SEC FILE NO.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-l
APPLICATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 ("Act")
JERSEY CENTRAL POWER & LIGHT COMPANY ("JCP&L")
2800 Pottsville Pike
Reading, Pennsylvania 19605
(Name of company filing this statement and address
of principal executive office)
GPU, INC. ("GPU")
(Name of top registered holding company parent of applicant)
Terrance G. Howson, Douglas E. Davidson, Esq.
Vice President and Treasurer Berlack, Israels & Liberman LLP
Mary A. Nalewako, Secretary 120 West 45th Street
Michael J. Connolly, New York, New York 10036
Assistant General Counsel
GPU Service, Inc.
300 Madison Avenue
Morristown, New Jersey 07962
Scott L. Guibord, Secretary
Jersey Central Power & Light Company
2800 Pottsville Pike
Reading, Pennsylvania 19605
(Names and addresses of agents for service)
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ITEM 1. DESCRIPTION OF PROPOSED TRANSACTIONS.
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A. JCP&L proposes to organize a special purpose business trust
under Delaware law ("JCP&L Capital Trust"), which will issue and sell from time
to time in one or more series through December 31, 2000 up to $200 million
aggregate liquidation value of preferred beneficial interests, in the form of
Trust Securities (having a liquidation value per interest to be determined) (the
"Trust Securities")*. Each Trust Security will represent a cumulative preferred
security (the "Preferred Securities") of a Delaware limited partnership ("JCP&L
Capital II, L.P."), which will be a special purpose indirect subsidiary of
JCP&L. JCP&L also proposes to form a special purpose Delaware corporation
("Investment Sub"), for the sole purpose of acting as general partner of JCP&L
Capital II, L.P. The sole purpose of JCP&L Capital Trust will be to acquire the
Preferred Securities and to issue the Trust Securities evidencing the Preferred
Securities. The sole purpose of JCP&L Capital II, L.P. is to issue one or more
series of Preferred Securities and to lend the proceeds thereof, plus the
capital contribution (in an amount not to exceed $7 million) made by JCP&L in
JCP&L Capital II, L.P., to JCP&L, which loan will be evidenced by Subordinated
Debentures (defined below) issued by JCP&L.
B. JCP&L will acquire the common stock of Investment Sub for a
nominal consideration and will capitalize Investment Sub with (i) a capital
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* The transactions proposed herein are substantially the same as the
transactions approved by the Commission in Order dated March 6, 1995
(HCAR No. 35-26246) (monthly income preferred securities ("MIPS")) with
the exception that the MIPS were issued by a limited partnership
subsidiary of JCP&L and the Trust Securities will be issued by a
special purpose business trust subsidiary. The trust structure is being
utilized to help ensure the intended tax treatment, as discussed below.
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contribution in the amount of up to $7 million, and (ii) a demand promissory
note in the principal amount of up to $21 million, such note to accrue interest,
compounded semi-annually, at a rate equal to the Citibank, N.A. base rate as in
effect from time to time. Investment Sub will acquire all of the general partner
interests in JCP&L Capital II, L.P. for up to $7 million (the "L.P. Equity
Contribution").
JCP&L Capital Trust will apply the proceeds from the sale of
the Trust Securities to purchase the Preferred Securities. JCP&L Capital II,
L.P. will, in turn, use the proceeds received from the sale of the Preferred
Securities, together with the L.P. Equity Contribution, to purchase JCP&L's
subordinated debentures (individually, a "Subordinated Debenture" and
collectively, the "Subordinated Debentures").
C. JCP&L will also unconditionally guarantee the payment by
JCP&L Capital II, L.P. of (A) accrued but unpaid distributions on the Preferred
Securities, if and to the extent JCP&L Capital II, L.P. has funds on hand
legally available therefor, (B) the redemption price for any redemption of the
Preferred Securities, (C) the aggregate liquidation preference on the Preferred
Securities to the extent JCP&L Capital II, L.P. has funds on hand legally
available therefor, including all accrued but unpaid distributions, whether or
not declared and (D) certain additional amounts (the "Guaranties").
D. Each Subordinated Debenture will be issued under an
Indenture to be entered into with United States Trust Company of New York, as
trustee, and will have an initial term of up to 49 years. Prior to maturity,
JCP&L will pay only interest on the Subordinated Debentures at a rate equal to
the distribution rate on the Preferred Securities. Such interest payments will
constitute JCP&L Capital II, L.P.'s only income and distributions on the
Preferred Securities will, in turn, constitute JCP&L Capital Trust's only
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income and will be used by it to pay distributions on the Trust Securities. Any
excess interest payment not needed for distributions on the Preferred Securities
will be distributed indirectly to JCP&L as a distribution on JCP&L's investment
in JCP&L Capital II, L.P., thereby reducing the interest cost on the
Subordinated Debentures. Distributions on the Trust Securities will be made not
less than semi-annually, and will be cumulative and must be made to the extent
that JCP&L Capital Trust has funds on hand legally available for such purposes.
However, JCP&L will have the right to defer payment of interest on the
Subordinated Debentures for up to five years in which event JCP&L Capital II,
L.P. and JCP&L Capital Trust may similarly defer payment of distributions on the
Preferred Securities and the Trust Securities, respectively, but in no event may
distributions be deferred beyond the maturity date of the Subordinated
Debentures. The distribution rates, payment dates, redemption and other similar
provisions of each series of Trust Securities will be identical to the interest
rates, payment dates, redemption and other provisions of the Preferred
Securities issued by JCP&L Capital II, L.P. and the Subordinated Debentures
issued by JCP&L with respect thereto.
E. Each Subordinated Debenture and related Guaranty will be
subordinate to all other existing and future "Senior Indebtedness," as defined
below, of JCP&L and will have no cross-default provisions with respect to other
JCP&L indebtedness -- i.e., a default under any other outstanding JCP&L
indebtedness will not result in a default under the Subordinated Debenture or
the Guaranty. However, JCP&L may not declare and pay dividends on, or redeem or
retire, its outstanding Cumulative Preferred Stock or Common Stock unless all
payments then due (whether or not previously deferred) under the Subordinated
Debentures and the Guaranties have been made. "Senior Indebtedness" consists of
(i) the principal of and premium (if any) in respect of (A) indebtedness of
JCP&L for money borrowed and (B) indebtedness evidenced
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by securities, debentures, bonds or other similar instruments (including
purchase money obligations) for payment of which JCP&L is responsible or liable;
(ii) all capital lease obligations of JCP&L; (iii) all obligations of JCP&L
issued or assumed as the deferred purchase price of property, all conditional
sale obligations of JCP&L and all obligations of JCP&L under any title retention
agreement (but excluding trade accounts payable arising in the ordinary course
of business); (iv) certain obligations of JCP&L for the reimbursement of any
obligor on any letter of credit, banker's acceptance, security purchase facility
or similar credit transaction; (v) all obligations of the type referred to in
clauses (i) through (iv) of other persons for the payment of which JCP&L is
responsible or liable as obligor, guarantor or otherwise; and (vi) all
obligations of the types referred to in clauses (i) through (v) of other persons
secured by any lien on any property or asset of JCP&L (whether or not such
obligation is assumed by JCP&L), except for any such indebtedness that is by its
terms subordinated to or pari passu with the Subordinated Debentures.
F. It is expected that JCP&L's interest payments on the
Subordinated Debentures will be deductible for income tax purposes and that
JCP&L Capital Trust will be treated as a trust for federal income tax purposes.
Consequently, distributions from JCP&L Capital Trust to the holders of Trust
Securities will be deemed to constitute distributions on the Preferred
Securities and in turn of the interest income received by JCP&L Capital II, L.P.
on the Subordinated Debentures. Consequently, such holders and Investment Sub,
as the general partner of JCP&L Capital II, L.P. will not be entitled to any
"dividend received deduction" under the Internal Revenue Code with respect to
such distributions.
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G. A series of the Trust Securities will be subject to
mandatory redemption upon redemption of the corresponding series of the
Preferred Securities. A series of Preferred Securities will be subject to
mandatory redemption upon the maturity or prior redemption of the corresponding
series of the Subordinated Debentures, but will not be subject to any mandatory
sinking fund. A series of Preferred Securities may also be redeemable at the
option of JCP&L at a price equal to its liquidation value plus any accrued and
unpaid distributions plus any premium negotiated in connection with the
marketing of the Trust Securities, (i) at any time after a specified no-call
period (if any) which could be up to the life of the issuance, or (ii) in the
event that (I) JCP&L Capital II, L.P. or JCP&L Capital Trust is required by
applicable tax laws to withhold or deduct certain amounts in connection with
distributions or other payments, or (II) JCP&L Capital II, L.P. or JCP&L Capital
Trust is subject to federal income tax with respect to interest received on the
Subordinated Debentures, or (III) it is determined that the interest payments by
JCP&L on the Subordinated Debentures are not deductible for federal income tax
purposes or will otherwise not be taxed as a partnership or grantor trust, as
the case may be, or (IV) JCP&L Capital II, L.P. or JCP&L Capital Trust is
subject to more than a de minimis amount of other taxes, duties or other
governmental charges, or (V) JCP&L Capital II, L.P. or JCP&L Capital Trust
becomes subject to regulation as an "investment company" under the Investment
Company Act of 1940, as amended ("1940 Act"). Upon occurrence of any of the
events set forth in clause (ii) of the immediately preceding sentence, JCP&L
Capital II, L.P. and JCP&L Capital Trust could be dissolved and the Subordinated
Debentures distributed directly to the holders of the Trust Securities and to
JCP&L on a pro rata basis, resulting in direct ownership of the Subordinated
Debentures by the holders of the Trust Securities. The Subordinated Debentures
distributed to JCP&L will be canceled.
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If at any time JCP&L Capital II, L.P. would be required to pay
any taxes, duties, assessments or governmental charges of whatever nature (other
than withholding taxes) imposed by the United States, or any other taxing
authority, then, in any such case, JCP&L also will pay as additional interest
such amounts as shall be required so that the net amounts received and retained
by JCP&L Capital II, L.P. after paying any such taxes, duties, assessments or
governmental charges will not be less than the amounts JCP&L Capital II, L.P.
would have received had no such taxes, duties, assessments or governmental
charges been imposed.
H. Upon receipt by JCP&L Capital Trust of any distribution
from JCP&L Capital II, L.P. upon any voluntary or involuntary liquidation,
dissolution or winding up of JCP&L Capital II, L.P., the holders of the Trust
Securities will be entitled to receive such amounts in proportion to the
respective number of Preferred Securities represented by such Trust Securities,
out of the assets of JCP&L Capital II, L.P. available for distribution to
holders of Preferred Securities and after satisfaction of liabilities to
creditors of JCP&L Capital Trust.
In the event of any voluntary or involuntary dissolution or
winding up of JCP&L Capital II, L.P., the holders of Preferred Securities will
be entitled to receive out of the assets of JCP&L Capital II, L.P., after
satisfaction of liabilities to creditors and before any distribution of assets
is made to Investment Sub, the sum of their stated liquidation preference and
all accumulated and unpaid distributions to the date of payment of the Preferred
Securities. All assets of JCP&L Capital II, L.P. remaining after payment of the
liquidation distribution to the holders of Preferred Securities will be
distributed to Investment Sub.
Upon any liquidation, dissolution or winding up of JCP&L, the
amount payable on each series of the Preferred Securities would be limited to a
pro rata portion of any amount recovered by JCP&L Capital II, L.P. in its
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capacity as a subordinated debt holder of JCP&L. The Subordinated Debentures and
the payment obligations under the Guaranty will be subordinate to all other
existing and future Senior Indebtedness, except for any such indebtedness that
is by its terms subordinated to or pari passu with the Subordinated Debentures.
I. The constituent instruments of JCP&L Capital Trust,
including its declaration of trust, will provide, among other things, that JCP&L
Capital Trust's activities will be limited to the issuance and sale of Trust
Securities from time to time and the application of the proceeds thereof to the
purchase of the Preferred Securities. Accordingly, it is not proposed that JCP&L
Capital Trust's constituent instruments include any interest or distribution
coverage or capitalization ratio restrictions on its ability to issue and sell
Trust Securities, as each such issuance will be supported by a Preferred
Security which in turn will be supported by a Subordinated Debenture and a
Guaranty, and such restrictions would therefore not be relevant or necessary for
JCP&L Capital Trust to maintain an appropriate capital structure. Moreover, the
issuance of Subordinated Debentures by JCP&L will be subject to the restriction
in Article VI, paragraph Eighth (B) of JCP&L's Restated Certificate of
Incorporation which limits, without the consent of the holders of a majority of
JCP&L's outstanding Cumulative Preferred Stock, the amount of unsecured
indebtedness which JCP&L may have outstanding at any one time to 20% of the
aggregate of the total outstanding principal amount of all bonds and other
securities representing secured indebtedness issued or assumed by JCP&L plus
JCP&L's capital stock, premiums thereon, and surplus of JCP&L as stated on its
books of account. JCP&L Capital Trust's constituent instruments will further
state that JCP&L Capital II, L.P will be responsible for all liabilities and
obligations of JCP&L Capital Trust.
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J. JCP&L expects to apply the net proceeds of the sale to
JCP&L Capital II, L.P. of Subordinated Debentures to the redemption of
outstanding senior securities pursuant to the optional redemption provisions
thereof, to the repayment of outstanding short-term debt, for construction
purposes, and for other general corporate purposes, including to reimburse
JCP&L's treasury for funds previously expended therefrom for the above purposes.
JCP&L will not use any of the net proceeds of the sale of Subordinated
Debentures to acquire, either directly or indirectly, any interest in any exempt
wholesale generator ("EWG") or foreign utility company ("FUCO").
K. Rule 54 Analysis.
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The proposed transactions contemplate, among other things, the issuance
or acquisition of securities by the Applicants which do not relate to EWGs and
FUCOs (the "Transactions"). Accordingly, the Transactions are subject to Rule
54, which provides that, in determining whether to approve an application which
does not relate to any EWG or FUCO, the Commission shall not consider the effect
of the capitalization or earnings of any such EWG or FUCO which is a subsidiary
of a registered holding company if the requirements of Rule 53 (a), (b) and (c)
are satisfied.
(a) As described below, GPU meets all of the conditions of
Rule 53 under the Act, except for Rule 53(a)(1). By Order dated November 5, 1997
(HCAR No. 35-26773) (the "November 5 Order"), the Commission authorized GPU to
increase to 100% of its "average consolidated retained earnings," as defined in
Rule 53, the aggregate amount which it may invest in EWGs and FUCOs. At June 30,
1998, GPU's average consolidated retained earnings was approximately $2,135
million. Accordingly, under the November 5 Order, GPU may invest up to an
additional $856 million in EWGs and FUCOs as of June 30, 1998.
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(i) GPU maintains books and records to identify investments
in, and earnings from, each EWG and FUCO in which it directly or
indirectly holds an interest.
(A) For each United States EWG in which GPU directly or
indirectly holds an interest:
(1) the books and records for such EWG will be
kept in conformity with United States
generally accepted accounting principles
("GAAP");
(2) the financial statements will be prepared
in accordance with GAAP; and
(3) GPU directly or through its subsidiaries
undertakes to provide the Commission
access to such books and records and
financial statements as the Commission may
request.
(B) For each FUCO or foreign EWG which is a majority-owned
subsidiary of GPU:
(1) the books and records for such subsidiary
will be kept in accordance with GAAP;
(2) the financial statements for such
subsidiary will be prepared in accordance
with GAAP; and
(3) GPU directly or through its subsidiaries
undertakes to provide the Commission
access to such books and records and
financial statements, or copies thereof in
English, as the Commission may request.
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(C) For each FUCO or foreign EWG in which GPU
owns 50% or less of the voting securities,
GPU directly or through its subsidiaries
will proceed in good faith, to the extent
reasonable under the circumstances, to
cause:
(1) such entity to maintain books and
records in accordance with GAAP;
(2) the financial statements of such
entity to be prepared in accordance with
GAAP; and
(3) access by the Commission to such books
and records and financial statements (or
copies thereof) in English as the
Commission may request and, in any event,
will provide the Commission on request
copies of such materials as are made
available to GPU and its subsidiaries. If
and to the extent that such entity's
books, records or financial statements are
not maintained in accordance with GAAP,
GPU will, upon request of the Commission,
describe and quantify each material
variation therefrom as and to the extent
required by subparagraphs (a) (2) (iii)
(A) and (a) (2) (iii) (B) of Rule 53.
(ii) No more than 2% of GPU's domestic public utility
subsidiary employees will render any services, directly or indirectly,
to any EWG or FUCO in which GPU directly or indirectly holds an
interest.
(iii) Copies of this Application on Form U-1 are being
provided to the New Jersey Board of Public Utilities ("NJBPU") and the
Pennsylvania Public Utility Commission, the only federal, state or
local regulatory
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agencies having jurisdiction over the retail rates of GPU's electric
utility subsidiaries.1 In addition, GPU will submit to each such
commission copies of any amendments to this Application Rule 24
certificates required hereunder, as well as a copy of Item 9 of GPU's
Form U5S and Exhibits H and I thereof (commencing with the Form U5S to
be filed for the calendar year in which the authorization herein
requested is granted).
(iv) None of the provisions of paragraph (b) of Rule 53 render
paragraph (a) of that Rule unavailable for the proposed transactions.
(A) Neither GPU nor any subsidiary of GPU having a
book value exceeding 10% of GPU's consolidated
retained earnings is the subject of any pending
bankruptcy or similar proceeding.
(B) GPU's average consolidated retained earnings for
the four most recent quarterly periods
(approximately $2,135 million) represented a
decrease of approximately $52.8 million (or
approximately 2.5%) compared to the average
consolidated retained earnings for the previous
four quarterly periods (approximately $2,187
million).2
(C) GPU did not incur operating losses from direct or
indirect investments in EWGs and FUCOs in 1997 in
excess of 5% of GPU's December 31, 1997
consolidated retained earnings.
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1 Pennsylvania Electric Company ("Penelec") is also subject to retail
rate regulation by the New York Public Service Commission with respect
to retail service to approximately 13,700 customers in Waverly, New
York served by Waverly Electric Power & Light Company, a Penelec
subsidiary. Waverly Electric's revenues are immaterial, accounting for
less than 1% of Penelec's total operating revenues.
2 As discussed in GPU's June 30, 1998, Quarterly Report on Form 10-Q, the
decrease is attributable to an extraordinary charge of $275.1 million
(after tax) as a result of the Pennsylvania Public Utility Commission's
June 20, 1998 restructuring orders on Met-Eds and Penelecs
restructuring plans.
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As described above, GPU meets all the conditions of Rule
53(a), except for clause (1). With respect to clause (1), the Commission
determined in the November 5 Order that GPU's financing of investments in EWGs
and FUCOs in an amount greater than 50% of GPU's average consolidated retained
earnings as otherwise permitted by Rule 53(a)(1) would not have either of the
adverse effects set forth in Rule 53(c).
Moreover, even if the effect of the capitalization and
earnings of subsidiary EWGs and FUCOs were considered, there is no basis for the
Commission to withhold or deny approval for the transactions proposed in this
Application (the "Transactions"). The Transactions would not, by themselves, or
even considered in conjunction with the effect of the capitalization and
earnings of GPU's subsidiary EWGs and FUCOs, have a material adverse effect on
the financial integrity of the GPU system, or an adverse impact on GPU's public
utility subsidiaries, their customers, or the ability of State commissions to
protect such public utility customers.
The November 5 Order was predicated, in part, upon the
assessment of GPU's overall financial condition which took into account, among
other factors, GPU's consolidated capitalization ratio and the recent growth
trend in GPU's retained earnings. As of June 30, 1997, the most recent quarterly
period for which financial statement information was evaluated in the November 5
Order, GPU's consolidated capitalization consisted of 49.2% equity and 50.8%
debt.
GPU's June 30, 1998 consolidated capitalization consists of
42.9% equity and 57.1% debt. Thus, since the date of the November 5 Order, there
has been no material adverse change in GPU's consolidated capitalization
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ratio, which remains within acceptable ranges and limits as evidenced by the
credit ratings of GPU's electric utility subsidiaries.1
GPU's consolidated retained earnings grew on average
approximately 4.5% per year from 1991 through 1997. Earnings attributable to
GPU's investments in EWGs and FUCOs have contributed positively to consolidated
earnings, excluding the impact of the windfall profits tax on the Midlands
Electricity plc investment.2
Accordingly, since the date of the November 5 Order, the
capitalization and earnings attributable to GPU's investments in EWGs and FUCOs
have not had any adverse impact on GPU's financial integrity.
Reference is made to Exhibit H filed herewith which sets forth
GPU's consolidated capitalization and earnings at June 30, 1998 and after giving
effect to the transactions proposed herein. As set forth in such exhibit, the
proposed transactions will not have a material impact on GPU's capitalization or
earnings.
ITEM 2. FEES, COMMISSIONS AND EXPENSES.
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The estimated fees, commission and expenses to be
incurred in connection herewith will be filed by amendment.
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1 The debt ratings of GPU's electric utility subsidiaries have not
changed since the issuance of the November 5 Order. Moreover, on
February 27, 1998, Standard & Poor's Corporation assigned an "A-"
credit rating to the A$1.925 billion senior bank debt of GPU PowerNet.
2 As discussed in the November 5 Order, GPU incurred a loss for 1997 from
its investments in EWGs and FUCOs as a result of the windfall profits
tax imposed on Midlands Electricity, plc.
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ITEM 3. APPLICABLE STATUTORY PROVISIONS.
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A. The acquisition by JCP&L of the
common stock of Investment Sub, the acquisition by Investment Sub of the general
partnership interests of JCP&L Capital II, L.P., and the acquisition by JCP&L
Capital II, L.P. of the Subordinated Debentures and the Guaranties are subject
to Sections 9(a), 10 and 12(b) of the Act and Rule 45 thereunder.
B. The issuance and sale of the Preferred
Securities by JCP&L Capital II, L.P. and the issuance and sale of the Trust
Securities by JCP&L Capital Trust, and the contingent distribution of
Subordinated Debentures to the Trust Securities holders, are subject to Sections
6(a) and 7 of the Act and Rule 54 thereunder.
C. JCP&L believes that the issuance of its
Subordinated Debentures and its Guaranties to JCP&L Capital II, L.P. will be
exempt from the declaration requirements of the Act by virtue of Rule 45(b) (1)
thereunder.
ITEM 4. REGULATORY APPROVALS
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A. The proposed transactions will require
approval of the NJBPU under Title 48 of the New Jersey Statutes. JCP&L will file
with the NJBPU a Petition seeking such approval. It is anticipated that the
NJBPU will expressly approve such transactions.
B. No other state commission has
jurisdiction with respect to the subject transactions and, assuming that your
Commission
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authorizes and approves all aspects of the Transactions (including the
accounting therefor), no other federal commission has jurisdiction with respect
thereto. JCP&L believes that JCP&L Capital II, L.P. and JCP&L Capital Trust will
be exempt from regulation as an investment company under the 1940 Act, pursuant
to the "finance company" exemption afforded by Section 6(a)(5) under the 1940
Act.
ITEM 5. PROCEDURE.
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It is requested that the Commission issue an order
with respect to the Transactions proposed herein at the earliest practicable
date, but in any event not later than January 15, 1999. It is further requested
that (i) there not be a recommended decision by an Administrative Law Judge or
other responsible officer of the Commission, (ii) the Office of Public Utility
Regulation be permitted to assist in the preparation of the Commission's
decision, and (iii) there be no waiting period between the issuance of the
Commission's order and the date on which it is to become effective.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS.
----------------------------------
A-1 - Certificate of Incorporation of Investment Sub -- to be
filed by amendment.
A-2 - By-Laws of Investment Sub -- to be filed by amendment.
A-3 - Certificate of Limited Partnership of JCP&L Capital
II, L.P. -- to be filed by amendment.
A-4 - Form of Limited Partnership Agreement of JCP&L Capital
II, L.P. -- to be filed by amendment.
A-5 - Form of Amended and Restated Limited Partnership
Agreement and JCP&L Capital II, L.P. -- to be filed by
amendment.
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A-6 - Form of Declaration of Trust of JCP&L Capital Trust --
to be filed by amendment.
A-7 - Form of Trust Agreement of JCP&L Capital Trust -- to
be filed by amendment.
A-8 - Form of Amended and Restated Trust Agreement of JCP&L
Capital Trust -- to be filed by amendment.
A-9 - Form of Trust Securities Certificate of JCP&L Capital
Trust -- to be filed by amendment.
A-10 - Form of JCP&L Subordinated Debenture Indenture - to be
filed by amendment.
A-11 - Form of Subordinated Debenture instrument --
incorporated by reference to Exhibit A-5.
B-1 - Form of Guaranty -- to be filed by amendment.
B-2 - Form of Underwriting Agreement -- to be filed by
amendment.
C - Registration Statement on Form S-3
under the Securities Act of 1933
relating to the various securities
which are the subject hereof and all
amendments and exhibits thereto --
Incorporated by reference to SEC
Registration No. _________ to be
assigned to such registration
statement.
D-1 - Copy of Petition filed by JCP&L with the NJBPU -
- to be filed by amendment.
D-2 - Copy of NJBPU Order granting the Petition -- to be
filed by amendment.
E - Not Applicable.
F-l - Opinion of Berlack, Israels & Liberman LLP -- to be
filed by amendment.
G - Proposed form of public notice.
H - GPU Actual and Pro Forma Capitalization ratios.
(b) Financial Statements:
1-A - JCP&L Consolidated Balance Sheets,
actual and pro forma, as at [June
30,] 1998, and Consolidated
Statements of Income, actual and pro
forma, and Statement of Retained
Earnings, for the year ended [June
30,] 1998; pro forma journal
entries.
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1-B - GPU Consolidated Balance Sheets,
actual and pro forma, as at [June
30, 1998,] and Consolidated
Statements of Income, actual and pro
forma, and Statement of Retained
Earnings, for the year ended [June
30,] 1998; pro forma journal
entries.
2 - Reference is made to Financial Statements included in
1 above.
3 - None.
4 - None, except as set forth in the Notes to Financial
Statements.
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS.
---------------------------------------
The proposed Transactions relate to a means of financing JCP&L's
business. Consequently, the issuance of an order by your Commission with respect
to the subject Transactions is not a major Federal action significantly
affecting the quality of the human environment.
No Federal agency has prepared or is preparing an
environmental impact statement with respect to the subject Transactions.
Reference is made to Item 4 hereof regarding regulatory approvals with respect
to the proposed Transactions.
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SIGNATURE
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PURSUANT TO THE REQUIREMENTS OF THE PUBLIC UTILITY HOLDING COMPANY ACT
OF 1935, THE UNDERSIGNED COMPANY HAS DULY CAUSED THIS STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
JERSEY CENTRAL POWER & LIGHT COMPANY
By: /S/ T. G. Howson
-------------------------
T. G. Howson,
Vice President and Treasurer
Dated: October 27, 1998
EXHIBITS AND FINANCIAL STATEMENTS TO BE FILED BY EDGAR
Exhibits:
G - Proposed form of public notice.
H - GPU Actual and Pro Forma Capitalization ratios.
Financial Statements:
1-A - JCP&L Consolidated Balance Sheets, actual and pro forma, as
at [June 30,] 1998, and Consolidated Statements of Income,
actual and pro forma, and Statement of Retained Earnings, for
the year ended [June 30,] 1998; pro forma journal entries.
1-B - GPU Consolidated Balance Sheets, actual and pro forma, as at
[June 30, 1998,] and Consolidated Statements of Income, actual
and pro forma, and Statement of Retained Earnings, for the
year ended [June 30,] 1998; pro forma journal entries.
18
EXHIBIT G
SECURITIES AND EXCHANGE COMMISSION
(RELEASE NO. 35------------; 70----)
JERSEY CENTRAL POWER & LIGHT
Jersey Central Power & Light Company (JCP&L), 2800 Pottsville Pike,
Reading, Pennsylvania, and electric utility subsidiary of GPU, Inc., a
registered holding company, has filed an application pursuant to Sections 6(a),
7, 9(a), 10 and 12(b) of the Public Utility Holding Company Act of 1935 and
Rules 45 and 54 thereunder.
JCP&L proposes to organize a special purpose business trust under
Delaware law ("JCP&L Capital Trust"), which will issue and sell from time to
time in one or more series through December 31, 2000 up to $200 million
aggregate liquidation value of preferred beneficial interests, in the form of
Trust Securities (having a liquidation value per interest to be determined) (the
"Trust Securities")*. Each Trust Security will represent a cumulative preferred
security (the "Preferred Securities") of a Delaware limited partnership ("JCP&L
Capital II, L.P."), which will be a special purpose
- --------
* The transactions proposed herein are substantially the same as
the transactions approved by the Commission in Order dated
March 6, 1995 (HCAR No. 35-26246) (monthly income preferred
securities ("MIPS")) with the exception that the MIPS were
issued by a limited partnership subsidiary of JCP&L and the
Trust Securities will be issued by a special purpose business
trust subsidiary. The trust structure is being utilized to
help ensure the intended tax treatment, as discussed below.
1
<PAGE>
indirect subsidiary of JCP&L. JCP&L also proposes to form a special purpose
Delaware corporation ("Investment Sub"), for the sole purpose of acting as
general partner of JCP&L Capital II, L.P. The sole purpose of JCP&L Capital
Trust will be to acquire the Preferred Securities and to issue the Trust
Securities evidencing the Preferred Securities. The sole purpose of JCP&L
Capital II, L.P. is to issue one or more series of Preferred Securities and to
lend the proceeds thereof, plus the capital contribution (in an amount not to
exceed $7 million) made by JCP&L in JCP&L Capital II, L.P., to JCP&L, which loan
will be evidenced by Subordinated Debentures (defined below) issued by JCP&L.
JCP&L will acquire the common stock of Investment Sub for a nominal
consideration and will capitalize Investment Sub with (i) a capital contribution
in the amount of up to $7 million, and (ii) a demand promissory note in the
principal amount of up to $21 million, such note to accrue interest, compounded
semi-annually, at a rate equal to the Citibank, N.A. base rate as in effect from
time to time. Investment Sub will acquire all of the general partner interests
in JCP&L Capital II, L.P. for up to $7 million (the "L.P. Equity Contribution").
JCP&L Capital Trust will apply the proceeds from the sale of the
Trust Securities to purchase the Preferred Securities. JCP&L Capital II, L.P.
will, in turn, use the proceeds received from the sale of the Preferred
Securities, together with the L.P. Equity Contribution, to purchase JCP&L's
subordinated debentures (individually, a "Subordinated Debenture" and
collectively, the "Subordinated Debentures").
2
<PAGE>
JCP&L will also unconditionally guarantee the payment by JCP&L
Capital II, L.P. of (A) accrued but unpaid distributions on the Preferred
Securities, if and to the extent JCP&L Capital II, L.P. has funds on hand
legally available therefor, (B) the redemption price for any redemption of the
Preferred Securities, (C) the aggregate liquidation preference on the Preferred
Securities to the extent JCP&L Capital II, L.P. has funds on hand legally
available therefor, including all accrued but unpaid distributions, whether or
not declared and (D) certain additional amounts (the "Guaranties").
Each Subordinated Debenture will be issued under an Indenture to be
entered into with United States Trust Company of New York, as trustee, and will
have an initial term of up to 49 years. Prior to maturity, JCP&L will pay only
interest on the Subordinated Debentures at a rate equal to the distribution rate
on the Preferred Securities. Such interest payments will constitute JCP&L
Capital II, L.P.'s only income and distributions on the Preferred Securities
will, in turn, constitute JCP&L Capital Trust's only income and will be used by
it to pay distributions on the Trust Securities. Any excess interest payment not
needed for distributions on the Preferred Securities will be distributed
indirectly to JCP&L as a distribution on JCP&L's investment in JCP&L Capital II,
L.P., thereby reducing the interest cost on the Subordinated Debentures.
Distributions on the Trust Securities will be made not less than semi-annually,
and will be cumulative and must be made to the extent that JCP&L Capital Trust
has funds on hand legally available for such purposes. However, JCP&L will have
the right to defer payment of interest on the Subordinated Debentures for up to
five years in which event JCP&L Capital II, L.P. and JCP&L Capital Trust may
similarly defer payment of distributions on the Preferred Securities and the
Trust Securities,
3
<PAGE>
respectively, but in no event may distributions be deferred beyond the maturity
date of the Subordinated Debentures. The distribution rates, payment dates,
redemption and other similar provisions of each series of Trust Securities will
be identical to the interest rates, payment dates, redemption and other
provisions of the Preferred Securities issued by JCP&L Capital II, L.P. and the
Subordinated Debentures issued by JCP&L with respect thereto.
Each Subordinated Debenture and related Guaranty will be subordinate
to all other existing and future "Senior Indebtedness," as defined below, of
JCP&L and will have no cross-default provisions with respect to other JCP&L
indebtedness -- i.e., a default under any other outstanding JCP&L indebtedness
will not result in a default under the Subordinated Debenture or the Guaranty.
However, JCP&L may not declare and pay dividends on, or redeem or retire, its
outstanding Cumulative Preferred Stock or Common Stock unless all payments then
due (whether or not previously deferred) under the Subordinated Debentures and
the Guaranties have been made. "Senior Indebtedness" consists of (i) the
principal of and premium (if any) in respect of (A) indebtedness of JCP&L for
money borrowed and (B) indebtedness evidenced by securities, debentures, bonds
or other similar instruments (including purchase money obligations) for payment
of which JCP&L is responsible or liable; (ii) all capital lease obligations of
JCP&L; (iii) all obligations of JCP&L issued or assumed as the deferred purchase
price of property, all conditional sale obligations of JCP&L and all obligations
of JCP&L under any title retention agreement (but excluding trade accounts
payable arising in the ordinary course of business); (iv) certain obligations of
JCP&L for the reimbursement of any obligor on any letter of credit, banker's
acceptance, security purchase facility or similar credit transaction; (v) all
obligations
4
<PAGE>
of the type referred to in clauses (i) through (iv) of other persons for the
payment of which JCP&L is responsible or liable as obligor, guarantor or
otherwise; and (vi) all obligations of the types referred to in clauses (i)
through (v) of other persons secured by any lien on any property or asset of
JCP&L (whether or not such obligation is assumed by JCP&L), except for any such
indebtedness that is by its terms subordinated to or pari passu with the
Subordinated Debentures.
It is expected that JCP&L's interest payments on the Subordinated
Debentures will be deductible for income tax purposes and that JCP&L Capital
Trust will be treated as a trust for federal income tax purposes. Consequently,
distributions from JCP&L Capital Trust to the holders of Trust Securities will
be deemed to constitute distributions on the Preferred Securities and in turn of
the interest income received by JCP&L Capital II, L.P. on the Subordinated
Debentures. Consequently, such holders and Investment Sub, as the general
partner of JCP&L Capital II, L.P. will not be entitled to any "dividend received
deduction" under the Internal Revenue Code with respect to such distributions.
A series of the Trust Securities will be subject to mandatory
redemption upon redemption of the corresponding series of the Preferred
Securities. A series of Preferred Securities will be subject to mandatory
redemption upon the maturity or prior redemption of the corresponding series of
the Subordinated Debentures, but will not be subject to any mandatory sinking
fund. A series of Preferred Securities may also be redeemable at the option of
JCP&L at a price equal to its liquidation value plus any accrued and unpaid
distributions plus any premium negotiated in connection with the
5
<PAGE>
marketing of the Trust Securities, (i) at any time after a specified no-call
period (if any) which could be up to the life of the issuance, or (ii) in the
event that (I) JCP&L Capital II, L.P. or JCP&L Capital Trust is required by
applicable tax laws to withhold or deduct certain amounts in connection with
distributions or other payments, or (II) JCP&L Capital II, L.P. or JCP&L Capital
Trust is subject to federal income tax with respect to interest received on the
Subordinated Debentures, or (III) it is determined that the interest payments by
JCP&L on the Subordinated Debentures are not deductible for federal income tax
purposes or will otherwise not be taxed as a partnership or grantor trust, as
the case may be, or (IV) JCP&L Capital II, L.P. or JCP&L Capital Trust is
subject to more than a de minimis amount of other taxes, duties or other
governmental charges, or (V) JCP&L Capital II, L.P. or JCP&L Capital Trust
becomes subject to regulation as an "investment company" under the Investment
Company Act of 1940, as amended ("1940 Act"). Upon occurrence of any of the
events set forth in clause (ii) of the immediately preceding sentence, JCP&L
Capital II, L.P. and JCP&L Capital Trust could be dissolved and the Subordinated
Debentures distributed directly to the holders of the Trust Securities and to
JCP&L on a pro rata basis, resulting in direct ownership of the Subordinated
Debentures by the holders of the Trust Securities. The Subordinated Debentures
distributed to JCP&L will be canceled.
If at any time JCP&L Capital II, L.P. would be required to pay any
taxes, duties, assessments or governmental charges of whatever nature (other
than withholding taxes) imposed by the United States, or any other taxing
authority, then, in any such case, JCP&L also will pay as additional interest
such amounts as shall be required so that the net amounts received and retained
by JCP&L Capital II, L.P. after paying any such taxes, duties, assessments or
governmental charges will not be less than the amounts JCP&L
6
<PAGE>
Capital II, L.P. would have received had no such taxes, duties,
assessments or governmental charges been imposed.
Upon receipt by JCP&L Capital Trust of any distribution from JCP&L
Capital II, L.P. upon any voluntary or involuntary liquidation, dissolution or
winding up of JCP&L Capital II, L.P., the holders of the Trust Securities will
be entitled to receive such amounts in proportion to the respective number of
Preferred Securities represented by such Trust Securities, out of the assets of
JCP&L Capital II, L.P. available for distribution to holders of Preferred
Securities and after satisfaction of liabilities to creditors of JCP&L Capital
Trust.
In the event of any voluntary or involuntary dissolution or winding
up of JCP&L Capital II, L.P., the holders of Preferred Securities will be
entitled to receive out of the assets of JCP&L Capital II, L.P., after
satisfaction of liabilities to creditors and before any distribution of assets
is made to Investment Sub, the sum of their stated liquidation preference and
all accumulated and unpaid distributions to the date of payment of the Preferred
Securities. All assets of JCP&L Capital II, L.P. remaining after payment of the
liquidation distribution to the holders of Preferred Securities will be
distributed to Investment Sub.
Upon any liquidation, dissolution or winding up of JCP&L, the amount
payable on each series of the Preferred Securities would be limited to a pro
rata portion of any amount recovered by JCP&L Capital II, L.P. in its capacity
as a subordinated debt holder of JCP&L. The Subordinated Debentures and the
payment obligations under the Guaranty will be subordinate to all other existing
and future Senior Indebtedness, except for any such indebtedness that is by its
terms subordinated to or pari passu with the Subordinated Debentures.
7
<PAGE>
The constituent instruments of JCP&L Capital Trust, including its
declaration of trust, will provide, among other things, that JCP&L Capital
Trust's activities will be limited to the issuance and sale of Trust Securities
from time to time and the application of the proceeds thereof to the purchase of
the Preferred Securities. Accordingly, it is not proposed that JCP&L Capital
Trust's constituent instruments include any interest or distribution coverage or
capitalization ratio restrictions on its ability to issue and sell Trust
Securities, as each such issuance will be supported by a Preferred Security
which in turn will be supported by a Subordinated Debenture and a Guaranty, and
such restrictions would therefore not be relevant or necessary for JCP&L Capital
Trust to maintain an appropriate capital structure. Moreover, the issuance of
Subordinated Debentures by JCP&L will be subject to the restriction in Article
VI, paragraph Eighth (B) of JCP&L's Restated Certificate of Incorporation which
limits, without the consent of the holders of a majority of JCP&L's outstanding
Cumulative Preferred Stock, the amount of unsecured indebtedness which JCP&L may
have outstanding at any one time to 20% of the aggregate of the total
outstanding principal amount of all bonds and other securities representing
secured indebtedness issued or assumed by JCP&L plus JCP&L's capital stock,
premiums thereon, and surplus of JCP&L as stated on its books of account. JCP&L
Capital Trust's constituent instruments will further state that JCP&L Capital
II, L.P will be responsible for all liabilities and obligations of JCP&L Capital
Trust.
JCP&L expects to apply the net proceeds of the sale to JCP&L Capital
II, L.P. of Subordinated Debentures to the redemption of outstanding senior
securities pursuant to the optional redemption provisions thereof, to the
repayment of outstanding short-term debt, for construction purposes, and for
other general corporate purposes, including to reimburse JCP&L's treasury
8
<PAGE>
for funds previously expended therefrom for the above purposes. JCP&L will not
use any of the net proceeds of the sale of Subordinated Debentures to acquire,
either directly or indirectly, any interest in any exempt wholesale generator
("EWG") or foreign utility company ("FUCO").
The Application and any amendments thereto are available for public
inspection through the Commission's Office of Public Reference. Interested
persons wishing to comment or request a hearing should submit their views in
writing by -----, 1998 to the Secretary, Securities and Exchange Commission,
Washington, D.C. 20549, and serve a copy on the applicant at the address
specified above. Proof of service (by affidavit, or in case of an attorney at
law, by certificate) should be filed with the request. Any request for a hearing
shall identify specifically the issues of fact or law that are disputed. A
person who so requests will be notified of any hearing, if ordered, and will
receive a copy of any notice or order issued in this matter. After said date,
the Application, as it may be amended, may be granted.
9
EXHIBIT
Item 6 H
CAPITALIZATION AND CAPITALIZATION RATIOS
----------------------------------------
(IN THOUSANDS)
The capitalization of GPU, Inc. and Subsidiary Companies at June 30, 1998
and pro forma is as follows:
Actual Pro Forma
---------------- -------------------
Amount % Amount %
--------- ----- ------------ -----
Long-term debt(1) $4 392 057 51.4 $4 392 057 49.0
Notes payable 487 160 5.7 487 160 5.4
Preferred stock (2) 155 478 1.8 155 478 1.7
Subsidiary-obligated
mandatorily redeemable
preferred securities 330 000 3.9 330 000 3.7
Trust originated
preferred securities - - 450 000 5.0
Common equity 3 172 886 37.2 3 151 795 35.2
--------- ----- --------- -----
$8 537 581 100.0 $8 966 490 100.0
========= ===== ========= =====
(1) Includes securities due within one year of $350,671.
(2) Includes securities due within one year of $2,500.
<PAGE>
Financial Statements
Item 6(b) 1-A
Page 1 of 38
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
CONSOLIDATED BALANCE SHEETS
ACTUAL (UNAUDITED) AND PRO FORMA
AT JUNE 30, 1998
-----------------------------------------------------
(IN THOUSANDS)
Actual Adjustments
(Unaudited) (See pages 5-6)Pro Forma
---------- -------------- ----------
ASSETS
Utility Plant:
In Service, at original cost $4 638 568 $ - $4 638 568
Less, accumulated depreciation 2 115 382 - 2 115 382
--------- ------- ---------
Net utility plant in service 2 523 186 - 2 523 186
Construction work in progress 112 191 - 112 191
Other, net 106 739 37 987 144 726
--------- ------- ---------
Net utility plant 2 742 116 37 987 2 780 103
--------- ------- ---------
Other Property and Investments:
Nuclear decommissioning trusts, at market 385 992 - 385 992
Nuclear fuel disposal trust, at market 112 418 - 112 418
Other, net 8 937 - 8 937
--------- --------- ---------
Total other property and investments 507 347 - 507 347
--------- --------- ---------
Current Assets:
Cash and temporary cash investments 8 741 180 617 189 358
Special deposits 5 997 - 5 997
Accounts receivable:
Customers, net 142 928 - 142 928
Other 27 245 - 27 245
Unbilled revenues 72 247 - 72 247
Materials and supplies, at average cost or less:
Construction and maintenance 82 753 - 82 753
Fuel 15 137 - 15 137
Deferred income taxes 24 168 - 24 168
Prepayments 122 384 - 122 384
--------- -------- ---------
Total current assets 501 600 180 617 682 217
--------- -------- ---------
Deferred Debits and Other Assets:
Other regulatory assets, net 798 156 - 798 156
Deferred income taxes 172 778 - 172 778
Other 24 324 2 518 26 842
--------- -------- ---------
Total deferred debits and other assets 995 258 2 518 997 776
--------- -------- ---------
Total Assets $4 746 321 $ 221 122 $4 967 443
========= ======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Financial
Statements
Item 6(b) 1-A
Page 2 of 38
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
CONSOLIDATED BALANCE SHEETS
ACTUAL (UNAUDITED) AND PRO FORMA
AT JUNE 30, 1998
-----------------------------------------------------
(IN THOUSANDS)
Actual Adjustments
(Unaudited)(See pages 5-6)Pro Forma
----------- ------------- ----------
LIABILITIES AND CAPITALIZATION
Capitalization:
Common stock $ 153 713 $ - $ 153 713
Capital surplus 510 769 - 510 769
Retained earnings 938 437 (9 813) 928 624
--------- -------- ---------
Total common stockholder's equity 1 602 919 (9 813) 1 593 106
Cumulative preferred stock
With mandatory redemption 86 500 - 86 500
Without mandatory redemption 37 741 - 37 741
Company-obligated mandatorily
redeemable preferred securities 125 000 - 125 000
Trust originated preferred securities - 200 000 200 000
Long-term debt 1 173 424 - 1 173 424
--------- -------- ---------
Total capitalization 3 025 584 190 187 3 215 771
--------- -------- ---------
Current Liabilities:
Securities due within one year 2 511 - 2 511
Notes payable 167 016 - 167 016
Obligations under capital leases 93 505 37 987 131 492
Accounts payable:
Affiliates 15 556 - 15 556
Other 110 403 - 110 403
Taxes accrued 6 285 (7 052) (767)
Deferred energy credits 15 254 - 15 254
Interest accrued 26 596 - 26 596
Other 105 115 - 105 115
--------- -------- ---------
Total current liabilities 542 241 30 935 573 176
--------- -------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 647 728 - 647 728
Three Mile Island Unit 2 future costs 114 755 - 114 755
Unamortized investment tax credits 52 075 - 52 075
Nuclear fuel disposal fee 137 915 - 137 915
Other 226 023 - 226 023
--------- -------- ---------
Total deferred credits and
other liabilities 1 178 496 - 1 178 496
--------- -------- ---------
Total Liabilities and Capitalization $4 746 321 $ 221 122 $4 967 443
========= ======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Financial Statements
Item 6(b) 1-A
Page 3 of 38
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
ACTUAL (UNAUDITED) AND PRO FORMA
FOR THE TWELVE MONTHS ENDED JUNE 30, 1998
-----------------------------------------------------
(IN THOUSANDS)
Actual Adjustments
(Unaudited)(See pages 5-6) Pro Forma
--------------- ---------- ---------
Operating Revenues $2 056 531 $ - $2 056 531
--------- ------- ---------
Operating Expenses:
Fuel 97 704 2 279 99 983
Power purchased and interchanged:
Affiliates 23 841 - 23 841
Others 640 391 - 640 391
Deferral of energy and capacity costs, net (12 016) - (12 016)
Other operation and maintenance 452 474 34 452 508
Depreciation and amortization 247 902 - 247 902
Taxes, other than income taxes 166 792 - 166 792
--------- ------- ---------
Total operating expenses 1 617 088 2 313 1 619 401
--------- ------- ---------
Operating Income Before Income Taxes 439 443 (2 313) 437 130
Income taxes 123 999 (7 052) 116 947
--------- ------- ---------
Operating income 315 444 4 739 320 183
--------- ------- ---------
Other Income and Deductions:
Allowance for other funds used during
construction 201 - 201
Other income, net 6 690 - 6 690
Income taxes (891) - (891)
--------- ------- ---------
Total other income and deductions 6 000 - 6 000
--------- ------- ---------
Income Before Interest Charges and
Dividends on Preferred Dividends 321 444 4 739 326 183
--------- ------- ---------
Interest Charges and Dividends
on Preferred Securities:
Interest on long-term debt 88 165 - 88 165
Other interest 13 058 52 13 110
Allowance for borrowed funds used during
construction (2 033) - (2 033)
Dividends on company-obligated mandatorily
redeemable preferred securities 10 700 - 10 700
Dividends on trust originated preferred
securities - 14 500 14 500
--------- ------- ---------
Total interest charges and dividends
on preferred securities 109 890 14 552 124 442
--------- ------- ---------
Net Income $ 211 554 $ (9 813) $ 201 741
Preferred stock dividends 10 638 - 10 638
--------- ------- --------
Earnings Available for Common Stock $ 200 916 $ (9 813) $ 191 103
========= ======= ========
<PAGE>
The accompanying notes are an integral part of the consolidated financial
statements.
Financial Statements
Item 6(b) 1-A
Page 4 of 38
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
ACTUAL (UNAUDITED) AND PRO FORMA
FOR THE TWELVE MONTHS ENDED JUNE 30, 1998
-----------------------------------------------------
(IN THOUSANDS)
Actual Adjustments
(Unaudited) (See pages 5-6)Pro Forma
---------- ----------- ---------
Balance at beginning of period $ 872 521 $ - $ 872 521
Net income 211 554 (9 813) 201 741
Cash dividends declared on common stock (135 000) - (135 000)
Cash dividends declared on cumulative
preferred stock (10 638) - (10 638)
Other adjustments, net - - -
--------- ------- ----------
Balance at end of period $ 938 437 $ (9 813) $ 928 624
========= ======= =========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Financial Statements
Item 6(b) 1-A
Page 5 of 38
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
PRO FORMA JOURNAL ENTRIES
AT JUNE 30, 1998
-----------------------------------------------------
(IN THOUSANDS)
(1)
Cash and temporary cash investments $200 000
Trust originated preferred securities $200 000
To reflect the proposed issuance of $200 million
trust originated preferred securities from time to
time through December 31, 2000 by JCP&L Capital
Trust. The trust originated preferred securities
and dividend payments are to be unconditionally
guaranteed by Jersey Central Power & Light
Company.
(2)
Other deferred debits $ 2 570
Cash and temporary cash investments $ 2 570
To reflect the underwriters compensation and
offering expenses paid in accordance with the
Underwriting Agreements for JCP&L Capital Trust.
(3)
Other interest $ 52
Other deferred debits $ 52
To reflect the annual amortization of the deferred
underwriters compensation and offering expenses
which are being amortized over 49 years.
(4)
Dividends on trust originated preferred
securities $14 500
Cash and temporary cash investments $14 500
To reflect the annual dividends paid on the trust
originated preferred securities by JCP&L Capital
Trust at an assumed rate of 7.25%.
<PAGE>
Financial Statements
Item 6(b) 1-A
Page 6 of 38
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
PRO FORMA JOURNAL ENTRIES
AT JUNE 30, 1998
-----------------------------------------------------
(IN THOUSANDS)
(5)
Other utility plant, net $37 987
Obligations under capital leases $37 987
To record the potential incremental nuclear fuel
to be leased for TMI-1 and Oyster Creek (proposed
$115,000 limit less $77,013 of nuclear fuel
subject to lease at March 31, 1998.) (SEC File No.
70-7862).
(6)
Fuel expense $ 2 279
Cash $ 2 279
To record incremental rent expense on the proposed
nuclear fuel lease at an
annual rate of 6.0% (SEC File No. 70-7862).
(7)
Other operation and maintenance $ 34
Cash $ 34
To record annual fees associated with the proposed
nuclear fuel lease (SEC File No. 70-7862).
(8)
Taxes accrued $ 7 052
Income taxes $ 7 052
To reflect the net decrease in the provision for
Federal and State income taxes at the rate of
40.85% attributable to interest payments on the
proposed issuance of $206,200 subordinated
debentures by Jersey Central Power & Light Company
to JCP&L Capital II L.P. and to record the
decrease in income taxes associated with the
proposed nuclear fuel lease (SEC File No.
70-7862).
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 7 of 38
GPU, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ACTUAL (UNAUDITED) AND PRO FORMA
AT JUNE 30, 1998
(IN THOUSANDS)
-----------------------------------------------------
Actual Adjustments
(Unaudited) (See pages
11-14) Pro Forma
---------- ------------ --------
ASSETS
Utility Plant:
In Service, at original cost $10 782 924 $ - $10 782 924
Less, accumulated depreciation 4 260 228 - 4 260 228
---------- -------- ----------
Net utility plant in service 6 522 696 - 6 522 696
Construction work in progress 251 272 - 251 272
Other, net 160 291 61 193 221 484
---------- -------- ----------
Net utility plant 6 934 259 61 193 6 995 452
---------- -------- ----------
Other Property and Investments:
GPUI Group equity investments 650 970 650 970
Goodwill, net 549 206 549 206
Nuclear decommissioning trusts, at market 654 812 - 654 812
Nuclear fuel disposal trust, at market 112 418 - 112 418
Other, net 140 255 - 140 255
---------- -------- ----------
Total other property and investments 2 107 661 - 2 107 661
---------- -------- ----------
Current Assets:
Cash and temporary cash investments 122 835 407 271 530 106
Special deposits 21 261 - 21 261
Accounts receivable:
Customers, net 273 482 - 273 482
Other 103 184 - 103 184
Unbilled revenues 154 564 - 154 564
Materials and supplies, at average cost or less:
Construction and maintenance 158 790 - 158 790
Fuel 38 231 - 38 231
Deferred income taxes 76 672 - 76 672
Prepayments 188 167 - 188 167
---------- -------- ----------
Total current assets 1 137 186 407 271 1 544 457
---------- -------- ----------
Deferred Debits and Other Assets:
Competitive transition charge 1 909 360 - 1 909 360
Other regulatory assets, net 1 599 207 - 1 599 207
Deferred income taxes 1 573 731 - 1 573 731
Other 183 292 6 245 189 537
---------- -------- ----------
Total deferred debits and other assets 5 265 590 6 245 5 271 835
---------- -------- ----------
Total Assets $15 444 696 $ 474 709 $15 919 405
========== ======== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 8 of 38
GPU, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ACTUAL (UNAUDITED) AND PRO FORMA
AT JUNE 30, 1998
-----------------------------------------------------
(IN THOUSANDS)
Actual Adjustments
(Unaudited) (See pages
11-14) Pro Forma
---------- ----------- ----------
LIABILITIES AND CAPITAL
Capitalization:
Common stock $ 331 958 $ - $ 331 958
Capital surplus 1 008 574 - 1 008 574
Retained earnings 1 947 585 (21 091) 1 926 494
Accumulated other comprehensive
income/(loss) (35 375) - (35 375)
---------- --------- ---------
Total 3 252 742 (21 091) 3 231 651
Less, reacquired common stock, at cost 79 856 - 79 856
---------- -------- ----------
Total common stockholders' equity 3 172 886 (21 091) 3 151 795
Cumulative preferred stock:
With mandatory redemption 86 500 - 86 500
Without mandatory redemption 66 478 - 66 478
Subsidiary-obligated mandatorily redeemable
preferred securities 330 000 - 330 000
Trust originated preferred securities - 450 000 450 000
Long-term debt 4 041 386 - 4 041 386
---------- -------- ----------
Total capitalization 7 697 250 428 909 8 126 159
---------- -------- ----------
Current Liabilities:
Securities due within one year 353 171 - 353 171
Notes payable 487 160 - 487 160
Obligations under capital leases 140 810 61 193 202 003
Accounts payable 357 436 - 357 436
Taxes accrued 81 281 (15 393) 65 888
Interest accrued 64 835 - 64 835
Deferred energy credits 15 254 - 15 254
Other 356 684 - 356 684
---------- -------- ----------
Total current liabilities 1 856 631 45 800 1 902 431
---------- -------- ----------
Deferred Credits and Other Liabilities:
Deferred income taxes 2 527 314 - 2 527 314
Unamortized investment tax credits 118 360 - 118 360
Three Mile Island Unit 2 future costs 458 919 - 458 919
Nonutility generation contract loss
liability 1 810 350 - 1 810 350
Other 975 872 - 975 872
---------- -------- ----------
Total deferred credits and
other liabilities 5 890 815 - 5 890 815
---------- -------- ----------
Total Liabilities and Capitalization $15 444 696 $ 474 709 $15 919 405
========== ======== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 9 of 38
GPU, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF INCOME
ACTUAL (UNAUDITED) AND PRO FORMA
FOR THE TWELVE MONTHS ENDED JUNE 30, 1998
------------------------------------------
(IN THOUSANDS)
Actual Adjustments
(Unaudited) (See pages
11-14) Pro Forma
--------- ------------ ----------
Operating Revenues $4 207 780 $ - $4 207 780
--------- ------- ---------
Operating Expenses:
Fuel 407 356 3 672 411 028
Power purchased and interchanged, net 1 078 362 - 1 078 362
Deferral of energy costs, net (12 016) - (12 016)
Other operation and maintenance 1 040 067 56 1 040 123
Depreciation and amortization 499 474 - 499 474
Taxes, other than income taxes 296 268 - 296 268
--------- ------- ---------
Total operating expenses 3 309 511 3 728 3 313 239
--------- ------- ---------
Operating income before income taxes 898 269 (3 728) 894 541
Income taxes 221 571 (15 393) 206 178
--------- ------- ---------
Operating income 676 698 11 665 688 363
--------- ------- ---------
Other Income and Deductions:
Allowance for other funds used during
construction (37) - (37)
Equity in undistributed earnings/(losses) of
affiliates (48 570) - (48 570)
Other income, net 40 266 - 40 266
Income taxes 22 858 - 22 858
--------- ------- ---------
Total other income and deductions 14 517 - 14 517
--------- ------- ---------
Income Before Interest Charges and
Preferred Dividends 691 215 11 665 702 880
--------- ------- ---------
Interest Charges and Preferred Dividends:
Interest on long-term debt 295 234 - 295 234
Other interest 35 686 130 35 816
Allowance for borrowed funds used during
construction (5 412) - (5 412)
Dividends on company-obligated mandatorily
redeemable preferred securities 28 888 - 28 888
Dividends on trust obligated preferred
securities - 32 626 32 626
Preferred stock dividends of
subsidiaries, net
of gain on reacquisition 11 815 - 11 815
--------- ------- ---------
Total interest charges and preferred
dividends 366 211 32 756 398 967
--------- ------- ---------
Minority interest net (income)/loss (1 473) - (1 473)
--------- ------- ---------
Income before extraordinary item 323 531 (21 091) 302 440
Extraordinary item (net of
income tax benefit) (275 110) - (275 110)
-------- ------- ---------
Net Income $ 48 421 $ (21 091) $ 27 330
========= ======= =========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 10 of 38
GPU, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
ACTUAL AND PRO FORMA
FOR THE TWELVE MONTHS ENDED JUNE 30, 1998
---------------------------------------------
(IN THOUSANDS)
Actual Adjustments
(Unaudited) (See pages
11-14) Pro Forma
----------- ------------ ----------
Balance at beginning of period $2 158 814 $ - $2 158 814
Net income 48 421 (21 091) 27 330
Cash dividends declared on
common stock (252 556) - (252 556)
Other (7 094) - (7 094)
--------- ------- ---------
Balance at end of period $1 947 585 $ (21 091) $1 926 494
========= ======= =========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 11 of 38
GPU, INC. AND SUBSIDIARY COMPANIES
PRO FORMA JOURNAL ENTRIES
AT JUNE 30, 1998
------------------------------------------
(IN THOUSANDS)
(1)
Cash and temporary cash investments $200 000
Trust originated preferred securities $200 000
To reflect the proposed issuance of $200 million
trust originated preferred securities from time to
time through December 31, 2000 by JCP&L Capital
Trust. The trust originated preferred securities
and dividend payments are to be unconditionally
guaranteed by Jersey Central Power & Light
Company.
(2)
Other deferred debits $ 2 570
Cash and temporary cash investments $ 2 570
To reflect the underwriters compensation and
offering expenses paid in accordance with the
Underwriting Agreements for JCP&L Capital Trust.
(3)
Other interest $ 52
Other deferred debits $ 52
To reflect the annual amortization of the deferred
underwriters compensation and offering expenses
which are being amortized over 49 years.
(4)
Dividends on trust originated
preferred securities $14 500
Cash and temporary cash investments $14 500
To reflect the annual dividends paid on the trust
originated preferred securities by JCP&L Capital
Trust at an assumed rate of 7.25%.
<PAGE>
Financial
Statements
Item 6(b) 1-B
Page 12 of 38
GPU, INC. AND SUBSIDIARY COMPANIES
PRO FORMA JOURNAL ENTRIES
AT JUNE 30, 1998
------------------------------------
(IN THOUSANDS)
(5)
Cash and temporary cash investments $250 000
Trust originated preferred securities $250 000
To reflect the proposed issuance of $125 million
trust originated preferred securities from time to
time through December 31, 2000 by Met-Ed Capital
Trust and Penelec Capital Trust, respectively. The
trust originated preferred securities and dividend
payments are to be unconditionally guaranteed by
Metropolitan Electric Company and Pennsylvania
Electric Company (SEC File No. 70-9329 and SEC
File No. 70-9327).
(6)
Other deferred debits $ 3 805
Cash and temporary cash investments $ 3 805
To reflect the underwriters compensation and
offering expenses paid in accordance with the
Underwriting Agreements for Met-Ed Capital Trust
and Penelec Capital Trust (SEC File No. 70-9329
and SEC File No. 70-9327).
(7)
Other interest $ 78
Other deferred debits $ 78
To reflect the annual amortization of the deferred
underwriters compensation and offering expenses
which are being amortized over 49 years (SEC File
No. 70-9329 and SEC File No. 70-9327).
<PAGE>
Financial
Statements
Item 6(b) 1-B
Page 13 of 38
GPU, INC. AND SUBSIDIARY COMPANIES
PRO FORMA JOURNAL ENTRIES
AT JUNE 30, 1998
-----------------------------------
(IN THOUSANDS)
(8)
Dividends on trust originated
preferred securities $18 126
Cash and temporary cash investments $18 126
To reflect the annual dividends paid on the trust
originated preferred securities of Met-Ed Capital
Trust (7.25%) and Penelec Capital Trust
(7.25%)(SEC File No. 70-9329 and SEC File No.
70-9327).
(9)
Other utility plant, net $61 193
Obligations under capital leases $61 193
To record the potential incremental nuclear fuel
to be leased for TMI-1 and Oyster Creek (proposed
$190,000 limit less $128,807 of nuclear fuel
subject to lease at March 31, 1998.) (SEC File No.
70-7862).
(10)
Fuel expense $ 3 672
Cash $ 3 672
To record incremental rent expense on the proposed
nuclear fuel lease at an annual rate of 6.0% (SEC
File No. 70-7862).
(11)
Other operation and maintenance $ 56
Cash $ 56
To record annual fees associated with the proposed
nuclear fuel lease (SEC File
No. 70-7862).
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 14 of 38
GPU, INC. AND SUBSIDIARY COMPANIES
PRO FORMA JOURNAL ENTRIES
AT JUNE 30, 1998
(IN THOUSANDS)
--------------------------------------
(12)
Taxes accrued $15 393
Income taxes $15 393
To reflect the net decrease in the provision for
Federal and State income taxes attributable to
interest payments on the proposed issuance of
subordinated debentures by Jersey Central Power &
Light Company, Metropolitan Electric Company (SEC
File No. 70-9329), and Pennsylvania Electric
Company (SEC File No. 70-9327) and to record the
decrease in income taxes associated with the
proposed nuclear fuel lease (SEC File No.
70-7862).
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 15 of 38
GPU, INC.
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------
GPU, Inc., a Pennsylvania corporation, is a holding company registered
under the Public Utility Holding Company Act of 1935. GPU, Inc. does not
directly operate any utility properties, but owns all the outstanding common
stock of three domestic electric utilities serving customers in New Jersey --
Jersey Central Power & Light Company (JCP&L) -- and Pennsylvania -- Metropolitan
Edison Company (Met-Ed) and Pennsylvania Electric Company (Penelec). The
customer service, transmission and distribution operations of these electric
utilities are conducting business under the name GPU Energy. JCP&L, Met-Ed and
Penelec considered together are referred to as the "GPU Energy companies." The
generation operations of the GPU Energy companies are conducted by GPU
Generation, Inc. (Genco) and GPU Nuclear, Inc. (GPUN). GPU, Inc. also owns all
the common stock of GPU International, Inc., GPU Power, Inc. and GPU Electric,
Inc. which develop, own and operate generation, transmission and distribution
facilities in the United States and in foreign countries. Collectively, these
are referred to as the "GPUI Group." Other wholly-owned subsidiaries of GPU,
Inc. are GPU Advanced Resources, Inc. (GPU AR), a subsidiary engaging in energy
services and retail energy sales; GPU Telcom Services, Inc. (GPU Telcom), a
subsidiary engaging in certain telecommunications-related businesses; and GPU
Service, Inc. (GPUS), which provides certain legal, accounting, financial and
other services to the GPU companies. All of these companies considered together
are referred to as "GPU."
These notes should be read in conjunction with the notes to consolidated
financial statements included in the 1997 Annual Report on Form 10-K. The
December 31, 1997 balance sheet data contained in the attached financial
statements was derived from audited financial statements. For disclosures
required by generally accepted accounting principles, see the 1997 Annual Report
on Form 10-K.
1. COMMITMENTS AND CONTINGENCIES
COMPETITION AND THE CHANGING REGULATORY ENVIRONMENT
---------------------------------------------------
The Emerging Competitive Market and Stranded Costs:
- ---------------------------------------------------
The current market price of electricity being below the cost of some
utility-owned generation and power purchase commitments, combined with the
ability of some customers to choose their energy suppliers, has created the
potential for stranded costs in the electric utility industry. These stranded
costs, while potentially recoverable in a regulated environment, are at risk in
a deregulated and competitive environment.
In 1996, the Federal Energy Regulatory Commission (FERC) issued Order 888,
which permits electric utilities to recover their legitimate and verifiable
stranded costs incurred when a wholesale customer purchases power from another
supplier using the utility's transmission system. In addition, Pennsylvania
adopted comprehensive legislation (Customer Choice Act) in 1996
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 16 of 38
which provides for the restructuring of the electric utility industry and will
permit utilities the opportunity to recover their prudently incurred stranded
costs through a Pennsylvania Public Utility Commission (PaPUC) approved
competitive transition charge (CTC), subject to certain conditions, including
that utilities attempt to mitigate these costs. In 1997, the New Jersey Board of
Public Utilities (NJBPU) released Phase II of the Energy Master Plan (NJEMP),
which proposes that New Jersey electric utilities should have an opportunity to
recover their stranded costs associated with generating capacity commitments and
caused by electric retail competition, provided that they attempt to mitigate
these costs. Implementing legislation, which has not yet been introduced, is
necessary to effect the restructuring programs by the NJEMP.
In June 1997, Met-Ed and Penelec filed with PaPUC their proposed
restructuring plans to implement competition and customer choice in Pennsylvania
as required by the Customer Choice Act. In June 1998, the PaPUC entered final
orders (Restructuring Orders) on the restructuring plans. In the Restructuring
Orders, the PaPUC, among other things, established a CTC which (a) would not
ensure Met-Ed and Penelec full recovery of the costs under their contracts with
nonutility generators (NUGs) as required by state and federal law; (b)
disallowed certain stranded cost claims by Met-Ed and Penelec; (c) lowered
unbundled transmission and distribution (T&D) rates for Met-Ed and Penelec by
reallocating certain T&D costs to generation; and (d) advanced the phase-in for
retail choice to January 2, 2000. Accordingly, Met-Ed and Penelec have written
off in the second quarter before taxes, $320 million and $150 million,
respectively. For additional information, see Note 2 Accounting for
Non-recurring Items.
On July 20, 1998, Met-Ed and Penelec appealed the Restructuring Orders to
the Commonwealth Court claiming more than 40 errors of law. Met-Ed and Penelec
have also filed complaints in the U.S. District Court seeking both declaratory
and injunctive relief challenging, among other things, the PaPUC's refusal in
the Restructuring Orders to ensure full recovery of the costs of NUG contracts,
as required by state and federal law.
In addition, on July 20, 1998 Met-Ed and Penelec filed Alternative
Restructuring Plans (Alternative Plans) with the PaPUC based on the provision in
the Customer Choice Act that enables a utility to file an alternate plan if the
PaPUC rejects the utility's initial plan. Met-Ed and Penelec believe that in the
Restructuring Orders, the PaPUC has objected to essentially the entirety of
their original restructuring plans and has therefore rejected these plans. On
August 5, 1998, the PaPUC rejected the Alternative Plans as invalid. Met-Ed and
Penelec intend to appeal this action to the Commonwealth Court. Highlights of
the Alternative Plans are presented in the Competitive Environment section of
Management's Discussion and Analysis.
Unless the Restructuring Orders are substantially modified consistent with
the Alternative Plans (in particular removing the proposed reduction of T&D
rates), there would be an adverse effect on Met-Ed and Penelec's future
earnings, except to the extent offset by spending reductions.
In July 1997, JCP&L filed with the NJBPU its proposed restructuring plan for
a competitive electric marketplace in New Jersey as required by the NJEMP. JCP&L
estimates that its total above-market costs related to power purchase
commitments and company-owned generation, on a present value basis at <PAGE>
Financial Statements
Item 6(b) 1-B
Page 17 of 38
September 30, 1998, is $1.6 billion. The $1.6 billion excludes above-market
generation costs related to the Oyster Creek Nuclear Generating Station (Oyster
Creek). These estimates are subject to significant uncertainties including the
future market price of both electricity and other competitive energy sources, as
well as the timing of when these above-market costs become stranded due to
customers choosing another supplier. In July 1997, JCP&L proposed, in its
restructuring plan, recovery of its remaining Oyster Creek plant investment as a
regulatory asset, through a nonbypassable charge to customers. At June 30, 1998,
JCP&L's net investment in Oyster Creek was $697 million. Highlights of this plan
are presented in the Competitive Environment section of Management's Discussion
and Analysis.
In February 1998, hearings with respect to JCP&L's stranded cost and
unbundled rate filings were completed before an Administrative Law Judge (ALJ)
and a recommended decision is scheduled to be issued in August. The NJBPU is not
expected to issue final decisions until legislation is enacted, but to date no
legislation has been introduced.
The inability of JCP&L to recover its stranded costs in whole or in part
would result in the recording of liabilities for above-market NUG costs,
decommissioning costs, and writedowns of uneconomic generation plant and
regulatory assets recorded in accordance with Statement of Financial Accounting
Standards No. 71 (FAS 71), "Accounting for the Effects of Certain Types of
Regulation." The inability to recover these stranded costs would have a material
adverse effect on GPU's results of operations.
In October 1997, GPU announced its intention to begin a process to sell,
through a competitive bid process, up to all of the fossil-fuel and
hydroelectric generating facilities owned by the GPU Energy companies. These
facilities, comprised of 26 operating stations, support organizations and
development sites, total approximately 5,300 MW (JCP&L 1,900 MW; Met-Ed 1,300
MW; Penelec 2,100 MW) of capacity and have a net book value of approximately
$1.1 billion (JCP&L $286 million; Met-Ed $297 million; Penelec $532 million) at
June 30, 1998. The net proceeds from the sale would be used to reduce the
capitalization of the respective GPU Energy companies and may also be applied to
reduce short-term debt, finance further acquisitions, repurchase GPU, Inc.
common stock, and to reduce acquisition debt of the GPUI Group. It is
anticipated that definitive purchase agreements will be entered into in November
1998 and the divestiture completed by mid-1999, subject to the timely receipt of
the necessary regulatory and other approvals.
In August 1998, Penelec and New York State Electric & Gas Corporation
(NYSEG) entered into definitive agreements with Edison Mission Energy to sell
the Homer City Station for a total purchase price of approximately $1.8 billion.
Penelec and NYSEG each own a 50% interest in the station, and will share equally
in the net sale proceeds. The sale, which is subject to various federal and
state regulatory approvals, is expected to be completed in the first quarter of
1999.
Nonutility Generation Agreements:
- ---------------------------------
Pursuant to the requirements of the federal Public Utility Regulatory
Policies Act (PURPA) and state regulatory directives, the GPU Energy companies
have entered into power purchase agreements with NUGs for the purchase of energy
and capacity for remaining periods of up to 23 years. The following
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 18 of 38
table shows actual payments from 1995 through 1997, and estimated payments from
1998 through 2002.
Payments Under NUG Agreements
-----------------------------
(in Millions)
Total JCP&L Met-Ed Penelec
----- ----- ------ -------
1995 $670 $381 $131 $158
1996 730 370 168 192
1997 759 384 172 203
* 1998 783 393 173 217
1999 789 395 167 227
2000 877 402 222 253
2001 916 411 261 244
2002 940 423 272 245
* The 1998 amounts consist of actual payments through June 30, 1998 and
estimated payments for the remainder of the year.
As of June 30, 1998, NUG facilities covered by agreements having 1,666 MW
(JCP&L 905 MW; Met-Ed 356 MW; Penelec 405 MW) of capacity were in service. While
a few of these NUG facilities are dispatchable, most are must-run and generally
obligate the GPU Energy companies to purchase, at the contract price, the output
up to the contract limits. Substantially all unbuilt NUG facilities for which
the GPU Energy companies have executed agreements are fully dispatchable.
The emerging competitive generation market has created uncertainty regarding
the forecasting of the companies' energy supply needs, which has caused the GPU
Energy companies to change their supply strategy to seek shorter-term agreements
offering more flexibility. The GPU Energy companies' future supply plan will
likely focus on short- to intermediate-term commitments and reliance on spot
market purchases. 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. As a result of these developments, the rates under
virtually all of the GPU Energy companies' NUG agreements for facilities
currently in operation are substantially in excess of current and projected
prices from alternative sources.
The GPU Energy companies are seeking to reduce the above-market costs of
these NUG agreements by: (1) attempting to convert must-run agreements to
dispatchable agreements; (2) attempting to renegotiate prices of the agreements;
(3) offering contract buyouts (see Management's Discussion and Analysis - The
GPU Energy Companies' Supply Plan,); and (4) initiating proceedings before
federal and state agencies, and in the courts, where appropriate. In addition,
the GPU Energy companies intend to avoid, to the maximum extent practicable,
entering into any new NUG agreements that are not needed or not consistent with
current market pricing, and are supporting legislative efforts to repeal PURPA.
These efforts may result in claims against GPU for substantial damages. There
can be no assurance as to the extent to which these efforts will be successful
in whole or in part.
In 1997, Met-Ed and Penelec issued requests for proposals (RFPs) to 24 NUG
projects which currently supply a total of approximately 760 MW under power
purchase agreements. The RFPs requested the NUGs to propose buyouts,
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 19 of 38
buydowns and/or restructurings of current power purchase contracts in return for
cash payments. In January 1998, Met-Ed and Penelec entered into definitive
buyout agreements with two bidders. These agreements are contingent upon Met-Ed
and Penelec obtaining a PaPUC order allowing for the full recovery of the buyout
payments through retail rates.
In February 1997, Met-Ed and Penelec entered into revised power purchase
agreements with AES Power Corporation (AES) for 377 MW and 80 MW of capacity and
related energy, respectively, related to a combined-cycle generating facility
that AES plans to construct in Pennsylvania. Met-Ed and Penelec have paid $63.4
million and $5 million, respectively, to previous developers and AES to
terminate the original power purchase agreements. In November 1997, in response
to an offer from AES, Met-Ed and Penelec agreed to increase the contract
capacity under the agreements by 163 MW. If the revised power purchase
agreements with AES are not approved by the PaPUC, Met-Ed and Penelec have
agreed to pay AES up to an additional $29 million and $6 million, respectively.
There can be no assurance as to the outcome of this matter.
The GPU Energy companies are currently recovering certain of their NUG costs
(including certain buyout costs) from customers. However, the PaPUC
Restructuring Orders do not provide for the collection from customers of a
substantial portion of above-market NUG costs. Met-Ed and Penelec are contesting
the Restructuring Orders. Although the Pennsylvania legislation and the NJEMP in
New Jersey both include provisions for the recovery of costs under NUG
agreements and certain NUG buyout costs, there can be no assurance that the GPU
Energy companies will continue to be able to recover similar costs which may be
incurred in the future. (See Management's Discussion and Analysis - Competitive
Environment for additional discussion.)
This discussion of "Nonutility Generation Agreements" contains estimates
which are based on current knowledge and expectations of the outcome of future
events. The estimates are subject to significant uncertainties, including
changes in fuel prices, improvements in technology, the changing regulatory
environment and the deregulation of the electric utility industry.
Regulatory Assets, Net:
- -----------------------
On June 30, 1998, Met-Ed and Penelec received final PaPUC Restructuring
Orders. The Restructuring Orders, among other things, essentially remove from
regulation the costs associated with providing electric generation service to
Pennsylvania consumers, effective January 1, 1999. Accordingly, Met-Ed and
Penelec have 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" with respect to their electric generation operations,
effective April 1, 1998. The transmission and distribution portion of Met-Ed and
Penelec's operations will continue to be subject to the provisions of FAS 71.
See Note 2 - Accounting for Non-recurring Items.
JCP&L will discontinue the application of FAS 71 and apply FAS 101 for its
electric generation operations no later than when it receives NJBPU approval of
its restructuring plans.
Regulatory Assets, Net as reflected in the June 30, 1998 and December 31,
1997 Consolidated Balance Sheets in accordance with the provisions of FAS 71,
were as follows:
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 20 of 38
GPU, Inc. and Subsidiary Companies Assets (in thousands)
- ------ --------------------------- ---------------------
June 30, December 31,
1998 1997
---- ----
Competitive transition charge per
PaPUC Order $1,832,780 $ -
Return recognized 76,580 -
--------- ---------
Total competitive transition charge (CTC) $1,909,360 $ -
========= =========
Other regulatory assets, net:
Reserve for generation divestiture (JCP&L) $ 122,409 $ -
Phase II reserve for generation divestiture 440,541 -
Income taxes recoverable through future rates 412,710 510,680
Income taxes refundable through future rates (57,475) (89,247)
Net investment in TMI-2 67,458 83,951
TMI-2 decommissioning costs 76,398 257,180
Nonutility generation contract buyout costs 139,708 245,568
Unamortized property losses 83,619 99,532
Other postretirement benefits 75,431 89,569
Environmental remediation 43,174 90,308
N.J. unit tax 36,583 39,797
Unamortized loss on reacquired debt 34,525 40,489
Load and demand-side management programs 21,932 23,164
N.J. low-level radwaste disposal 26,496 31,479
DOE enrichment facility decommissioning 30,306 33,472
Nuclear fuel disposal fee 22,556 21,512
Storm damage 31,252 31,097
Deferred nonutility generation costs
not in current rates - 24,857
Other regulatory liabilities (17,691) (13,959)
Other regulatory assets 9,275 28,029
--------- ---------
Total other regulatory assets, net $1,599,207 $1,547,478
========== ==========
JCP&L Assets (in thousands)
- ----- ---------------------
June 30, December 31,
1998 1997
---- ----
Other regulatory assets, net:
Reserve for generation divestiture $ 122,409 $ -
Income taxes recoverable through future rates 140,920 128,111
Income taxes refundable through future rates (35,964) (37,759)
Net investment in TMI-2 67,458 75,541
TMI-2 decommissioning costs 23,398 30,024
Nonutility generation contract buyout costs 132,208 140,500
Unamortized property losses 83,540 94,726
Other postretirement benefits 48,147 49,807
Environmental remediation 43,174 61,324
N.J. unit tax 36,583 39,797
Unamortized loss on reacquired debt 27,342 28,729
Load and demand-side management programs 21,932 23,164
N.J. low-level radwaste disposal 26,496 31,479
DOE enrichment facility decommissioning 18,679 21,223
Nuclear fuel disposal fee 22,016 23,781
Storm damage 31,252 31,097
Other regulatory liabilities (16,665) (11,467)
Other regulatory assets 5,231 6,399
--------- ---------
Total other regulatory assets, net $ 798,156 $ 736,476
========= =========
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 21 of 38
Met-Ed Assets (in thousands)
- ------ ---------------------
June 30, December 31,
1998 1997
---- ----
Competitive transition charge per PaPUC Order $ 974,860 $ -
Return recognized 50,110 -
--------- ---------
Total competitive transition charge (CTC) $1,024,970 $ -
========= =========
Other regulatory assets, net: Transmission & Distribution related:
Income taxes recoverable through future rates $ 123,060 $ 116,303
Income taxes refundable through future rates (12,201) (12,614)
Nonutility generation contract buyout costs 7,500 12,500
Other postretirement benefits 27,284 27,436
Unamortized loss on reacquired debt 3,153 3,411
DOE enrichment facility decommissioning 7,751 8,166
Other regulatory liabilities (940) (1,014)
Other regulatory assets 223 216
--------- ---------
Subtotal $ 155,830 $ 154,404
--------- ---------
Generation related:
Income taxes recoverable through future rates $ - $ 62,624
Income taxes refundable through future rates - (9,135)
Unamortized property losses 79 2,650
Other postretirement benefits - 12,326
Environmental remediation - 4,121
Unamortized loss on reacquired debt 140 1,918
Nuclear fuel disposal fee 302 (1,511)
Other regulatory liabilities - (1,432)
Other regulatory assets 642 3,227
--------- ---------
Subtotal $ 1,163 $ 74,788
--------- ---------
Other:
Phase II reserve for generation divestiture $ 96,421 $ -
Net investment in TMI-2 - 1,187
TMI-2 decommissioning costs 36,530 145,103
Nonutility generation contract buyout costs - 63,868
Deferred nonutility generation costs
not in current rates - 10,265
Other regulatory assets 1,347 1,072
--------- ---------
Subtotal $ 134,298 $ 221,495
--------- ---------
Total other regulatory assets, net $ 291,291 $ 450,687
========= =========
Penelec Assets (in thousands)
- ------- ---------------------
June 30, December 31,
1998 1997
---- ----
Competitive transition charge per PaPUC Order $ 857,920 $ -
Return recognized 26,470 -
--------- ---------
Total competitive transition charge (CTC) $ 884,390 $ -
========= =========
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 22 of 38
Other regulatory assets, net: Transmission & Distribution related:
Income taxes recoverable through future rates $ 148,730 $ 142,549
Income taxes refundable through future rates (9,310) (9,516)
Unamortized loss on reacquired debt 3,690 4,116
DOE enrichment facility decommissioning 3,876 4,083
Other regulatory liabilities (86) (46)
--------- ---------
Subtotal $ 146,900 $ 141,186
--------- ---------
Generation related:
Income taxes recoverable through future rates $ - $ 61,093
Income taxes refundable through future rates - (20,223)
Unamortized property losses - 2,156
Environmental remediation - 24,863
Unamortized loss on reacquired debt 200 2,315
Nuclear fuel disposal fee 238 (758)
Other regulatory assets 686 15,964
--------- ---------
Subtotal $ 1,124 $ 85,410
--------- ---------
Other:
Phase II reserve for generation divestiture 344,120 -
Net investment in TMI-2 - 7,223
TMI-2 decommissioning costs 16,470 82,053
Nonutility generation contract buyout costs - 28,700
Deferred nonutility generation costs
not in current rates - 14,592
Other regulatory assets 1,146 1,151
--------- ---------
Subtotal $ 361,736 $ 133,719
--------- ---------
Total other regulatory assets, net $ 509,760 $ 360,315
========= =========
Competitive transition charge: Represents the stranded cost recovery amounts
- ------------------------------
allowed by the PaPUC, and a recognized return, which are to be collected from
customers of Met-Ed and Penelec, beginning January 1, 1999, over eleven-year and
eight-year transition periods, respectively. Stranded costs, as defined by the
Pennsylvania Competition Act, include an electric utility's known and measurable
generation-related costs, which would have been recoverable in the former
regulated market, but are not recoverable in a competitive electric generation
market.
Reserve for generation divestiture (JCP&L): Represents generation divestiture
- ------------------------------------------
shortfall which is probable of recovery in future rates, inclusive of
transaction costs.
Phase II reserve for generation divestiture (Met-Ed and Penelec): Represents
- -------------------------------------------------------------------
generation divestiture CTC shortfall to be addressed in a Phase II rate
restructuring order, inclusive of transaction costs.
Income taxes recoverable/refundable through future rates: Represents amounts
- ---------------------------------------------------------
deferred due to the implementation of FAS 109, "Accounting for Income Taxes," in
1993.
Net investment in TMI-2: Represents costs that are recoverable through rates for
- -----------------------
the GPU Energy companies' remaining investment in the plant and fuel core.
TMI-2 decommissioning costs: Represents costs that are recoverable through
- ---------------------------
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 23 of 38
rates for the GPU Energy companies' radiological decommissioning and the cost of
removal of nonradiological structures and materials in accordance with the 1995
site-specific study (in 1998 dollars). For additional information, see Nuclear
Plant Retirement Costs.
Nonutility generation contract buyout costs: Represents amounts incurred for
- ---------------------------------------------
terminating power purchase contracts with NUGs, for which rate recovery has been
granted or is probable.
Unamortized property losses: Consists mainly of costs associated with JCP&L's
- -----------------------------
Forked River project, which are included in rates.
Other postretirement benefits: Includes costs associated with the adoption of
- -------------------------------
FAS 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," which are deferred in accordance with Emerging Issues Task Force
(EITF) Issue 92-12, "Accounting for OPEB Costs by Rate-Regulated Enterprises."
Environmental remediation: Consists of amounts related to the investigation and
- -------------------------
remediation of several manufactured gas plant sites formerly owned by JCP&L, as
well as several other JCP&L sites; Penelec's Seward station property; and future
closure costs of various ash disposal sites for the GPU Energy companies. For
additional information, see Environmental Matters.
N.J. unit tax: Represents certain state taxes, with interest, for which JCP&L
- -------------
received NJBPU approval in 1993 to recover over a ten-year period.
Unamortized loss on reacquired debt: Represents premiums and expenses incurred
- ----------------------------------
in the early redemption of long-term debt. In accordance with FERC regulations,
reacquired debt costs are amortized over the remaining original life of the
retired debt.
Load and demand-side management (DSM) programs: Consists of load management
- -------------------------------------------------
costs and other DSM program expenditures that are currently being recovered,
with interest, through JCP&L's retail base rates and demand-side factor. Also
includes provisions for lost revenues between base rate cases and performance
incentives.
N.J. low-level radwaste disposal: Represents the estimated assessment for the
- -------------------------------
siting of a disposal facility for low-level waste from Oyster Creek, less
amortization, as allowed in JCP&L's rates.
Department of Energy (DOE) enrichment facility decommissioning: Represents
- ------------------------------------------------------------------
payments to the DOE over a 15-year period which began in 1994.
Nuclear fuel disposal fee: Represents amounts recoverable through rates for
- --------------------------
estimated future disposal costs for spent nuclear fuel at Oyster Creek and Three
Mile Island Unit 1 (TMI-1) in accordance with the Nuclear Waste Policy Act of
1982.
Storm damage: Relates to incremental noncapital costs associated with various
- ------------
storms in the JCP&L service territory that are not recoverable through
insurance. These amounts were deferred based upon past rate recovery precedent.
An annual amortization amount is included in JCP&L's retail base rates and is
charged to expense.
Deferred nonutility generation costs not in current rates:
- ----------------------------------------------------------
Represents incremental NUG operating costs incurred above amounts reflected in
Met-Ed and
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 24 of 38
Penelec's current rates, for which rate recovery is probable but has not yet
been granted (see Management's Discussion and Analysis - Competitive
Environment).
Accounting Matters:
- -------------------
In June 1998, Statement of Financial Accounting Standards No. 133 (FAS 133),
"Accounting for Derivative Instruments and Hedging Activities" was issued. FAS
133 requires that companies recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value. To
comply with this statement, 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 reported as a
component of other comprehensive income, depending upon the intended use and
designation of the derivative as a hedge. This statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. GPU expects to
adopt this statement in the first quarter of 2000. GPU is in the process of
evaluating the impact of FAS 133.
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," requires that regulatory assets meet the recovery criteria of FAS 71 on an
ongoing basis in order to avoid a write-down. In addition, FAS 121 requires that
long-lived assets, identifiable intangibles, capital leases and goodwill be
reviewed for impairment whenever events occur or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. FAS 121
also requires the recognition of impairment losses when the carrying amounts of
those assets are greater than the estimated cash flows expected to be generated
from the use and eventual disposition of the assets. See Note 2 Accounting for
Non-recurring Items.
Should the restructuring proceeding in New Jersey result in substantial
disallowance of certain capital additions; the disallowance of certain stranded
costs; reduction in cost of capital allowances on certain elements of plant and
cost deferrals; and tariff rate unbundling reflecting an allocation of costs to
the transmission and distribution activities lower than that proposed by JCP&L,
management believes that the outcome of that proceeding would have a material
adverse effect on GPU's future earnings.
NUCLEAR FACILITIES
------------------
The GPU Energy companies have made investments in three major nuclear
projects -- TMI-1 and Oyster Creek, both of which are operating generation
facilities, and TMI-2, which was damaged during a 1979 accident. TMI-1 and TMI-2
are jointly owned by JCP&L, Met-Ed and Penelec in the percentages of 25%, 50%
and 25%, respectively. Oyster Creek is owned by JCP&L. At June 30, 1998 and
December 31, 1997, the GPU Energy companies' net investment in TMI-1 and Oyster
Creek, including nuclear fuel, was as follows:
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 25 of 38
Net Investment (in millions)
----------------------------
TMI-1 Oyster Creek
----- ------------
June 30, 1998
-------------
JCP&L $ 33 $697
Met-Ed 65 -
Penelec 33 -
--- ---
Total $131 $697
=== ===
Net Investment (in millions)
----------------------------
TMI-1 Oyster Creek
----- ------------
December 31, 1997
-----------------
JCP&L $155 $701
Met-Ed 300 -
Penelec 147 -
--- ---
Total $602 $701
=== ===
The GPU Energy companies' net investment in TMI-2 at June 30, 1998 was $68
million for JCP&L and $84 million, (JCP&L $76 million; Met-Ed $1 million; and
Penelec $7 million) at December 31 1997. 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. On June 30, 1998, Met-Ed and Penelec received final PaPUC
Restructuring Orders. The companies discontinued the application of FAS 71 and
adopted the provisions of FAS 101 with respect to their electric generation
operations. Accordingly, Met-Ed and Penelec wrote-off their remaining investment
in TMI-2 of $1 million and $7 million, respectively. See Note 2 Accounting for
Non-recurring Items.
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. The GPU Energy companies may also incur costs and experience
reduced output at their nuclear plants because of the prevailing design criteria
at the time of construction and the age of the plants' systems and equipment. In
addition, for economic or other reasons, operation of these plants for the full
term of their operating licenses cannot be assured. Also, not all risks
associated with the ownership or operation of nuclear facilities may be
adequately insured or insurable. Consequently, the recovery of costs associated
with nuclear projects, including replacement power, any unamortized investment
at the end of each plant's useful life (whether scheduled or premature), the
carrying costs of that investment and retirement costs, is not assured. (See
Competition and the Changing Regulatory Environment.)
In addition to the continued operation of the Oyster Creek facility, JCP&L
has been exploring the sale or early retirement of the plant to mitigate costs
associated with its continued operation. In July 1998, GPU, Inc. announced that
it was unable to identify a buyer for the Oyster Creek facility. A final
decision on the plant will not be made until the NJBPU rules on JCP&L's
restructuring filing. If a decision is made to retire the plant early,
retirement would likely occur in 2000. Although management believes that the
current rate structure would allow for the recovery of and return on its net
investment in the plant and provide for decommissioning costs, there can be no
assurance that such costs will be fully recoverable.
(See Management's Discussion and Analysis - Competitive Environment).
In July 1998, GPU entered into a Letter of Intent to sell TMI-1 to
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 26 of 38
AmerGen Energy Company, LLC (AmerGen), a joint venture between PECO Energy and
British Energy. The Letter of Intent initiates a 90-day period during which GPU
and AmerGen will seek to negotiate a definitive agreement for the purchase and
sale of TMI-1 and AmerGen will complete its due diligence review of the TMI-1
facility. Highlights of the Letter of Intent are presented in the Competitive
Environment section of Management's Discussion and Analysis.
TMI-2:
- ------
The 1979 TMI-2 accident resulted in individual claims for alleged personal
injury (including claims for punitive damages), which are material in amount,
have been asserted against GPU, Inc. and the GPU Energy companies. Approximately
2,100 of such claims were filed in the United States District Court for the
Middle District of Pennsylvania. Some of the claims also seek recovery for
injuries from alleged emissions of radioactivity before and after the accident.
At the time of the TMI-2 accident, as provided for in the Price-Anderson
Act, the GPU Energy companies had (a) primary financial protection in the form
of insurance policies with groups of insurance companies providing an aggregate
of $140 million of primary coverage, (b) secondary financial protection in the
form of private liability insurance under an industry retrospective rating plan
providing for up to an aggregate of $335 million in premium charges under such
plan, and (c) an indemnity agreement with the NRC for up to $85 million,
bringing their total financial protection up to an aggregate of $560 million.
Under the secondary level, the GPU Energy companies are subject to a
retrospective premium charge of up to $5 million per reactor, or a total of $15
million (JCP&L $7.5 million; Met-Ed $5 million; Penelec $2.5 million).
In October 1995, the U.S. Court of Appeals for the Third Circuit ruled that
the Price-Anderson Act provides coverage under its primary and secondary levels
for punitive as well as compensatory damages, but that punitive damages could
not be recovered against the Federal Government under the third level of
financial protection. In so doing, the Court of Appeals referred to the "finite
fund" (the $560 million of financial protection under the Price-Anderson Act) to
which plaintiffs must resort to get compensatory as well as punitive damages.
The Court of Appeals also ruled that the standard of care owed by the
defendants to a plaintiff was determined by the specific level of radiation
which was released into the environment, as measured at the site boundary,
rather than as measured at the specific site where the plaintiff was located at
the time of the accident (as the defendants proposed). The Court of Appeals also
held that each plaintiff still must demonstrate exposure to radiation released
during the TMI-2 accident and that such exposure had resulted in injuries. In
1996, the U.S. Supreme Court denied petitions filed by GPU, Inc. and the GPU
Energy companies to review the Court of Appeals' rulings.
In June 1996, the District Court granted a motion for summary judgment filed
by GPU, Inc. and the GPU Energy companies, and dismissed all of the 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 have appealed the District Court's ruling to the Court of
Appeals for the Third Circuit, before which the matter is pending. There can be
no assurance as to the outcome of this litigation.
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 27 of 38
Based on the above, 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 1990, the GPU Energy companies submitted a report, in compliance with
Nuclear Regulatory Commission (NRC) regulations, setting forth a funding plan
(employing the external sinking fund method) for the decommissioning of their
nuclear reactors. Under this plan, the GPU Energy companies intend to complete
the funding for Oyster Creek and TMI-1 by the end of the plants' license terms,
2009 and 2014, respectively. The TMI-2 funding completion date is 2014,
consistent with TMI-2's remaining in long-term storage and being decommissioned
at the same time as TMI-1. Based on NRC studies, a comparable funding target was
developed for TMI-2 which took the accident into account. Under the NRC
regulations, the funding targets (in 1998 dollars) are as follows:
(in millions)
Oyster
TMI-1 TMI-2 Creek
----- ----- -----
JCP&L $ 46 $ 73 $314
Met-Ed 92 146 -
Penelec 46 73 -
--- --- ---
Total $184 $292 $314
=== === ===
The funding targets, while not considered cost estimates, are reference
levels designed to assure that licensees demonstrate adequate financial
responsibility for decommissioning. While the NRC regulations address activities
related to the removal of the radiological portions of the plants, they do not
establish residual radioactivity limits nor do they address costs related to the
removal of nonradiological structures and materials.
In 1995, a consultant to GPUN performed site-specific studies of the TMI
site, including both Units 1 and 2, and of Oyster Creek, 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. The NRC may require an
acceleration of the decommissioning funding for Oyster Creek if the plant is
retired early. The retirement cost estimates under the site-specific studies are
as follows (in 1998 dollars):
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 28 of 38
(in millions)
Oyster
TMI-1 TMI-2 Creek
----- ----- -----
Radiological decommissioning $337 $410 $397
Nonradiological cost of removal 83 34 * 38
--- --- ---
Total $420 $444 $435
=== === ===
* Net of $11.6 million spent as of June 30, 1998.
Each of the GPU Energy companies is responsible for retirement costs in
proportion to its respective ownership percentage.
In July 1998, GPU entered into a Letter of Intent to sell TMI-1 to AmerGen.
The Letter of Intent provides, among other things, that upon closing, AmerGen
will assume all TMI-1 decommissioning liabilities beyond $320 million, the
amount to which GPU has agreed to fund the trusts. If all the necessary
regulatory approvals, as well as certain Internal Revenue Service (IRS) rulings,
are obtained, then the transfer of all the TMI-1 decommissioning liabilities and
expenses to AmerGen will take place at the financial closing.
The ultimate cost of retiring the GPU Energy companies' nuclear facilities
may be different from the cost estimates contained in these site-specific
studies. Such costs are subject to (a) the escalation of various cost elements
(for reasons including, but not limited to, general inflation), (b) the further
development of regulatory requirements governing decommissioning, (c) the
technology available at the time of decommissioning, and (d) the availability of
nuclear waste disposal facilities.
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. Accounting for retirement costs may
change based upon the FASB Exposure Draft discussed below.
The FASB has issued an Exposure Draft titled "Accounting for Certain
Liabilities Related to Closure or Removal of Long-Lived Assets," which includes
nuclear plant retirement costs. If the Exposure Draft is adopted, Oyster Creek
and TMI-1 future retirement costs would have to be recognized as a liability
immediately, rather than the current industry practice of accruing these costs
in accumulated depreciation over the life of the plants. A regulatory asset for
amounts probable of recovery through rates would also be established. Any
amounts not probable of recovery through rates would have to be charged to
expense. (For TMI-2, a liability (in 1998 dollars) has already been recognized,
based on the 1995 site-specific study because the plant is no longer operating
(see TMI-2)). The effective date of this accounting change has not yet been
established.
TMI-1 and Oyster Creek:
- -----------------------
The NJBPU has granted JCP&L annual revenues for TMI-1 and Oyster Creek
retirement costs of $2.5 million and $13.5 million, respectively. These annual
revenues are based on both the NRC funding targets for radiological
decommissioning costs and a site-specific study which was performed in 1988
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 29 of 38
for nonradiological costs of removal. The Stipulation of Final Settlement
approved by the NJBPU in 1997 allows for JCP&L's future collection of retirement
costs to increase annually to $5.2 million and $22.5 million for TMI-1 and
Oyster Creek, respectively, beginning in 1998, based on the 1995 site-specific
study estimates.
The PaPUC has granted Met-Ed annual revenues for TMI-1 retirement costs of
$8.5 million based on both the NRC funding target for radiological
decommissioning costs and the 1988 site-specific study for nonradiological costs
of removal. The PaPUC also granted Penelec annual revenues of $4.2 million for
its share of TMI-1 retirement costs, on a basis consistent with that granted
Met-Ed. As part of their restructuring plans filed with the PaPUC in June 1997,
Met-Ed and Penelec have requested that these amounts be increased to reflect the
estimated retirement costs contained in the 1995 site-specific study for
radiological decommissioning and nonradiological costs of removal. On June 30,
1998, Met-Ed and Penelec received final PaPUC Restructuring Orders, which
granted recovery of TMI-1 decommissioning costs as part of the CTC. The PaPUC,
however rejected Met-Ed and Penelec's proposed TMI-1 decommissioning recovery
period and inflation assumptions. Met-Ed and Penelec have appealed the
Restructuring Orders to the Commonwealth Court and have filed complaints in the
U.S. District Court. Met-Ed and Penelec have filed revised stranded cost claims
for TMI-1 decommissioning in their Alternative Plans. On August 5, 1998, the
PaPUC rejected the Alternative Plans as invalid. Met-Ed and Penelec intend to
appeal this action to the Commonwealth Court.
The amounts charged to depreciation expense for the six months ended June
30, 1998 and the provisions for the future expenditure of these funds, which
have been made in accumulated depreciation, are as follows:
(in millions)
Oyster
TMI-1 Creek
----- -----
Amount expensed for the six months ended June 30, 1998:
JCP&L $ 3 $ 11
Met-Ed 4 -
Penelec 2 -
--- ---
$ 9 $ 11
=== ===
(in millions)
Oyster
TMI-1 Creek
----- -----
Accumulated depreciation provision at June 30, 1998:
JCP&L $ 43 $246
Met-Ed 79 -
Penelec 34 -
--- ---
$156 $246
==== ====
Management believes that any TMI-1 and Oyster Creek retirement costs, in
excess of those currently recognized for ratemaking purposes, should be
recoverable from customers.
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 30 of 38
TMI-2:
- ------
The estimated liabilities for TMI-2 future retirement costs (reflected as
Three Mile Island Unit 2 Future Costs on the Consolidated Balance Sheets) as of
June 30, 1998 and December 31, 1997 are as follows:
(in millions)
GPU JCP&L Met-Ed Penelec
--- ----- ------ -------
June 30, 1998 $459 $115 $229 $115
December 31, 1997 $449 $112 $225 $112
These amounts are based upon the 1995 site-specific study estimates (in 1998
and 1997 dollars, respectively) discussed above and an estimate for remaining
incremental monitored storage costs of $16 million (JCP&L $4 million; Met-Ed $8
million; Penelec $4 million) as of June 30, 1998 and December 31, 1997, 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 million (JCP&L $250 thousand; Met-Ed $500 thousand; Penelec
$250 thousand).
Offsetting the $459 million liability at June 30, 1998 is $255 million which
management believes is probable of recovery from customers and included in
Competitive transition charge (Met-Ed $107 million; Penelec $67 million) and
Other regulatory assets, net (JCP&L $27 million; Met-Ed $37 million; Penelec $17
million) on the Consolidated Balance Sheets, and $246 million (JCP&L $96
million; Met-Ed $110 million; Penelec $40 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 Competitive transition charge and Other
regulatory assets. TMI-2 decommissioning costs charged to depreciation expense
during the six months ended June 30, 1998 amounted to $7 million (JCP&L $1
million; Met-Ed $5 million; Penelec $1 million).
The NJBPU has granted JCP&L, TMI-2 decommissioning revenues for the NRC
funding target and allowances for the cost of removal of nonradiological
structures and materials. In addition, JCP&L is recovering its share of TMI-2's
incremental monitored storage costs. The Stipulation of Final Settlement
approved by the NJBPU in 1997 adjusts JCP&L's future revenues for retirement
costs based on the 1995 site-specific study estimates, beginning in 1998. On
June 30, 1998, Met-Ed and Penelec received final PaPUC Restructuring Orders,
which granted recovery of TMI-2 decommissioning costs as part of the CTC. The
PaPUC rejected the companies' proposed TMI-2 decommissioning recovery period and
inflation assumptions but allowed Met-Ed and Penelec to defer as a regulatory
asset those amounts that are above which was provided for in the CTC.
At June 30, 1998, the accident-related portion of TMI-2 radiological
decommissioning costs is considered to be $73 million (JCP&L $18 million, Met-Ed
$37 million; Penelec $18 million), which is the difference between the 1995
TMI-1 and TMI-2 site-specific study estimates (in 1998 dollars). In connection
with rate case resolutions at the time, JCP&L, Met-Ed and Penelec made
contributions to irrevocable external trusts relating to their shares of the
accident-related portions of the decommissioning liability. In 1990, JCP&L
contributed $15 million and in 1991, Met-Ed and Penelec contributed $40
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 31 of 38
million and $20 million, respectively, to irrevocable external trusts. These
contributions were not recovered from customers and have been expensed. The GPU
Energy companies will not pursue recovery from customers for any of these
amounts contributed in excess of the $73 million accident-related portion
referred to above.
JCP&L intends to seek recovery for any increases in TMI-2 retirement costs,
and Met-Ed and Penelec intend to seek recovery for any increases in the
nonaccident-related portion of such costs, but recognize that recovery cannot be
assured.
INSURANCE
---------
GPU has insurance (subject to retentions and deductibles) for its operations
and facilities including coverage for property damage, liability to employees
and third parties, and loss of use and occupancy (primarily incremental
replacement power costs). There is no assurance that GPU will maintain all
existing insurance coverages. Losses or liabilities that are not completely
insured, unless allowed to be recovered through ratemaking, could have a
material adverse effect on the financial position of GPU.
The decontamination liability, premature decommissioning and property damage
insurance coverage for the TMI station and for Oyster Creek totals $2.7 billion
per site. In accordance with NRC regulations, these insurance policies generally
require that proceeds first be used for stabilization of the reactors and then
to pay for decontamination and debris removal expenses. Any remaining amounts
available under the policies may then be used for repair and restoration costs
and decommissioning costs. Consequently, there can be no assurance that in the
event of a nuclear incident, property damage insurance proceeds would be
available for the repair and restoration of that station.
The Price-Anderson Act limits GPU's liability to third parties for a nuclear
incident at one of its sites to approximately $9.9 billion. Coverage for the
first $200 million of such liability is provided by private insurance. The
remaining coverage, or secondary financial protection, is provided by
retrospective premiums payable by all nuclear reactor owners. Under secondary
financial protection, a nuclear incident at any licensed nuclear power reactor
in the country, including those owned by the GPU Energy companies, could result
in assessments of up to $88 million per incident for each of the GPU Energy
companies' two operating reactors, subject to an annual maximum payment of $10
million per incident per reactor. In addition to the retrospective premiums
payable under the Price-Anderson Act, the GPU Energy companies are also subject
to retrospective premium assessments of up to $26.5 million (JCP&L $17.0
million; Met-Ed $6.3 million; Penelec $3.2 million) in any one year under
insurance policies applicable to nuclear operations and facilities.
The GPU Energy companies have insurance coverage for incremental replacement
power costs resulting from an accident-related outage at their nuclear plants.
Coverage commences after a 17 week waiting period at $3.5 million per week, and
after 23 weeks of an outage, continues for three years beginning at $1.8 million
and $2.6 million per week for the first year for Oyster Creek and TMI-1,
respectively, decreasing to 80% of such amounts for years two and three.
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 32 of 38
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.
To comply with Titles I and IV of the federal Clean Air Act Amendments of
1990 (Clean Air Act), the GPU Energy companies expect to spend up to $248
million (JCP&L $44 million; Met-Ed $98 million; Penelec $106 million) for air
pollution control equipment by the year 2000, of which approximately $242
million (JCP&L $43 million; Met-Ed $96 million; Penelec $103 million) has
already been spent. In developing their least-cost plan to comply with the Clean
Air Act, the GPU Energy companies will continue to evaluate major capital
investments compared to participation in the sulfur dioxide (SO2) emission
allowance market, the expected nitrogen oxide (NOx) emissions trading market and
the use of low-sulfur fuel or retirement of facilities. In 1994, the Ozone
Transport Commission (OTC), consisting of representatives of 12 northeast states
(including New Jersey and Pennsylvania) and the District of Columbia, proposed
reductions in NOx emissions it believes necessary to meet ambient air quality
standards for ozone and the statutory deadlines set by the Clean Air Act.
Effective November 1997, the Pennsylvania Environmental Quality Board adopted
regulations implementing the OTC's proposed NOx reductions and in December 1997,
the New Jersey Department of Environmental Protection developed a proposal with
the electric utility industry on a plan to implement the OTC's proposed NOx
reductions. The GPU Energy companies expect that the U.S. Environmental
Protection Agency (EPA) will approve state implementation plans, including those
in Pennsylvania and New Jersey, and that as a result, they will spend an
estimated $6 million (JCP&L $0.2 million; Met-Ed $2.8 million; Penelec $3.0
million) (included in the above total), to meet the 1999 seasonal reductions
agreed upon by the OTC. The OTC has stated that it anticipates that additional
NOx reductions will be necessary to meet the Clean Air Act's 2005 National
Ambient Air Quality Standard for ozone. However, the specific requirements that
will have to be met at that time have not been finalized. In addition, in July
1997 the EPA adopted new, more stringent rules on ozone and particulate matter.
Several groups have filed suit in the U.S. Court of Appeals to overturn these
new air quality standards on the grounds that, among other things, they are
based on inadequate scientific evidence. Also, legislation has been introduced
in the Congress that would impose a four-year moratorium on any new standards
under the Clean Air Act. The GPU Energy companies are unable to determine what
additional costs, if any, will be incurred if the EPA rules are upheld.
GPU has been formally notified by the EPA and state environmental
authorities that it is among the potentially responsible parties (PRPs) who may
be jointly and severally liable to pay for the costs associated with the
investigation and remediation at hazardous and/or toxic waste sites in the
following number of instances (in some cases, more than one company is named for
a given site):
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JCP&L MET-ED PENELEC GPUN GPU INC. TOTAL
----- ------ ------- ---- -------- -----
7 4 2 1 1 12
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 United States
District Court for the District of Delaware for enforcement of its unilateral
order issued against GPU, Inc. to clean up the former Dover Gas Light Company
(Dover) manufactured gas production site in Dover, Delaware. Dover was part of
the AGECO/AGECORP group of companies from 1929 until 1942 and GPU, Inc. emerged
from the AGECO/AGECORP reorganization proceedings. All of the common stock of
Dover was sold in 1942 by a member of the AGECO/AGECORP group to an unaffiliated
entity, and was subsequently acquired by Chesapeake Utilities Corporation.
According to the complaint, the EPA is seeking up to $0.5 million in past costs,
$4.2 million for work in connection with the cleanup of the Dover site and
approximately $19 million in penalties. GPU, Inc. has responded to the EPA
complaint stating that such claims should be dismissed because, among other
things, they are barred by the operation of the Final Decree entered by the
United States District Court for the Southern District of New York at the
conclusion of the 1946 reorganization proceedings of AGECO/AGECORP. Chesapeake
Utilities Corporation has also sued GPU, Inc. for a contribution to the cleanup
of the Dover site. In December 1997, the Court refused to dismiss the complaint;
GPU, Inc. has requested that the Court reconsider its decision. There can be no
assurance as to the outcome of these proceedings.
Pursuant to federal environmental monitoring requirements, Penelec has
reported to the Pennsylvania Department of Environmental Protection (PaDEP) that
contaminants from coal mine refuse piles were identified in storm water run-off
at Penelec's Seward station property. Penelec signed a modified Consent Order,
which became effective December 1996, that establishes a schedule for submitting
a plan for long-term remediation, based on future operating scenarios. Penelec
currently estimates that the remediation of the Seward station property will
range from $12 million to $20 million and has a recorded liability of $12
million at June 30, 1998. These cost estimates are subject to uncertainties
based on continuing discussions with the PaDEP as to the method of remediation,
the extent of remediation required and available cleanup technologies. Penelec
expects recovery of these remediation costs in Phase II of its restructuring
proceeding and has recorded a corresponding deferred debit of approximately $12
million at June 30, 1998.
In 1997, the GPU Energy companies filed with the PaDEP applications for
re-permitting seven (JCP&L - one; Met-Ed - three; Penelec - three) operating ash
disposal sites, including projected site closure procedures and related cost
estimates. The cost estimates for the closure of these sites range from
<PAGE>
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Item 6(b) 1-B
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approximately $17 million to $22 million, and a liability of $17 million (JCP&L
$1 million; Met-Ed $4 million; Penelec $12 million) is reflected on the
Consolidated Balance Sheets at June 30, 1998. JCP&L has requested recovery of
its share of closure costs in its restructuring plan filed with the NJBPU in
July 1997. Met-Ed and Penelec expect recovery of these costs in Phase II of
their restructuring proceedings. As a result, a deferred debit of $16 million is
reflected on the Consolidated Balance Sheets at June 30, 1998.
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 June 30, 1998, JCP&L has spent
approximately $29 million in connection with the cleanup of these sites. In
addition, JCP&L has recorded an estimated environmental liability of $46 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 $46 million due to significant uncertainties,
including changes in acceptable remediation methods and technologies.
In 1997, JCP&L's request to establish a Remediation Adjustment Clause for
the recovery of MGP remediation costs was approved by the NJBPU as part of the
Stipulation of Final Settlement. At June 30, 1998, JCP&L had recorded on its
Consolidated Balance Sheet a regulatory asset of $37 million. JCP&L is
continuing to pursue reimbursement from its insurance carriers for remediation
costs already spent and for future estimated costs. In 1994, JCP&L filed a
complaint with the Superior Court of New Jersey against several of its insurance
carriers, relative to these MGP sites. Pretrial discovery is continuing.
OTHER COMMITMENTS AND CONTINGENCIES
-----------------------------------
Year 2000 Issue:
- ----------------
GPU is addressing the year 2000 issue as it relates to its business,
operations and operating systems, and its business dealings with third parties
including customers, banks, partners, vendors, suppliers and service providers.
Comprehensive reviews of all computers, equipment, systems and applications are
being performed; remediation plans are being developed; and certain corrective
actions have begun. GPU's remediation plans include, among other things, the
upgrade or replacement of computers, equipment and computer software. Management
currently believes that adequate resources are being allocated to this project
and anticipates that GPU's remediation efforts will, in all material respects,
be completed by the end of 1999. However, if GPU or critical third parties on
which GPU relies are unable to successfully correct their year 2000 issue on a
timely basis, certain computers, equipment, systems and applications may not
function properly, which could have a material adverse effect on GPU's
operations and financial condition. Among other things, GPU's operations could
be affected by a temporary inability to process transactions, send bills or
operate electric generating stations, as well as by interruptions of electric
service and reduced customer service. There can be no assurance as to the
outcome of this matter.
As part of their year 2000 solution, the GPU Energy companies have purchased
and are installing an integrated information system (Project
<PAGE>
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Item 6(b) 1-B
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Enterprise) that will help them manage business growth and meet the mandates of
electric utility deregulation. The system is scheduled to be fully operational
in early 1999.
The GPU Energy companies currently estimate they will spend $24.2 million
(JCP&L $10.6 million; Met-Ed $7.4 million; Penelec $6.2 million) on year 2000
remediation of their computers, equipment and computer software. Of the $24.2
million, approximately $6.7 million (JCP&L $3 million; Met-Ed $2 million;
Penelec $1.7 million) would have been spent in any event because of maintenance
and cyclical replacement plans that are already in place. Also, an additional
$8.1 million (JCP&L, Met-Ed and Penelec $2.7 million each) would have been
needed to be spent on modifications to systems that are being replaced by
Project Enterprise.
The GPUI Group currently estimates it will spend approximately $9.2 million
to address the year 2000 issue, primarily to replace or modify equipment.
GPUI Group:
- -----------
At June 30, 1998, the GPUI Group had investments totaling approximately $2.4
billion in businesses and facilities located in foreign countries. Although
management attempts to mitigate the risk of investing in certain foreign
countries by securing political risk insurance, the GPUI Group faces additional
risks inherent to operating in such locations, including foreign currency
fluctuations (see Management's Discussion and Analysis - GPUI Group).
At June 30, 1998, GPU, Inc.'s aggregate investment in the GPUI Group was
$526 million; GPU, Inc. has also guaranteed up to an additional $893 million of
GPUI Group obligations. Of this amount, $725 million is included in Long-term
debt and Securities due within one year on GPU's Consolidated Balance Sheet at
June 30, 1998; $30 million of that amount relates to a GPU International, Inc.
revolving credit agreement; and $138 million relates to various other
obligations of the GPUI Group.
GPU International, Inc. has ownership interests in three NUG projects which
have long-term power purchase agreements with Niagara Mohawk Power Corporation
(NIMO). In July 1997, NIMO and 16 independent power producers (IPP), including
the GPUI Group, executed a master agreement providing for the restructuring or
termination of 29 power purchase agreements, pursuant to which NIMO has agreed
to pay an aggregate of $3.6 billion in cash and/or debt securities, and to issue
an aggregate of 46 million shares of NIMO common stock. In June 1998, NIMO
executed the master agreement whereby each of the IPP agreements were negotiated
independently and resulted in lump sum payments and/or new contracts with NIMO.
At that time, two of GPUI's NUG projects were restructured; and the third NUG
project has until August 31, 1998 to complete its restructuring. GPUI has
deferred its net gain on the proceeds received from the settlement, which
ensures recovery of the investment, and will recognize the gain in income over
the ten year period of their restructured agreements with NIMO or until such
time as an independent system operator (ISO) is established in New York State.
The ISO for New York is expected to be implemented as early as 1999, at which
time the net deferred gain resulting from the lump sum proceeds will be
recognized in income.
Midlands Electricity (Midlands) has invested in a power project in Pakistan
(Uch Power Project) which was originally scheduled to begin commercial operation
in late 1998. The Uch Power Project is a 586 MW facility
<PAGE>
Financial Statements
Item 6(b) 1-B
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of which Midlands is a 40% owner. The Pakistani government-owned utility has
recently issued a notice of intent to terminate certain key project agreements.
The notice asserts that various forms of corruption were involved in the
original granting of the agreements to the Uch investors by the predecessor
Pakistani government. GPU Electric believes that this notice is similar to
notices received by other independent power projects in Pakistan.
The Uch investors, including Midlands, strongly deny the allegations and
intend to pursue all available legal options to enforce their contractual rights
under the project agreements. The Uch investors are continuing to explore
remedies to the situation with officials of the Pakistani government. Through
its 50% ownership in Midlands, GPU Electric's current investment in the Uch
Power Project is approximately $30 million. In addition, the project lenders
could require investors to make additional investments to the project under
certain conditions. GPU Electric's share of the additional investment could
amount to a maximum of approximately $14 million. There can be no assurance as
to the outcome of this matter.
Other:
GPU's capital programs, for which substantial commitments have been incurred
and which extend over several years, contemplate expenditures of $545 million
(JCP&L $198 million; Met-Ed $89 million; Penelec $110 million; Other $148
million) during 1998.
The GPU Energy companies have entered into long-term contracts with
nonaffiliated mining companies for the purchase of coal for certain generating
stations in which they have ownership interests. The contracts, which expire at
various dates between 1998 and 2007, require the purchase of either fixed or
minimum amounts of the stations' coal requirements. The price of the coal under
the contracts is based on adjustments of indexed cost components. The GPU Energy
companies' share of the cost of coal purchased under these agreements is
expected to aggregate $171 million (JCP&L $26 million; Met-Ed $55 million;
Penelec $90 million) for 1998.
JCP&L has entered into agreements with other utilities to purchase capacity
and energy for various periods through 2004. These agreements will provide for
up to 614 MW in 1998, declining to 529 MW in 1999 and 345 MW in 2000, through
the expiration of the final agreement in 2004. Payments pursuant to these
agreements are estimated to be $129 million in 1998, $111 million in 1999, $83
million in 2000, $92 million in 2001, and $101 million in 2002.
In accordance with the Nuclear Waste Policy Act of 1982 (NWPA), the GPU
Energy companies have entered into contracts with, and have been paying fees to,
the DOE for the future disposal of spent nuclear fuel in a repository or interim
storage facility. In December 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. In
January 1997, the GPU Energy companies, along with other electric utilities and
state agencies, petitioned the U.S. Court of Appeals to, among other things,
permit utilities to cease payments into the Federal Nuclear Waste Fund until the
DOE complies with the NWPA. The DOE's inability to accept spent nuclear fuel by
1998 could have a material impact on GPU's results of operations, as additional
costs may be incurred to build and
<PAGE>
Financial Statements
Item 6(b) 1-B
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maintain interim on-site storage at Oyster Creek. TMI-1 has sufficient on-site
storage capacity to accommodate spent nuclear fuel through the end of its
licensed life. In June 1997, a consortium of electric utilities, including GPUN,
filed a license application with the NRC seeking permission to build an interim
above-ground disposal facility for spent nuclear fuel in northwestern Utah.
There can be no assurance as to the outcome of these matters.
New Jersey and Connecticut have established the Northeast Compact, to
construct a low-level radioactive waste disposal facility in New Jersey, which
should commence operation by the end of 2003. GPUN's total share of the cost for
developing, constructing and site licensing the facility is estimated to be $58
million, which will be paid through 2002. Through June 30, 1998, $6 million has
been paid. As a result, at June 30, 1998, a liability of $52 million is
reflected on the Consolidated Balance Sheets. JCP&L is recovering these costs
from customers, and a regulatory asset has also been recorded. In February 1998,
the New Jersey Low-Level Radwaste Facility Siting Board (Siting Board) voted to
suspend the siting process in New Jersey. The Siting Board is reviewing its
legal and financial obligations, subject to review from the Governor. GPUN
cannot determine at this time what effect, if any, this matter will have on its
operations.
Pennsylvania, Delaware, Maryland and West Virginia have established the
Appalachian Compact to construct a facility for the disposal of low-level
radwaste in those states, including low-level radwaste from TMI-1. To date,
pre-construction costs of $33 million, out of an estimated $88 million, have
been paid. Eleven nuclear plants have so far shared equally in the
pre-construction costs; GPUN has contributed $3 million on behalf of TMI-1.
Pennsylvania has stated that it may suspend the search for a low level radwaste
disposal site in the state. GPUN cannot determine at this time what effect, if
any, this may have on its operations.
JCP&L's two operating nuclear units are subject to the NJBPU's annual
nuclear performance standard. Operation of these units at an aggregate annual
generating capacity factor below 65% or above 75% would trigger a charge or
credit based on replacement energy costs. At current cost levels, the maximum
annual effect on net income of the performance standard charge at a 40% capacity
factor would be approximately $11 million before tax. While a capacity factor
below 40% would generate no specific monetary charge, it would require the issue
to be brought before the NJBPU for review. The annual measurement period, which
begins in March of each year, coincides with that used for the Levelized Energy
Adjustment Clause.
At June 30, 1998, GPU, Inc. and consolidated affiliates had 9,325 employees
worldwide, of which 8,967 employees were located in the U.S. The majority of the
U.S. workforce is employed by the GPU Energy companies, of which 4,800 are
represented by unions for collective bargaining purposes. JCP&L, Met-Ed and
Penelec's collective bargaining agreements with the International Brotherhood of
Electrical Workers expire in 1999, 2000 and 2002, respectively. Penelec and the
Utility Workers Union of America have entered into a new three-year agreement
which expires in 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
<PAGE>
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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.
