained. Most of these contracts were at
fixed prices in excess of the market price of gas as of December 31, 1999. A
liability was previously established for the estimated loss under
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such contracts, which extend to September 2005. The estimated liability at
December 31, 1999 was $55.1 million.
GPUI Group
On July 9, 1999, DIAN (the Columbian national tax authority) issued a
"Special Requirement" on the Termobarranquilla S.A., Empresa de Servicios
Publicos (TEBSA, an investment in which GPU Power has a 29% interest) 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.
The failure to give notice of this Special Requirement to the US Export
Import Bank may be asserted as a technical event of default under the loan
agreement. An event of default would entitle TEBSA's lenders to accelerate the
payment of outstanding loans of TEBSA and require payment of certain standby
equity commitments by TEBSA's shareholders and equity guarantors, which include
a subsidiary of GPU Power and GPU, Inc. respectively. The lenders have not
asserted that an event of default has occurred or indicated whether they will
pursue remedies under the project financing documents.
As of December 31, 1999, GPU Power has an investment of approximately
$79 million in TEBSA and GPU, Inc. has guaranteed $21.3 million in standby
equity commitments. There can be no assurance as to the outcome of these
matters.
Other:
- -----
GPU AR has entered into contracts to supply electricity to retail
customers through May 2001. In connection with meeting its supply obligations,
GPU AR has entered into firm purchase commitments for energy and capacity with
payment obligations totaling approximately $27 million as of December 31, 1999.
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. AmerGen has assumed all liability for disposal costs related
to spent fuel generated after its purchase of TMI-1 and has agreed to assume
this liability for Oyster Creek following its purchase of that plant. In 1996,
the DOE notified the GPU Energy companies and other standard contract holders
that it will be unable to begin acceptance of spent nuclear fuel for disposal by
1998, as mandated by the NWPA. The DOE requested recommendations from contract
holders for handling the delay. The DOE's inability to accept spent nuclear fuel
could have a material impact on GPU's results of operations, as additional costs
may be incurred to build and maintain interim on-site storage at Oyster Creek.
In June 1997, a consortium of electric utilities, including GPUN, filed a
license application with the NRC seeking permission to build an interim
above-ground disposal facility for spent nuclear fuel in Utah. There can be no
assurance as to the outcome of these matters.
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GPU, Inc. and consolidated affiliates have approximately 10,800
employees worldwide, of which 6,100 are employed in the US and 3,700 are
employed in the United Kingdom. The majority of the US workforce is employed by
the GPU Energy companies, of which approximately 4,000 are represented by unions
for collective bargaining purposes. In the United Kingdom, approximately 2,800
Midlands employees are represented by unions; terms and conditions of the
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,
April 30, 2000 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.
13. 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.
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<TABLE>
GPU, Inc. and Subsidiary Companies
Business Segment Data (in thousands)
<CAPTION>
Income
Interest Before Extra-
Depreciation Charges and Income Tax ordinary and Investments
Operating and Preferred Expense/ Non-recurring Total and Capital
Revenues Amortization Dividends (Benefit)(a) Items Assets Expenditures(b)
-------- ------------ --------- ------------ ----- ------ ---------------
1999
- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Domestic Segments:
Electric Utility Operations (GPU Energy) $3,685,821 $ 409,345 $ 209,769 $ 238,591 $ 440,983 $13,244,301 $ 291,391
Independ Power Prod (GPU International) 83,434 9,401 1,044 9,478 11,337 359,374 1,225
Electric Retail Energy Sales (GPU AR) 84,681 - - (2,393) (4,558) 24,630 -
--------- --------- --------- --------- ---------- ---------- --------
Subtotal 3,853,936 418,746 210,813 245,676 447,762 13,628,305 292,616
--------- --------- --------- --------- --------- ---------- --------
Foreign Segments:
Electric/Gas Utility Operations:
(GPU Electric)
Electric Distribution - United Kingdom 504,826 52,847 91,433 21,208 54,836(c) 4,687,476 727,793
Electric Distribution - Argentina 135,938 15,273 23,414 (960) (1,778) 579,907 407,225
Electric Transmission - Australia 193,366 42,850 110,059 (1,171) (6,715) 1,824,309 19,889
Gas Transmission - Australia 31,326 6,933 28,821 (12,156) (39) 795,527 653,747
Independ Power Prod - S. America 37,732 6,290 3,560 5,152 8,116 238,644 30,421
(GPU Power
------ ----- ----- ----- ----- ------- ------
Subtotal 903,188 124,193 257,287 12,073 54,420 8,125,863 1,839,075
--------- --------- --------- --------- --------- ---------- ---------
Corporate and Eliminations - - 14,397 - (18,068) (36,086) -
--------- --------- --------- --------- -------- ---------- ---------
Consolidated Total $4,757,124 $ 542,939 $ 482,497 $ 257,749 $ 484,114 $21,718,082 $2,131,691
========== ========== ========== ========== ========== =========== ==========
1998
- ----
Domestic Segments:
Electric Utility Operations (GPU Energy) $3,953,254 $ 469,623 $ 241,886 271,336 $ 369,752 $13,298,257 $ 328,418
Independ Power Prod (GPU International) 72,256 4,560 748 9,103 11,622 397,523 21,375
Electric Retail Energy Sales (GPU AR) 10,938 - - (1,201) (2,231) 2,651 34
------ --------- --------- ------- ------- ---------- ----------
Subtotal 4,036,448 474,183 242,634 279,238 379,143 13,698,431 349,827
--------- --------- --------- --------- --------- ---------- ---------
Foreign Segments:
Electric/Gas Utility Operations:
(GPU Electric)
Electric Distribution - United Kingdom 944 1,226 30,859 (6,489) 37,249(d) 617,737 -
Electric Transmission - Australia 181,059 40,841 108,227 11,421 18,885 1,788,877 58,549
Independ Power Prod - S. America 33,136 5,844 4,219 719 2,499 237,162 59,847
(GPU Power)
--------- --------- --------- --------- --------- --------- ---------
Subtotal 215,139 47,911 143,305 5,651 58,633 2,643,776 118,396
--------- --------- --------- --------- --------- --------- ---------
Corporate and Eliminations (2,795) - 3,293 - (11,818) (54,098) -
--------- --------- --------- --------- --------- --------- ---------
Consolidated Total $4,248,792 $ 522,094 $ 389,232 $ 284,889 $ 425,958 $16,288,109 $ 468,223
========== ========== ========== ========== ========== =========== ==========
</TABLE>
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<TABLE>
(in thousands)
<CAPTION>
Income
Interest Before Extra-
Depreciation Charges and Income Tax ordinary and Investments
Operating and Preferred Expense/ Non-recurring Total and Capital
Revenues Amortization Dividends (Benefit)(a) Items Assets Expenditures(b)
-------- ------------ --------- ------------ ----- ------ ---------------
1997
- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Domestic Segments:
Electric Utility Operations $4,045,233 $ 451,009 $ 249,015 $ 249,184 $ 388,030 $ 9,850,784 $ 356,416
(GPU Energy)
Independ Power Prod (GPU International) 38,727 778 713 (3,115) (13,362) 318,592 111,700
Electric Retail Energy Sales (GPU AR) 1,339 - - (2,576) (4,782) 5,122 -
----- -------- --------- ------- ------- ----- ----------
Subtotal 4,085,299 451,787 249,728 243,493 369,886 10,174,198 468,116
--------- ------- ------- ------- ------- ---------- -------
Foreign Segments:
Electric/Gas Utility Operations:
(GPU Electric)
Electric Distribution - United Kingdom - 354 39,312 (44,438) 78,463(d) 568,997 449
Electric Transmission & 30,339 9,412 23,397 (5,184) 12,631 1,967,946 1,800,072
Distribution-Australia
Independ Power Prod - S. America (GPU Power) 29,174 6,161 3,202 (335) (2,301) 145,859 -
------ ----- ----- ---- ------ ------- ---------
Subtotal 59,513 15,927 65,911 (49,957) 88,793 2,682,802 1,800,521
------ ------ ------ ------- ------ --------- ---------
Corporate and Eliminations (1,433) - 3,682 - (14,278) (34,366) -
------ ------ ----- ---------- ------- ------- ---------
Consolidated Total $4,143,379 $ 467,714 $ 319,321 $ 193,536 $ 444,401 $12,822,934 $2,268,637
========== ========== ========== ========== ========== =========== ==========
</TABLE>
(a) Represents income taxes on income before extraordinary and
non-recurring items.
(b) Includes acquisitions, net of cash acquired of $1,671
million in 1999 (Midlands $653 million; Emdersa $369
million; GPU GasNet $649 million)and $1,798 million in 1997
(GPU PowerNet).
(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 Midlands.
(d) Includes equity in net income of investee accounted for
under the equity method of $62 million in 1998 and $74
million in 1997.
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<TABLE>
GPU, Inc. and Subsidiary Companies
QUARTERLY FINANCIAL DATA (UNAUDITED)
<CAPTION>
First Quarter Second Quarter
------------- --------------
in thousands, except
per share data 1999 (1) 1998 1999 (2) 1998 (3)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $1,068,703 $1,043,109 $892,700 $1,015,087
Operating income 298,633 259,634 132,027 215,622
Income before extraordinary item 190,719 133,780 47,262 79,937
Net income/(loss) 190,719 133,780 47,262 (195,173)
Basic earnings per share before
extraordinary item 1.49 1.07 0.39 0.62
Diluted earnings per share before
extraordinary item 1.49 1.07 0.38 0.62
Basic earnings/(loss) per share 1.49 1.07 0.39 (1.54)
Diluted earnings/(loss) per share 1.49 1.07 0.38 (1.54)
Third Quarter Fourth Quarter
------------- --------------
in thousands, except
per share data 1999 1998 (4) 1999 (5) 1998
- --------------------------------------------------------------------------------------------------------
Operating revenues $1,424,286 $1,168,779 $1,371,435 $1,021,817
Operating income 376,970 225,950 201,200 194,873
Income before extraordinary item 147,547 88,691 73,486 83,473
Net income 147,547 338,046 73,486 83,473
Basic earnings per share before
extraordinary item 1.18 0.69 0.60 0.65
Diluted earnings per share before
extraordinary item 1.18 0.69 0.60 0.65
Basic earnings per share 1.18 2.65 0.60 0.65
Diluted earnings per share 1.18 2.65 0.60 0.65
</TABLE>
(1) Results for the first quarter of 1999 include an increase
of $27.8 million after-tax, or $0.22 per share, for the
gain on the sale of Penelec's Homer City Station, related
to wholesale operations.
(2) Results for the second quarter of 1999 include a
reduction of $68 million after-tax, or $0.54 per
share, as a result of the NJBPU's Restructuring Order
on JCP&L; and an after-tax increase of $9.7 million,
or $0.08 per share, for the gain on the sale of the
Midlands supply business.
(3) Results for the second quarter of 1998 were
affected by an extraordinary charge of $275.1 million
after-tax, or $2.16 per share, as a result of the
Pennsylvania Public Utility Commission's (PaPUC)
June 30, 1998 Restructuring Orders on Met-Ed
and Penelec's restructuring plans.
(4) In the third quarter of 1998, as a result of
amended PaPUC Restructuring Orders, GPU reversed $266.3
million after-tax, or $2.09 per share, of the
extraordinary charge taken in the second quarter,
primarily related to above-market nonutility generation
costs; and recorded an additional extraordinary charge
of $17 million after-tax, or $0.13 per share, primarily
related to the write-off of FERC jurisdictional assets.
Also in the third quarter of 1998, as a result of the
amended PaPUC Orders, GPU recorded a non-recurring charge
of $40 million after-tax, or $0.32 per share, related to
the obligation to refund 1998 revenues; and for the
establishment of a sustainable energy fund.
(5) Results for the fourth quarter of 1999 include an
increase of $8.3 million after-tax, or $0.07 per share,
for the net gains on the sales of substantially all of GPU
Energy's remaining generating assets; and, as a result o
adjustments to the working capital estimate, a reduction
of $2.9 million after-tax, or $0.03 per share, was taken
against the previously recorded gain on the sale of the
Midlands supply business. In addition, the aggregate
effect on earnings of other fourth quarter 1999
adjustments was a loss of approximately $23 million
after-tax, or approximately $0.19 per share.
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<TABLE>
GPU ENERGY COMPANIES' STATISTICS
<CAPTION>
For The Years Ended December 31, 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Capacity at System Peak (in MW):
<S> <C> <C> <C> <C> <C>
Company owned 5,765 6,751 6,740 6,680 6,637
Contracted 3,192 4,275 3,930 3,536 3,604
------ ------ ------ ------ ------
Total capacity (a) 8,957 11,026 10,670 10,216 10,241
====== ====== ====== ====== ======
Hourly Peak Load (in MW):
Summer peak 10,075 9,412 9,555 8,497 9,101
Winter peak 8,046 7,579 7,736 7,756 7,861
Reserve at system peak (%) (11.1) 17.0 11.7 20.2 12.5
Load factor (%) (b) 57.2 59.4 57.6 64.2 57.5
Sources of Energy (in thousands of MWH):
Coal 12,116 19,675 19,390 18,133 17,500
Nuclear 11,479 11,358 10,992 11,439 11,582
Gas, hydro & oil 736 888 800 812 1,019
------ ------ ------ ------ ------
Net generation 24,331 31,921 31,182 30,384 30,101
Utility purchases and interchange 11,047 8,782 9,004 8,795 10,297
Nonutility purchases 10,875 10,952 11,119 11,046 10,712
------ ------ ------ ------ ------
Total sources of energy 46,253 51,655 51,305 50,225 51,110
Energy from alternate suppliers 10,034 - - - -
Company use, line loss, etc. (4,783) (4,300) (5,437) (5,777) (5,357)
------ ------ ------ ------ ------
Total delivered MWH sales 51,504 47,355 45,868 44,448 45,753
====== ====== ====== ====== ======
Fuel Expense (in millions):
Coal $ 162 $ 263 $ 268 $263 $251
Nuclear 67 67 63 70 74
Gas & oil 31 32 40 38 38
----- ---- ---- --- ---
Total $ 260 $ 362 $ 371 $371 $363
===== ==== ==== === ===
Power Purchased and Interchanged (in millions):
Utility and interchange purchases $ 422 $ 311 $ 294 $ 267 $ 351
Nonutility purchases 783 788 759 730 671
Deferred nonutility costs (PA) (66) (17) (25) - -
Amortization of nonutility buyout costs 26 30 19 9 -
----- ----- ----- ----- -----
Total $1,165 $1,112 $1,047 $1,006 $1,022
===== ===== ===== ===== =====
Delivered MWH Sales (in thousands):
Residential 16,107 15,347 15,091 15,298 14,802
Commercial 15,431 14,778 14,281 14,017 13,544
Industrial 12,239 12,644 12,469 12,093 11,982
Other 811 996 1,110 1,105 1,143
------ ------ ------ ------ ------
Sales to customers 44,588 43,765 42,951 42,513 41,471
Sales to other utilities 6,916 3,590 2,917 1,935 4,282
------ ------ ------ ------ ------
Total 51,504 47,355 45,868 44,448 45,753
====== ====== ====== ====== ======
Operating Revenues (in millions):
Residential $1,618 $1,579 $1,617 $1,599 $1,542
Commercial 1,229 1,350 1,372 1,324 1,258
Industrial 498 795 833 803 780
Other 60 66 75 71 73
----- ----- ----- ----- -----
Sales to customers 3,405 3,790 3,897 3,797 3,653
Provision for rate refunds (56) (62) - - -
Sales to other utilities 233 132 77 57 101
----- ----- ----- ----- -----
Total electric energy sales 3,582 3,860 3,974 3,854 3,754
Other revenues 104 93 70 64 51
----- ----- ----- ----- -----
Total $3,686 $3,953 $4,044 $3,918 $3,805
===== ===== ===== ===== =====
Customers at Year-End (in thousands):
Total customers 2,063 2,041 2,021 1,997 1,976
Customers choosing alternate suppliers 72 - - - -
</TABLE>
(a) Summer ratings at December 31, 1999 of owned and contracted
capacity were 904 MW and 7,828 MW, respectively.
(b) The ratio of the average hourly load in kilowatts supplied
during the year to the peak load occurring during the year.
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