Post-Effective
Amendment No. 9 to
SEC File No. 70-6903
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
Scott Guibord, Secretary 120 West 45th Street
Michael J. Connolly, Esq. New York, New York 10036
Vice President - Law
GPU Service, Inc.
300 Madison Avenue
Morristown, New Jersey 07962
(Names and addresses of agents for service)
<PAGE>
JCP&L hereby post-effectively amends its Application on Form U-1,
docketed in SEC File No. 70-6903, as follows:
A. By Orders dated November 16, 1983 (HCAR No. 23121), November 19,
1984 (HCAR No. 23486), July 30, 1985 (HCAR No. 23773), June 27, 1986 (HCAR No.
24138), January 17, 1990 (HCAR No. 25007) and October 24, 1994 (HCAR No. 26149),
the Commission, among other things, authorized JCP&L to acquire from time to
time until December 31, 1999, up to $15 million of obligations of its electric
customers, and to incur up to $750,000 of administrative and other related
expenses, arising from such customers' participation in the following energy
conservation programs:
(1) Home Energy Loan Program;
(2) Solar Water Heating Conversion Program; and
(3) Electric Heat Conversion Program.
B. The acquisition of such obligations by JCP&L was designed to
facilitate the financing of energy-saving improvements and thereby promote
energy conservation. Such energy conservation programs had been approved by an
Order of the New Jersey Board of Public Utilities ("NJBPU"), dated August 3,
1983, implementing a previous NJBPU Order, dated December 1, 1982, mandating all
New Jersey utilities, including JCP&L, to develop and institute programs for
financing their customers' purchase and installation of energy-saving products
or conservation measures. Such customer obligations consist of notes evidencing
disbursements made by JCP&L to contractors on
<PAGE>
behalf of these customers or directly to the customer in connection with the
foregoing programs.
C. In its Application, JCP&L had stated that if it were necessary to
continue the financing program beyond the date authorized by the Commission, it
would seek a further Order of the Commission by post-effective amendment in this
docket.
D. Consequently, by this post-effective amendment, JCP&L requests
authorization to extend, until December 31, 2004, the time during which it may
acquire such customer obligations (up to the aforesaid amount of $15 million)
and incur administrative and other related expenses (up to the aforesaid
aggregate amount of $750,000). In all other respects, the transactions as
heretofore authorized by the Commission would remain unchanged. Through July 31,
1999, JCP&L had acquired, from the date of the inception of the energy
conservation programs, obligations of its customers in the aggregate amount of
$8,419,180, of which approximately $550,000 was outstanding on July 31, 1999,
and had incurred administrative and other related expenses in the aggregate
amount of $520,474.
E. Rule 53 Analysis
(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,
1999, GPU's average consolidated retained
-2-
<PAGE>
earnings was approximately $2.316 billion, and GPU's aggregate investment in
EWGs and FUCOs was approximately $2.168 billion. Accordingly, under the November
5 Order, GPU may invest up to an additional $148 million in EWGs and FUCOs.
(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
- ----------------
1 Including the effect of the July 1999 Midlands Electricity plc purchase.
-3-
<PAGE>
(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.
(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
-4-
<PAGE>
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 Post-Effective Amendment are being provided to
the NJBPU and the Pennsylvania Public Utility Commission, the only
federal, state or local regulatory agencies having jurisdiction over the
retail rates of GPU's electric utility subsidiaries. In addition, GPU will
submit to each such commission copies of any further post-effective
amendments to this Application and any 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 transaction.
(A) Neither GPU nor any subsidiary of GPU having a book value
exceeding 10% of GPU's consolidated
- ----------------
2 Pennsylvania Electric Company ("Penelec"), one of GPU's operating
subsidiaries, is also subject to retail rate regulation by the New York Public
Service Commission with respect to retail service to approximately 3,700
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.
-5-
<PAGE>
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 $2.316
billion) represented an increase of approximately $96.9
million (or approximately 4%) in the average consolidated
retained earnings for the previous four quarterly periods
(approximately $2.219 billion).
(C) GPU did not incur operating losses from direct or indirect
investments in EWGs and FUCOs in 1998 in excess of 5% of
GPU's December 31, 1998 consolidated retained earnings.
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 would not, by themselves, or even when 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
-6-
<PAGE>
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. As
stated in the November 5 Order, GPU's June 30, 1997 pro forma capitalization,
reflecting the November 6, 1997 acquisition of PowerNet Victoria, was 39.3%
equity and 60.7% debt.
GPU's June 30, 1999 consolidated capitalization consists of 43.1%
equity and 56.9% debt. Thus, since the date of the November 5 Order, there has
been no adverse change in GPU's consolidated capitalization ratio, which remains
within acceptable ranges and limits as evidenced by the credit ratings of GPU's
electric utility subsidiaries.
GPU's consolidated retained earnings grew on average approximately
4.5% per year from 1992 through 1998. Earnings attributable to GPU's investments
in EWGs and FUCOs have
- ----------------
3 The first mortgage bonds of GPU's operating companies, Penelec, JCP&L and
Metropolitan Edison Company, are rated A+ by Standard & Poors Corporation, and
A2, Baa1 and A3, respectively, by Moody's Investor Services, Inc.
-7-
<PAGE>
contributed positively to consolidated earnings, excluding the impact of the
windfall profits tax on the Midlands Electricity plc investment.
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, 1999 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.
F. The estimated fees, commission and expenses to be incurred in
connection herewith will be supplied by further post-effective amendment.
G. JCP&L believes that the proposed transactions may be subject to
Sections 9(a) and 10 of the Act.
H. No Federal or State commission, other than your Commission, has
jurisdiction with respect to the proposed transactions.
I. 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 November 15, 1999. It is further requested that (i) there
not be a
- ----------------
4 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.
-8-
<PAGE>
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.
J. The following exhibits and financial statements are filed in Item
6 thereof:
(a) Exhibits
A - Not Applicable.
B - Not Applicable.
C - None.
D - None.
E - Not Applicable.
F - Opinion of Berlack, Israels & Liberman LLP -- to
be filed by further post-effective amendment.
G - Financial Data Schedule.
H - GPU Actual and Pro Forma Capitalization Table.
I - Proposed Notice.
(b) Financial Statements:
1 - JCP&L Balance Sheets, actual and pro forma, as at
June 30, 1999, Statements of Income and Retained
Earnings, actual and pro forma, for the twelve
months ended June 30, 1999; pro forma journal
entries.
2 - GPU Consolidated Financial Statements have been
omitted as the proposed transactions will not have
a material effect thereto.
-9-
<PAGE>
3 - None.
4 - None, except as set forth in the Notes to
Financial Statements.
K. No Federal agency has prepared or is preparing an environmental
impact statement with respect to the subject transaction. Reference is made to
paragraph H hereof regarding regulatory approvals with respect to the proposed
transactions.
-10-
<PAGE>
SIGNATURE
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.
Date: September 15, 1999
Jersey Central Power & Light Company
By: /s/ T. G. Howson
------------------------------
T. G. Howson
Vice President and Treasurer
-11-
EXHIBITS TO BE FILED BY EDGAR
Exhibits
G - Financial Data Schedule.
H - GPU Actual and Pro Forma Capitalization Table.
I - Proposed Notice.
(b) Financial Statements:
1 - JCP&L Balance Sheets, actual and pro forma, as
at June 30, 1999, Statements of Income and
Retained Earnings, actual and pro forma, for
the twelve months ended June 30, 1999; pro
forma journal entries.
2 - GPU Consolidated Financial Statements have been
omitted as the proposed transactions will not
have a material effect thereto.
<TABLE> <S> <C>
<ARTICLE> OPUR1
<CIK> 0000053456
<NAME> JERSEY CENTRAL POWER & LIGHT COMPANY
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1998 JUL-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1999
<EXCHANGE-RATE> 1 1
<BOOK-VALUE> PER-BOOK PRO-FORMA
<TOTAL-NET-UTILITY-PLANT> 2,050,214 2,050,214
<OTHER-PROPERTY-AND-INVEST> 572,762 572,762
<TOTAL-CURRENT-ASSETS> 495,157 684,668
<TOTAL-DEFERRED-CHARGES> 3,223,013 3,225,531
<OTHER-ASSETS> 0 0
<TOTAL-ASSETS> 6,341,146 6,533,175
<COMMON> 153,713 153,713
<CAPITAL-SURPLUS-PAID-IN> 510,769 510,769
<RETAINED-EARNINGS> 840,631 <F1> 832,061
<F1>
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,505,113 1,496,543
206,500 <F2> 406,500
<F2>
37,741 37,741
<LONG-TERM-DEBT-NET> 1,133,653 1,133,653
<SHORT-TERM-NOTES> 92,300 92,300
<LONG-TERM-NOTES-PAYABLE> 0 0
<COMMERCIAL-PAPER-OBLIGATIONS> 95,500 95,500
<LONG-TERM-DEBT-CURRENT-PORT> 40,012 40,012
2,500 2,500
<CAPITAL-LEASE-OBLIGATIONS> 0 0
<LEASES-CURRENT> 77,227 77,227
<OTHER-ITEMS-CAPITAL-AND-LIAB> 3,150,600 3,151,199
<TOT-CAPITALIZATION-AND-LIAB> 6,341,146 6,533,175
<GROSS-OPERATING-REVENUE> 2,026,334 2,026,334
<INCOME-TAX-EXPENSE> 133,078 133,078
<OTHER-OPERATING-EXPENSES> 1,642,931 1,643,143
<TOTAL-OPERATING-EXPENSES> 1,776,009 1,776,221
<OPERATING-INCOME-LOSS> 250,325 250,113
<OTHER-INCOME-NET> 34,540 40,734
<INCOME-BEFORE-INTEREST-EXPEN> 284,865 290,847
<TOTAL-INTEREST-EXPENSE> 107,682 <F3> 122,234
<F3>
<NET-INCOME> 177,183 168,613
9,564 9,564
<EARNINGS-AVAILABLE-FOR-COMM> 167,619
159,049
<COMMON-STOCK-DIVIDENDS> 265,000 <F4> 265,000
<F4>
<TOTAL-INTEREST-ON-BONDS> 87,232 87,232
<CASH-FLOW-OPERATIONS> 458,748 458,748
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
<FN>
<F1> INCLUDES ACCUMULATED OTHER COMPREHENSIVE LOSS OF $425.
<F2> REPRESENTS COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
<F2> SECURITIES OF $125,000 (ACTUAL AND PRO-FORMA) AND TRUST PREFERRED
<F2> SECURITIES OF $200,000 (PRO-FORMA ONLY).
<F3> INCLUDES AMOUNT FOR COMPANY-OBLIGATED MANDATORILY REDEEMABLE
<F3> PREFERRED SECURITIES OF $10,700 (ACTUAL AND PRO-FORMA) AND
<F3> TRUST PREFERRED SECURITIES OF $14,500 (PRO-FORMA ONLY).
<F4> REPRESENTS COMMON STOCK DIVIDENDS PAID TO PARENT CORPORATION.
</FN>
</TABLE>
Item 6(a) H
CAPITALIZATION AND CAPITALIZATION RATIOS
(IN THOUSANDS)
The actual and pro forma capitalization of GPU, Inc. and Subsidiary
Companies at June 30, 1999 is as follows:
Actual Pro Forma (3)
----------------- ------------------
Amount % Amount %
----------- ---- ---------- ----
Long-term debt (1) $4,980,002 52.0 $4,980,002 51.0
Notes payable 472,400 4.9 472,400 4.8
Trust preferred securities 200,000 2.1 400,000 4.1
Subsidiary-obligated
mandatorily redeemable
preferred securities 330,000 3.4 330,000 3.4
Preferred stock (2) 121,741 1.3 121,741 1.2
Common equity 3,475,044 36.3 3,466,474 35.5
--------- ----- --------- -----
Total $9,579,187 100.0 $9,770,617 100.0
========= ===== ========= =====
(1) Includes securities due within one year of $153,272.
(2) Includes securities due within one year of $2,500.
(3) The pro forma capitalization excludes $917,806 of GPU's proportionate
share of non-recourse debt used to finance the acquisition of exempt
wholesale generators and foreign utility companies, as defined under the
Public Utility Holding Company Act of 1935, which debt is not consolidated
for financial reporting purposes. After giving effect to the non-recourse
debt, the pro forma percentages would be as follows: Long-term debt 55.2%;
Notes payable 4.4%; Trust preferred securities 3.8%; Subsidiary-obligated
mandatorily redeemable preferred securities 3.1%; Preferred stock 1.1%;
and Common equity 32.4%.
Exhibit I
SECURITIES AND EXCHANGE COMMISSION
(RELEASE NO. 35- -------); 70-6903
Jersey Central Power & Light Company, 2800 Pottsville Pike, Reading,
Pennsylvania 19605, an electric utility subsidiary of GPU, Inc., a registered
holding company, has filed with the Commission a further post-effective
amendment to its Application in this proceeding pursuant to Section 9(a) and 10
of the Public Utility Holding Company Act of 1935 ("Act").
By Orders dated November 16, 1983 (HCAR No. 23121), November 19,
1984 (HCAR No. 23486), July 30, 1985 (HCAR No. 23773), June 27, 1986 (HCAR No.
24138), January 17, 1990 (HCAR No. 25007) and October 24, 1994 (HCAR No. 26149),
the Commission, among other things, authorized JCP&L to acquire from time to
time until December 31, 1999, up to $15 million of obligations of its electric
customers, and to incur up to $750,000 of administrative and other related
expenses, arising from such customers' participation in the JCP&L's Home Energy
Loan Program, Solar Water Heating Conversion Program, and Electric Heat
Conversion Program. Such obligations consist of notes evidencing disbursements
made by JCP&L to contractors on behalf of these customers in connection with the
foregoing programs.
JCP&L now requests authorization to extend the time during which
it may acquire such customer obligations (up to the
<PAGE>
aforesaid amount of $15 million) and incur administrative and other related
expenses (up to the aforesaid aggregate amount of $750,000) until December 31,
2004.
The Application, as amended, is 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
- ---------------, 1999 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 amended, may be granted.
-2-
<TABLE>
<CAPTION>
FinancialStatements
Item 6(b) 1
Page 1 of 26
Jersey Central Power & Light Company and Subsidiary
Consolidated Balance Sheets
Actual (unaudited) and Pro Forma (unaudited)
June 30, 1999
-------------------------------------------------
(In Thousands)
ASSETS Actual Adjustments Pro Forma
------------ ----------- ----------
Utility Plant:
<S> <C> <C> <C>
Transmission, distribution and general plant $ 3,135,468 $ - $ 3,135,468
Generation plant 1,096,520 - 1,096,520
---------- ---------- ----------
Utility plant in service 4,231,988 - 4,231,988
Accumulated depreciation (2,310,599) - (2,310,599)
---------- ---------- ---------
Net utility plant in service 1,921,389 - 1,921,389
Construction work in progress 69,115 - 69,115
Other, net 59,710 - 59,710
---------- ---------- ----------
Net utility plant 2,050,214 - 2,050,214
---------- ---------- ----------
Other Property and Investments:
Nuclear decommissioning trusts, at market 452,098 - 452,098
Nuclear fuel disposal trust, at market 118,861 - 118,861
Other, net 1,803 - 1,803
---------- ---------- ----------
Total other property and investments 572,762 - 572,762
---------- ---------- ----------
Current Assets:
Cash and temporary cash investments 11,909 182,930 194,839
Special deposits 3,338 - 3,338
Accounts receivable:
Customers, net 145,537 - 145,537
Other 61,484 6,581 68,065
Unbilled revenues 102,130 - 102,130
Materials and supplies, at average cost or less:
Construction and maintenance 26,061 - 26,061
Fuel 13,908 - 13,908
Deferred income taxes 3,583 - 3,583
Prepayments 127,207 - 127,207
---------- ---------- ---------
Total current assets 495,157 189,511 684,668
---------- ---------- ---------
Deferred Debits and Other Assets:
<S> <C> <C> <C>
Regulatory assets, net 3,005,897 - 3,005,897
Deferred income taxes 196,578 - 196,578
Other 20,538 2,518 23,056
---------- ---------- ---------
Total deferred debits and other assets 3,223,013 2,518 3,225,531
---------- ---------- ---------
Total Assets $ 6,341,146 $ 192,029 $ 6,533,175
========== ========== ==========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Financial Statements
Item 6(b) 1
Page 2 of 26
Jersey Central Power & Light Company and Subsidiary
Consolidated Balance Sheets
Actual (unaudited) and Pro Forma (unaudited)
June 30, 1999
-------------------------------------------------
(In Thousands)
LIABILITIES AND CAPITALIZATION Actual Adjustments Pro Forma
------ ----------- ----------
Capitalization:
<S> <C> <C> <C>
Common stock $ 153,713 $ - $ 153,713
Capital surplus 510,769 - 510,769
Retained earnings 841,056 (8,570) 832,486
Accumulated other comprehensive income (425) - (425)
---------- ---------- ---------
Total common stockholder's equity 1,505,113 (8,570) 1,496,543
Cumulative preferred stock:
With mandatory redemption 81,500 - 81,500
Without mandatory redemption 37,741 - 37,741
Company-obligated mandatorily redeemable
preferred securities 125,000 - 125,000
Trust preferred securities - 200,000 200,000
Long-term debt 1,133,653 - 1,133,653
---------- ---------- ----------
Total capitalization 2,883,007 191,430 3,074,437
---------- ---------- ----------
Current Liabilities:
Securities due within one year 42,512 - 42,512
Notes payable 187,800 - 187,800
Obligations under capital leases 77,227 - 77,227
Accounts payable:
Affiliates 49,263 - 49,263
Other 98,223 6,793 105,016
Taxes accrued 22,043 (6,194) 15,849
Interest accrued 26,887 - 26,887
Deferred energy credits 3,004 - 3,004
Other 52,484 - 52,484
---------- ---------- ---------
Total current liabilities 559,443 599 560,042
---------- ---------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 572,633 - 572,633
Unamortized investment tax credits 48,000 - 48,000
Three Mile Island Unit 2 future costs 122,541 - 122,541
Nuclear fuel disposal fee 144,464 - 144,464
Power purchase contract loss liability 1,769,275 - 1,769,275
Other 241,783 - 241,783
---------- ---------- ---------
Total deferred credits and other liabilities 2,898,696 - 2,898,696
---------- ---------- ----------
Total Liabilities and Capitalization $ 6,341,146 $ 192,029 $ 6,533,175
========== ========== ==========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Financial Statements
Item 6(b) 1
Page 3 of 26
Jersey Central Power & Light Company and Subsidiary
Consolidated Statements of Income and Retained Earnings
Actual (unaudited) and Pro Forma (unaudited)
For The Twelve Months Ended June 30, 1999
-------------------------------------------------
(In Thousands)
Actual Adjustments Pro Forma
-------- ----------- ----------
<S> <C> <C> <C>
Operating Revenues $2,026,334 $ - $2,026,334
--------- --------- ----------
Operating Expenses:
Fuel 87,402 - 87,402
Power purchased and interchanged:
Affiliates 100,163 - 100,163
Others 648,395 - 648,395
Deferral of energy and capacity costs, net (14,068) - (14,068)
Other operation and maintenance 487,039 212 487,251
Depreciation and amortization 246,054 - 246,054
Taxes, other than income taxes 87,946 - 87,946
--------- --------- ---------
Total operating expenses 1,642,931 212 1,643,143
--------- --------- ---------
Operating Income Before Income Taxes 383,403 (212) 383,191
Income taxes 133,078 - 133,078
--------- --------- ---------
Operating Income 250,325 (212) 250,113
--------- --------- ---------
Other Income and Deductions:
Allowance for other funds
used during construction 441 - 441
Other income, net 15,791 - 15,791
Income taxes 18,308 6,194 24,502
--------- --------- ---------
Total other income and deductions 34,540 6,194 40,734
--------- --------- ---------
Income Before Interest Charges 284,865 5,982 290,847
--------- --------- ---------
Interest Charges:
Long-term debt 87,232 - 87,232
Trust preferred securities - 14,500 14,500
Company-obligated mandatorily
redeemable preferred securities 10,700 - 10,700
Other interest 11,156 52 11,208
Allowance for borrowed funds used
during construction (1,406) - (1,406)
--------- --------- ---------
Total interest charges 107,682 14,552 122,234
--------- --------- ---------
Net Income 177,183 (8,570) 168,613
Preferred stock dividends 9,564 - 9,564
--------- --------- ---------
Earnings Available for Common Stock $ 167,619 $ (8,570) $ 159,049
========= ========= ==========
Retained Earnings:
Balance at beginning of period $ 938,437 $ - $ 938,437
Net income 177,183 (8,570) 168,613
Cash dividends declared on common stock (265,000) - (265,000)
Cash dividends declared on cumulative preferred stock (9,564) - (9,564)
-------- --------- ----------
Balance at end of period $ 841,056 $ (8,570 $ 832,486
======== ========= ==========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
Financial Statements
Item 6(b) 1
Page 4 of 26
Jersey Central Power & Light Company and Subsidiary
Pro Forma Journal Entries
-------------------------------------------------
(In Thousands)
(1)
Accounts Receivable - other $6,581
Accounts Payable - other $6,581
To reflect an increase of $6.581 million of
notes receivable, to a total of $15 million,
in accordance with the provisions of the
customer home energy improvement financing
program ($8.419 million of electric customer
obligations were acquired as of July 31, 1999
under the program).
(2)
Other operation and maintenance $212
Accounts Payable - other $212
To reflect the increase of $0.212 million in
operating expenses, to a total of $0.75
million, as a result of the administrative
fee due to the participating banks in
accordance with the provisions of customer
home energy improvement financing program
($0.538 million of administrative fees were
incurred under the program as of July 31,
1999).
(3)
Cash and temporary cash investments $200,000
Trust preferred securities $200,000
To reflect the proposed issuance of $200
million of trust preferred securities from
time to time through December 31, 2000 by
JCP&L Capital Trust. The trust preferred
securities and dividend payments are to be
unconditionally guaranteed by Jersey Central
Power & Light Company (SEC File No. 70-9399).
(4)
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 (SEC File No.
70-9399).
<PAGE>
Financial Statements
Item 6(b) 1
Page 5 of 26
Jersey Central Power & Light Company and Subsidiary
Pro Forma Journal Entries
-------------------------------------------------
(In Thousands)
(5)
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 (SEC File No.
70-9399).
(6)
Interest on trust preferred securities $14,500
Cash and temporary cash investments $14,500
To reflect the annual interest paid on
the subordinated debentures by Jersey
Central Power & Light Company to JCP&L
Capital II L.P. at an assumed rate of
7.25% (SEC File No. 70-9399).
(7)
Taxes accrued $6,194
Income taxes $6,194
To reflect the decrease in the provision
for Federal and State income taxes at
the rate of 40.85% attributable to (a)
the increase in other operation and
maintenance expense as a result of
administrative fees associated with the
customer home energy improvement
financing program and (b) interest
payments on the proposed issuance of
subordinated debentures by Jersey
Central Power & Light Company to JCP&L
Capital II L.P. (SEC File No. 70-9399).
<PAGE>
Financial Statements
Item 6(b) 1
Page 6 of 26
GPU, INC. AND SUBSIDIARY COMPANIES
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GPU, Inc. owns all the outstanding common stock of three domestic electric
utilities -- Jersey Central Power & Light Company (JCP&L), Metropolitan Edison
Company (Met-Ed) and Pennsylvania Electric Company (Penelec). The customer
service, 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 Capital, Inc. and GPU
Electric, Inc. and their subsidiaries, own, operate and fund the acquisition of
electric and gas transmission and distribution systems in foreign countries, and
are referred to as "GPU Electric." GPU International, Inc. and GPU Power, Inc.
and their subsidiaries, develop, own and operate generation facilities in the
United States and foreign countries and are referred to as the "GPUI Group."
Other subsidiaries of GPU, Inc. include GPU Advanced Resources, Inc. (GPU AR),
which is involved in retail energy sales; GPU Telcom Services, Inc. (GPU
Telcom), which is engaged in telecommunications-related businesses; and GPU
Service, Inc. (GPUS), which provides legal, accounting, financial and other
services to the GPU companies. All of these companies considered together are
referred to as "GPU."
1. COMMITMENTS AND CONTINGENCIES
COMPETITION AND THE CHANGING REGULATORY ENVIRONMENT
---------------------------------------------------
The Emerging Competitive Market and Stranded Costs:
- ---------------------------------------------------
With the current market price of electricity being below the cost of some
utility-owned generation and power purchase commitments, and the ability of
customers to choose their energy suppliers, stranded costs have been created in
the electric utility industry. These stranded costs, while generally recoverable
in a regulated environment, are at risk in a deregulated and competitive
environment. The Pennsylvania Public Utility Commission's (PaPUC) Restructuring
Orders issued in 1998 granted Met-Ed and Penelec recovery of a substantial
portion of their stranded costs. On May 24, 1999, the New Jersey Board of Public
Utilities (NJBPU) issued a Summary Order (Summary Order) which, among other
things, provides for full recovery of JCP&L's stranded costs.
In June 1998, the PaPUC issued restructuring rate orders to Met-Ed and
Penelec which resulted in pre-tax charges to income in the second quarter of
1998 of $320 million and $150 million, respectively. In October 1998, the PaPUC
issued amended Restructuring Orders, approving the Settlement Agreements entered
into by Met-Ed and Penelec. An appeal by one intervenor in the restructuring
proceedings is still pending before the Pennsylvania Commonwealth Court. There
can be no assurance as to the outcome of this
<PAGE>
Financial Statements
Item 6(b) 1
Page 7 of 26
appeal. In the third quarter of 1998, as a result of the amended Restructuring
Orders, Met-Ed and Penelec reversed $313 million and $142 million pre-tax,
respectively, of their earlier charges and recorded additional non-recurring
charges of $38 million and $58 million pre-tax, for Met-Ed and Penelec,
respectively.
In January 1999, New Jersey enacted legislation to deregulate the state's
electricity market. In April 1999, JCP&L entered into a settlement agreement
with several parties to its stranded cost and rate unbundling proceedings which
were pending before the NJBPU. The NJBPU issued a Summary Order, which approved
the settlement with certain modifications, and provides for, among other things:
a 5% rate reduction commencing August 1, 1999; additional rate reductions of 1%
in 2000 and 2% in 2001; and an additional net 3% rate reduction in 2002
inclusive of a 5% rate refund from April 30, 1997 rates for service rendered on
or after August 1, 2002, partially offset by a 2% increase in the Market
Transition Charge (MTC). For customers who choose an alternate supplier, the
Summary Order provides average customer shopping credits beginning at 5.14 cents
per kilowatt-hour increasing to 5.40 cents per kilowatt-hour in 2003. The
Summary Order also permits JCP&L to apply the net proceeds from its generation
asset sales to reduce stranded costs, the securitization of approximately $400
million of stranded costs associated with the Oyster Creek nuclear generating
station, and adequate assurance (through a deferral and true-up mechanism) of
full recovery of above-market costs associated with JCP&L's obligations under
nonutility generation, utility and transition power purchase agreements. JCP&L
expects the NJBPU to issue a Final Order in the third quarter of 1999. As a
result of the NJBPU's actions, for the quarter ended June 30, 1999, JCP&L
recorded a reduction in operating revenues of $115 million reflecting JCP&L's
obligation to make refunds to customers from 1999 revenues. For additional
information, see Note 2 Accounting for Extraordinary and Non-recurring items.
In October 1998, the GPU Energy companies entered into definitive agreements
to sell TMI-1 to AmerGen Energy Company, LLC (AmerGen), which is a joint venture
between PECO Energy and British Energy, for approximately $100 million. Of the
$100 million, $23 million will be paid at closing and $77 million, which is for
the nuclear fuel in the reactor, will be paid in five equal annual installments
beginning one year after closing. The sale, which GPU expects to complete by the
end of 1999, is subject to various conditions, including the receipt of
satisfactory federal and state regulatory approvals. There can be no assurance
as to the outcome of these matters.
In 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. The net proceeds from
the sale will be used to reduce the capitalization of the respective GPU Energy
companies, repurchase GPU, Inc. common stock, fund previously incurred
liabilities in accordance with the Pennsylvania settlement, and may also be
applied to reduce short-term debt, finance further acquisitions, and to reduce
acquisition debt of GPU Electric.
<PAGE>
Financial Statements
Item 6(b) 1
Page 8 of 26
In March 1999, Penelec completed the sale of its 50% interest in the Homer
City Station to a subsidiary of Edison Mission Energy for approximately $900
million. As a result of the sale, Penelec recorded an after-tax gain of $27.8
million in the first quarter of 1999 for the portion of the gain related to
wholesale operations and deferred as a regulatory liability $596.7 million
pending Phase II of the Pennsylvania restructuring proceeding.
In July 1999, Penelec completed the sale of its 20% interest in the Seneca
Pumped Storage Hydroelectric Generating Station to The Cleveland Electric
Illuminating Company for $43 million. This sale will be recorded in
the third quarter of 1999.
In November 1998, the GPU Energy companies entered into definitive
agreements with Sithe Energies (Sithe) to sell all their remaining fossil-fuel
and hydroelectric generating facilities, other than JCP&L's 50% interest in the
Yards Creek Pumped Storage Facility (Yards Creek) for a total purchase price of
approximately $1.7 billion (JCP&L $442 million; Met-Ed $677 million; Penelec
$561 million). The sales to Sithe are expected to be completed in the third
quarter of 1999, subject to the timely receipt of the necessary regulatory and
other approvals.
JCP&L and Public Service Electric & Gas Company (PSE&G) each hold a 50%
undivided ownership interest in Yards Creek. In December 1998, JCP&L filed a
petition with the NJBPU seeking a declaratory order that PSE&G's right of first
refusal to purchase JCP&L's ownership interest at its current book value under a
1964 agreement between the companies is void and unenforceable. In January 1999,
the New Jersey Superior Court held that the NJBPU had primary jurisdiction in
the matter and dismissed a PSE&G complaint requesting that the Court require
JCP&L to sell its ownership interest to PSE&G. Management believes that the fair
market value of JCP&L's ownership interest in Yards Creek is substantially in
excess of its June 30, 1999 book value of $22 million. There can be no assurance
of the outcome of this matter.
Nonutility Generation Agreements:
Pursuant to the mandates of the federal Public Utility Regulatory Policies
Act and state regulatory directives, the GPU Energy companies have been required
to enter into power purchase agreements with nonutility generators (NUGs) for
the purchase of energy and capacity for remaining periods of up to 22 years. The
following table shows actual payments from 1997 through June 30, 1999, and
estimated payments thereafter through 2003.
Payments Under NUG Agreements
-----------------------------
(in millions)
Total JCP&L Met-Ed Penelec
----- ----- ------ -------
1997 759 384 172 203
1998 788 403 174 211
1999 781 384 179 218
2000 816 404 169 243
2001 805 413 166 226
2002 819 425 169 225
2003 827 422 173 232
<PAGE>
Financial Statements
Item 6(b) 1
Page 9 of 26
As of June 30, 1999, NUG facilities covered by agreements having 1,681 MW
(JCP&L 928 MW; Met-Ed 348 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.
The emerging competitive generation market has created uncertainty
regarding the forecasting of the GPU Energy companies' energy supply needs,
which has caused the GPU Energy companies to change their supply strategy to
seek shorter term agreements offering more flexibility. The GPU Energy
companies' future supply plan will focus on short- to intermediate-term
commitments (one month to three years) during periods of expected high energy
price volatility and reliance on spot market purchases during other periods. 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 are substantially in excess of current and
projected prices from alternative sources.
The NJBPU Summary Order and PaPUC Restructuring Orders provide the GPU
Energy companies assurance of full recovery of their NUG costs (including
above-market NUG costs and certain buyout costs). Accordingly, the GPU Energy
companies have recorded, on a present value basis, a liability of $3.5 billion
(JCP&L $1.7 billion; Met-Ed $0.8 billion; Penelec $1 billion) on the
Consolidated Balance Sheets which is fully offset by Regulatory assets, net. In
addition, JCP&L recorded a liability of $75 million for above-market utility
purchase power agreements with a corresponding offset to Regulatory assets, net,
since there is also assurance of full recovery of these costs. The GPU Energy
companies will continue efforts to reduce the above-market costs of these
agreements and will, where beneficial, attempt to renegotiate the prices of the
agreements, offer contract buyouts and attempt to convert must-run agreements to
dispatchable agreements. There can be no assurance as to the extent to which
these efforts will be successful.
In 1997, the NJBPU approved a Stipulation of Final Settlement which, among
other things, provides for the recovery of costs associated with the buyout of
the Freehold Cogeneration project (Freehold buyout). The Stipulation of Final
Settlement provides for recovery through the levelized energy adjustment clause
of: (1) buyout costs up to $130 million, and (2) 50% of any costs from $130
million to $140 million, over a seven-year period for the termination of the
Freehold power purchase agreement. The NJBPU approved the cost recovery on an
interim basis subject to refund, pending further review by the NJBPU. The
NJBPU's Summary Order provides for the continued recovery of the Freehold buyout
in the MTC, but has not altered the interim nature of such recovery. There can
be no assurance as to the outcome of this matter.
In 1998, Met-Ed and Penelec entered into definitive buyout agreements with
two NUG project developers. These agreements are contingent upon Met-Ed and
Penelec obtaining a final and non-appealable PaPUC order allowing for the full
recovery of the buyout payments through retail rates. The Restructuring Orders
established terms and conditions that would enable the buyout agreements to
proceed; however, until the pending appeal of the Restructuring Orders is
resolved, there can be no assurance as to the outcome of these matters.
<PAGE>
Financial Statements
Item 6(b) 1
Page 10 of 26
ACCOUNTING MATTERS
------------------
The PaPUC Restructuring Orders and the NJBPU Summary Order essentially
deregulated the electric generation portions of the GPU Energy companies'
businesses. Accordingly, JCP&L, in the second quarter of 1999, and Met-Ed and
Penelec in 1998, discontinued the application of Statement of Financial
Accounting Standards No. 71 (FAS 71), "Accounting for the Effects of Certain
Types of Regulation," and adopted the provisions of Statement of Financial
Accounting Standards No. 101 (FAS 101), "Regulated Enterprises - Accounting for
the Discontinuation of Application of FASB Statement No. 71, and Emerging Issues
Task Force Issue 97-4, Deregulation of the Pricing of Electricity Issues Related
to the Application of FASB Statement No. 71 "Accounting for the Effects of
Certain Types of Regulation" and No. 101 "Regulated Enterprises Accounting for
the Discontinuation of Application of FASB Statement No. 71," (EITF Issue 97-4)
with respect to their electric generation operations. The transmission and
distribution portion of the GPU Energy companies' operations continue to be
subject to the provisions of FAS 71.
Regulatory assets, net as reflected in the June 30, 1999 and December 31,
1998 Consolidated Balance Sheets in accordance with the provisions of FAS 71 and
EITF Issue 97-4 were as follows:
GPU, Inc. and Subsidiary Companies (in thousands)
---------------------------
June 30, December 31,
1999 1998
----------- -------------
Competitive transition charge (CTC)
per PaPUC Order $ 973,163 $1,023,815
========= =========
Other regulatory assets, net:
Reserve for generation divestiture (JCP&L) $ 134,383 $ 136,804
Oyster Creek investment 639,958 -
Phase II reserve for generation divestiture 765,322 1,356,580
Income taxes recoverable through future rates 331,685 449,638
Income taxes refundable through future rates (39,093) (52,701)
Net investment in TMI-2 63,406 65,787
TMI-2 decommissioning costs 112,886 119,571
Nonutility generation contract buyout costs 109,833 123,208
Unamortized property losses 76,553 80,287
Other postretirement benefits 71,137 73,770
Environmental remediation 48,619 50,214
N.J. unit tax 29,780 33,244
Unamortized loss on reacquired debt 31,815 32,247
Load and demand-side management programs 225 12,568
DOE enrichment facility decommissioning 27,255 28,956
Nuclear fuel disposal fee 22,347 21,092
Storm damage 31,367 30,166
Deferred nonutility generation costs
not in current rates 32,541 (16,067)
Power purchase contract loss (JCP&L) 1,769,275 -
Power purchase contract loss not in CTC 369,290 369,290
Public utility realty taxes 6,406 8,060
Other regulatory liabilities (55,190) (50,319)
Other regulatory assets 8,698 10,018
--------- ---------
Total other regulatory assets, net $4,588,498 $2,882,413
========= =========
<PAGE>
Financial Statements
Item 6(b) 1
Page 11 of 26
JCP&L (in thousands)
- ----- ------------------------
June 30, December 31,
1999 1998
----------- ------------
Other regulatory assets, net:
Reserve for generation divestiture $ 134,383 $ 136,804
Oyster Creek investment 639,958 -
Income taxes recoverable through future rates 54,118 172,752
Income taxes refundable through future rates (22,596) (35,535)
Net investment in TMI-2 63,406 65,787
TMI-2 decommissioning costs 13,063 19,192
Nonutility generation contract buyout costs 109,833 120,708
Unamortized property losses 76,553 80,287
Other postretirement benefits 44,828 46,486
Environmental remediation 48,619 50,214
N.J. unit tax 29,780 33,244
Unamortized loss on reacquired debt 24,658 25,981
Load and demand-side management programs 225 12,568
DOE enrichment facility decommissioning 16,981 18,049
Nuclear fuel disposal fee 22,347 21,092
Storm damage 31,367 30,166
Power purchase contract loss 1,769,275 -
Other regulatory liabilities (54,843) (49,840)
Other regulatory assets 3,942 5,930
--------- ---------
Total other regulatory assets, net $3,005,897 $ 753,885
========= =========
Met-Ed (in thousands)
- ------ -----------------------------
June 30, December 31,
1999 1998
------------- -------------
Competitive transition charge per PaPUC Order $ 661,927 $ 680,213
========= =========
Other regulatory assets, net:
Phase II reserve for
generation divestiture $ 425,119 $ 421,807
Income taxes recoverable through future rates 118,885 133,585
Income taxes refundable through future rates (10,367) (10,804)
TMI-2 decommissioning costs 66,010 68,091
Nonutility generation contract buyout costs - 2,500
Other postretirement benefits 26,309 27,284
Unamortized loss on reacquired debt 2,690 3,023
DOE enrichment facility decommissioning 6,987 7,409
Deferred nonutility generation costs
not in current rates 8,365 (7,746)
Power purchase contract loss not in CTC 271,270 271,270
Public utility realty taxes 2,952 3,699
Other regulatory liabilities (83) (83)
Other regulatory assets 2,368 1,899
--------- ---------
Total other regulatory assets, net $ 920,505 $ 921,934
========= =========
<PAGE>
Financial Statements
Item 6(b) 1
Page 12 of 26
Penelec (in thousands)
- ------- ----------------------------
June 30, December 31,
1999 1998
------------- -------------
Competitive transition charge per PaPUC Order $ 311,236 $ 343,602
========= =========
Other regulatory assets, net:
Phase II reserve for
generation divestiture 340,203 934,773
Income taxes recoverable through future rates 158,682 143,301
Income taxes refundable through future rates (6,130) (6,362)
TMI-2 decommissioning costs 33,813 32,288
Unamortized loss on reacquired debt 4,467 3,243
DOE enrichment facility decommissioning 3,287 3,498
Deferred nonutility generation costs
not in current rates 24,176 (8,321)
Power purchase contract loss not in CTC 98,020 98,020
Public utility realty taxes 3,454 4,361
Other regulatory liabilities (264) (396)
Other regulatory assets 2,388 2,189
--------- ---------
Total other regulatory assets, net $ 662,096 $1,206,594
========= =========
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.
In accordance with FAS 121, impairment tests performed by the GPU Energy
companies on the net book values of their generation facilities determined that
the net investments in TMI-1 and Oyster Creek were impaired. This has resulted
in a write-down to reflect TMI-1 and Oyster Creek's fair market values in the
amounts of $520 million (pre-tax) and $630 million (pre-tax), respectively. The
majority of the TMI-1 write-down was recorded in 1998 while the Oyster Creek
write-down was recorded in the quarter ended June 30, 1999. Of the amount
written down for TMI-1, however, $510 million was reestablished as a regulatory
asset because management believes it is probable of recovery in the
restructuring process and $10 million (the Federal Energy Regulatory Commission
jurisdictional portion) was charged to expense as an extraordinary item in 1998.
The total impairment amount of Oyster Creek has also been reestablished as a
regulatory asset since the Summary Order provides for recovery in the
restructuring process. (For further information relating to the Oyster Creek
impairment write-down, see Note 2, Accounting for Extraordinary and
Non-recurring items.)
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (FAS 133), "Accounting for Derivative
Instruments and Hedging Activities". FAS 133 establishes accounting and
<PAGE>
Financial Statements
Item 6(b) 1
Page 13 of 26
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. FAS 133
requires that companies recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
GPU will be required to include its derivative transactions on its balance sheet
at fair value, and recognize the subsequent changes in fair value as either
gains or losses in earnings or report them as a component of other comprehensive
income, depending upon the intended use and designation of the derivative as a
hedge. FAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. GPU will adopt FAS 133 in the first quarter of 2001 and is
in the process of evaluating the impact of this statement.
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. In 1998, GPU entered into
definitive agreements to sell TMI-1 to AmerGen.
At June 30, 1999 and December 31, 1998, the GPU Energy companies' net
investment in TMI-1 and Oyster Creek, including nuclear fuel, was as follows:
Net Investment (in millions)
----------------------------
TMI-1 Oyster Creek
---- ------------
June 30, 1999
JCP&L $23 $100
Met-Ed 47 -
Penelec 23 -
-- ---
Total $93 $100
== ===
Net Investment (in millions)
----------------------------
TMI-1 Oyster Creek
----- ------------
December 31, 1998
JCP&L $18 $682
Met-Ed 36 -
Penelec 17 -
-- ---
Total $71 $682
== ===
JCP&L's net investment in TMI-2 at June 30, 1999 and December 31, 1998 was
$63 million and $66 million, respectively. JCP&L is collecting revenues for
TMI-2 on a basis which provides for the recovery of its remaining investment in
the plant by 2008. In 1998, Met-Ed and Penelec received PaPUC Restructuring
Orders, discontinued the application of FAS 71 and adopted the provisions of FAS
101 and EITF Issue 97-4 with respect to their electric generation operations.
Accordingly, Met-Ed and Penelec wrote-off their remaining investment in TMI-2 of
$1 million and $7 million, respectively.
<PAGE>
Financial Statements
Item 6(b) 1
Page 14 of 26
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.)
JCP&L has been exploring the sale or early retirement of the Oyster Creek
facility. In May 1999, the NJBPU approved JCP&L's request to recover the costs
associated with an early retirement of Oyster Creek in 2000. 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.
TMI-2:
As a result of the 1979 TMI-2 accident, individual claims for alleged
personal injury (including claims for punitive damages), which are material in
amount, were asserted against GPU, Inc. and the GPU Energy companies.
Approximately 2,100 of such claims were filed in the 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.
In 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
<PAGE>
Financial Statements
Item 6(b) 1
Page 15 of 26
"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 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.
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
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 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 1999
dollars) are as follows:
(in millions)
Oyster
TMI-1 TMI-2 Creek
----- ----- -----
JCP&L $ 68 $108 $334
Met-Ed 136 217 -
Penelec 68 108 -
--- --- ---
Total $272 $433 $334
=== === ===
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Item 6(b) 1
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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
address costs related to the removal of nonradiological structures and
materials.
In 1995, a consultant to GPUN performed site-specific studies of TMI-1,
TMI-2 and Oyster Creek (updated in 1998), that considered various
decommissioning methods and estimated the cost of decommissioning the
radiological portions and the cost of removal of the nonradiological portions of
each plant, using the prompt removal/dismantlement method. GPUN management has
reviewed the methodology and assumptions used in these studies, is in agreement
with them, and believes the results are reasonable. 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 1995 site-specific
studies, assuming decommissioning at the end of the plants' license terms, are
as follows (in 1999 dollars):
(in millions)
Oyster
TMI-1 TMI-2 Creek
----- ----- -----
Radiological decommissioning $358 $435 $591
Nonradiological cost of removal 88 34* 32
--- --- ---
Total $446 $469 $623
=== === ===
* Net of $12.6 million spent as of June 30, 1999.
Each of the GPU Energy companies is responsible for retirement costs in
proportion to its respective ownership percentage.
The 1995 Oyster Creek site-specific study was updated in 1998 in response
to the previously announced potential early closure of the plant in the year
2000. An early shutdown would increase the retirement costs shown above to $632
million ($600 million for radiological decommissioning and $32 million for
nonradiological cost of removal). Both estimates include substantial spending
for an on-site dry storage facility for spent nuclear fuel and significant costs
for storing the fuel until the DOE complies with the Nuclear Waste Policy Act of
1982 (see OTHER COMMITMENTS AND CONTINGENCIES).
In 1998, GPU entered into definitive agreements to sell TMI-1 to AmerGen.
The agreements provide, among other things, that upon closing, the GPU Energy
companies will fund the TMI-1 decommissioning trusts up to $320 million and
AmerGen will assume all TMI-1 decommissioning liabilities. If all the necessary
regulatory approvals are obtained, the transfer of all TMI-1 decommissioning
liability and expense to AmerGen will take place at the financial closing which
is expected by the end of 1999.
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),
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(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.
TMI-1 and Oyster Creek:
The NJBPU has granted JCP&L annual revenues for TMI-1 and Oyster Creek
retirement costs of $5.2 million and $22.5 million, respectively. These annual
revenues are based on the 1995 site-specific study estimates. Effective August
1, 1999, annual revenues for Oyster Creek are based on the 1998 site-specific
study estimates.
Through 1998, the PaPUC 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 a 1988 site-specific study for nonradiological costs
of removal. The PaPUC also granted Penelec annual revenues of $4.2 million
through 1998 for its share of TMI-1 retirement costs, on a basis consistent with
that granted Met-Ed. In the Restructuring Orders, the PaPUC granted recovery of
an interim level of TMI-1 decommissioning costs as part of the CTC based on the
1995 site-specific study. This amount will be adjusted in Phase II of Met-Ed and
Penelec's restructuring proceedings, once the net proceeds from the generation
asset divestiture are determined.
The amounts charged to depreciation expense for the second quarter of 1999
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, 1999:
JCP&L $2.6 $11.2
Met-Ed 0.4 -
Penelec 0.2 -
--- -----
$3.2 $11.2
==== =====
(in millions)
Oyster
TMI-1 Creek
----- -----
Accumulated depreciation
provision at June 30, 1999:
JCP&L $ 48 $297
Met-Ed 81 -
Penelec 37 -
--- ---
$166 $297
==== ====
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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.
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, 1999 and December 31, 1998 are as follows:
(in millions)
GPU JCP&L Met-Ed Penelec
--- ----- ------ -------
June 30, 1999 $490 $123 $244 $123
December 31, 1998 $484 $121 $242 $121
These amounts are based upon the 1995 site-specific study estimates (in 1999 and
1998 dollars, respectively) discussed above and an estimate for remaining
incremental monitored storage costs of $28 million (JCP&L $7 million; Met-Ed $14
million; Penelec $7 million) as of June 30, 1999 and $29 million (JCP&L $7
million; Met-Ed $15 million; Penelec $7 million) as of December 31, 1998, as a
result of TMI-2's entering long-term monitored storage in 1993. The GPU Energy
companies are incurring annual incremental monitored storage costs of
approximately $1.8 million (JCP&L $450 thousand; Met-Ed $900 thousand; Penelec
$450 thousand).
Offsetting the $490 million liability at June 30, 1999 is $244 million
(JCP&L $17 million; Met-Ed $144 million; Penelec $83 million) which management
believes is probable of recovery from customers and included in Regulatory
assets, net on the Consolidated Balance Sheets, and $281 million (JCP&L $110
million; Met-Ed $126 million; Penelec $45 million) in trust funds for TMI-2 and
included in Nuclear decommissioning trusts, at market on the Consolidated
Balance Sheets. Earnings on trust fund deposits are included in amounts shown on
the Consolidated Balance Sheets under Regulatory assets, net. TMI-2
decommissioning costs charged to depreciation expense for the six months ended
June 30, 1999 amounted to $2.6 million (JCP&L $1.1 million; Met-Ed $1.0 million;
Penelec $0.5 million).
The NJBPU has granted JCP&L revenues for TMI-2 retirement costs based on
the 1995 site-specific estimates. In addition, JCP&L is recovering its share of
TMI-2 incremental monitored storage costs. The PaPUC Restructuring Orders
granted Met-Ed and Penelec recovery of TMI-2 decommissioning costs as part of
the CTC, but also allowed Met-Ed and Penelec to defer as a regulatory asset
those amounts that are above the level provided for in the CTC.
At June 30, 1999, the accident-related portion of TMI-2 radiological
decommissioning costs is considered to be $77 million (JCP&L $19 million; Met-Ed
$39 million; Penelec $19 million), which is the difference between the 1995
TMI-1 and TMI-2 site-specific study estimates (in 1999 dollars). In connection
with rate case resolutions at the time, JCP&L, Met-Ed and Penelec have made
contributions to irrevocable external trusts relating to their shares of the
accident-related portions of the decommissioning liability in the amounts of $15
million, $40 million and $20 million, respectively. These
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contributions were not recoverable from customers and have been expensed. The
GPU Energy companies will not pursue recovery from customers for any amounts
contributed in excess of the $77 million accident-related portion referred to
above.
JCP&L intends to seek recovery for any increases in TMI-2 retirement costs,
and Met-Ed and Penelec intend to seek recovery for any increases in the
nonaccident-related portion of such costs, but recognize that recovery cannot be
assured.
INSURANCE
---------
GPU has insurance (subject to retentions and deductibles) for its
operations and facilities including coverage for property damage, liability to
employees and third parties, and loss of use and occupancy (primarily
incremental replacement power costs). There is no assurance that GPU will
maintain all existing insurance coverages. Losses or liabilities that are not
completely insured, unless allowed to be recovered through ratemaking, could
have a material adverse effect on the financial position of GPU.
The decontamination liability, premature decommissioning and property
damage insurance coverage for 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 $9.7 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 $26.8 million (JCP&L $16.9
million; Met-Ed $6.6 million; Penelec $3.3 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 12-week waiting period at $1.8
million and $2.6 million per week for 52 weeks for Oyster Creek and TMI-1,
respectively, decreasing to 80% of such amounts for the next 110 weeks.
<PAGE>
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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 have spent $242 million (JCP&L 44
million; Met-Ed $95 million; Penelec $103 million) to date. Effective November
1997, the Pennsylvania Environmental Quality Board adopted regulations
implementing the NOx reductions proposed by the Ozone Transport Commission
(OTC), 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 these state
implementation plans, and that as a result, they would expect to spend an
estimated $0.6 million (JCP&L $30 thousand; Met-Ed $340 thousand; Penelec $200
thousand) in 1999 to meet the seasonal reductions agreed upon by the OTC. In
1997 and 1998 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. The GPU Energy companies are unable
to determine what additional costs, if any, will be incurred if the EPA rules
are upheld. Moreover, the timing and amounts of expenditures under the Clean Air
Act will be dependent upon the timing of the sales of the related generating
facilities.
GPU has been formally notified by the EPA and state environmental
authorities that it is among the potentially responsible parties (PRPs) who may
be jointly and severally liable to pay for the costs associated with the
investigation and remediation at hazardous and/or toxic waste sites (in some
cases, more than one company is named for a given site):
JCP&L MET-ED PENELEC GPUN GPU, INC. TOTAL
----- ------ ------- ---- --------- -----
8 4 2 1 1 13
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.
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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
(Chesapeake). According to the complaint, the EPA is seeking up to $0.5 million
in past costs, $4.2 million for 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 has also sued GPU,
Inc. for a contribution to the cleanup of the Dover site. The United States
District Court for the District of Delaware has refused to dismiss the
complaints and discovery is proceeding. The parties continue to engage in
settlement discussions. 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, and a third Amendment in December 1998,
that establish 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, 1999. 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
regulatory asset of approximately $12 million at June 30, 1999.
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
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, 1999. JCP&L has requested recovery of
its share of closure costs in its restructuring plan filed with the NJBPU in
1997. Met-Ed and Penelec expect recovery of these costs in Phase II of their
restructuring proceedings. As a result, a regulatory asset of $17 million (JCP&L
$1 million; Met-Ed $4 million; Penelec $12 million) is reflected on the
Consolidated Balance Sheets at June 30, 1999.
JCP&L has entered into agreements with the New Jersey Department of
Environmental Protection for the investigation and remediation of 17 formerly
owned MGP sites. JCP&L has also entered into various cost-sharing agreements
with other utilities for most of the sites. As of June 30, 1999, JCP&L has
<PAGE>
Financial Statements
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spent approximately $33 million in connection with the cleanup of these sites.
In addition, JCP&L has recorded an estimated environmental liability of $53
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 $53 million due to significant uncertainties,
including changes in acceptable remediation methods and technologies. In
addition, federal and state law provides for payment by responsible parties for
damage to natural resources.
In 1997, JCP&L's request to establish a Remediation Adjustment Clause for
the recovery of MGP remediation costs was approved by the NJBPU. At June 30,
1999, JCP&L had recorded on its Consolidated Balance Sheet a regulatory asset of
$43 million. JCP&L is continuing to pursue reimbursement from its insurance
carriers for remediation costs already spent and for future estimated costs. In
1994, JCP&L commenced litigation in the New Jersey Superior Court against
several of its insurance carriers, relative to these MGP sites and has settled
with all but one of those insurance companies.
OTHER COMMITMENTS AND CONTINGENCIES
-----------------------------------
GPU, Inc. Investments and Guarantees:
- -------------------------------------
GPU, Inc. has made significant investments in foreign businesses and
facilities through its subsidiaries, GPU Electric and the GPUI Group. At June
30, 1999, GPU, Inc.'s aggregate investment in GPU Electric and the GPUI Group
was $518 million and $242 million, respectively. Although management attempts to
mitigate the risks of investing in certain foreign countries by, among other
things, securing political risk insurance, GPU faces additional risks inherent
to operating in such locations, including foreign currency fluctuations.
GPU Electric
At June 30, 1999, GPU Electric had investments located in foreign countries
totaling approximately $3.9 billion (excluding the additional 50% interest in
Midlands Electricity plc (Midlands) which GPU acquired from Cinergy in July
1999). GPU, Inc. has also guaranteed up to an additional $1.19 billion of GPU
Electric obligations. Of the $1.19 billion, $1.04 billion is included in
Long-term debt and Securities due within one year on GPU's Consolidated Balance
Sheet at June 30, 1999.
Through its ownership of Midlands, GPU Electric has an investment 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 of
which Midlands is a 40% owner. Construction of the Uch Power Project is
virtually complete, but testing and commercial operation have been delayed.
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Midlands' current investment in the Uch Power Project is approximately $75
million, and project lenders could require Midlands to make additional capital
contributions to the project of approximately $12 million under certain
conditions. On June 30, 1999, the project lenders issued a notice of default to
the project sponsors (including Midlands) for failure to obtain permanent
financing and repay the construction debt by the original loan due date. The
project sponsors have proposed a restructured financing arrangement which the
lenders and EXIM Bank are currently considering. As part of GPU's July 1999
purchase of Cinergy's 50% ownership interest in Midlands, Cinergy has agreed to
fund up to an aggregate of $20 million of additional capital contributions
and/or certain future "cash losses" which GPU could incur on the Uch Power
Project. There can be no assurance as to the outcome of this matter.
GPUI Group
At June 30, 1999, the GPUI Group had investments located in foreign
countries totaling approximately $80 million. As of that date, GPU, Inc. has
also guaranteed up to an additional $33.7 million of GPUI Group obligations
(including guarantees of $21.3 million related to domestic operations). Of the
$33.7 million, $7.6 million is included in Long-term debt and Securities due
within one year on GPU's Consolidated Balance Sheet at June 30, 1999, and $26.1
million relates to various other obligations of the GPUI Group.
Other:
- ------
GPU's capital programs, for which substantial commitments have been incurred
and which extend over several years, contemplate expenditures of $453 million
(JCP&L $183 million; Met-Ed $97 million; Penelec $98 million; Other $75 million)
during 1999.
In July 1999, New Jersey experienced a severe heat wave that resulted in
major power outages and temporary service interruptions in JCP&L's service
territory. As a result, the NJBPU, with the assistance of the New Jersey
Attorney General, has initiated an investigation into the reliability of JCP&L's
transmission and distribution system and JCP&L's response to the power outages.
In addition, lawsuits have been filed in New Jersey Superior Court against JCP&L
seeking class action certification for all JCP&L customers who incurred
financial losses, including both compensatory and punitive damages. There can be
no assurance as to the outcome of these matters.
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 (JCP&L - 16.67% ownership
interest in Keystone; and Met-Ed - 16.45% ownership interest in Conemaugh). The
contracts, which expire at various dates between 1999 and 2002, 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 $135 million (JCP&L $27 million;
Met-Ed $57 million; Penelec $51 million) for 1999. These contracts will be
assumed by Sithe, upon the closings of the sales of the GPU Energy companies'
fossil generation facilities.
<PAGE>
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Item 6(b) 1
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JCP&L has entered into agreements with other utilities to purchase capacity
and energy for various periods through 2004. These agreements provide for up to
629 MW in 1999, declining to 445 MW in 2000 through 2003 and 345 MW in 2004 when
the final agreement expires. Payments pursuant to these agreements are estimated
to be $114 million in 1999, $91 million in 2000, $99 million in 2001, $109
million in 2002, $113 million in 2003 and $48 million in 2004.
GPU AR has entered into sales contracts to supply electricity to retail
customers through December 31, 2000, with energy and capacity costs estimated at
$50 million. GPU AR has also entered into various agreements to purchase energy
and capacity totaling approximately $24 million, of which $11 million has been
guaranteed by GPU, Inc.
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. Following its purchase of TMI-1, AmerGen will assume all
liability for disposal costs related to spent fuel generated after the sale. In
1996, the DOE notified the GPU Energy companies and other standard contract
holders that it will be unable to begin acceptance of spent nuclear fuel for
disposal by 1998, as mandated by the NWPA. The DOE requested recommendations
from contract holders for handling the delay. 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. In November 1997, the Court denied this request. The DOE's inability to
accept spent nuclear fuel could have a material impact on GPU's results of
operations, as additional costs may be incurred to build and maintain interim
on-site storage at Oyster Creek. 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 (radwaste) disposal facility in New
Jersey, which was expected to commence operation by the end of 2003. GPUN's
total share of the cost for developing, constructing and site licensing the
facility was estimated to be $58 million. Through June 30, 1999, GPUN has made
payments of $6 million to fund construction of the radwaste disposal facility
and JCP&L has collected $30 million from customers. As a result of the NJBPU
Summary Order, effective August 1, 1999, JCP&L will no longer be collecting
monies from customers for the facility's construction. Any over-recovered
balance will be applied to reduce the MTC. 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 in the process of determining
what activities are required by law to be continued, and the level of funding
required to support these activities. 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
<PAGE>
Financial Statements
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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 suspended 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
effect on 1999 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 LEAC. The New
Jersey restructuring legislation eliminates the nuclear performance standard,
effective with the implementation of retail choice on August 1, 1999. The
calculation in 1999 is based on a 5-month performance period from March 1, 1999
through July 31, 1999.
GPU, Inc. and consolidated affiliates have approximately 12,800 employees
worldwide of which nearly 8,200 are employed in the U.S and approximately 3,600
are employed by Midlands in the United Kingdom. The majority of the U.S.
workforce is employed by the GPU Energy companies, of which approximately 4,300
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 on October 31, 1999, April 30, 2000 and May 14, 2002,
respectively. Penelec's collective bargaining agreement with the Utility Workers
Union of America expires on June 30, 2001.
During the normal course of the operation of its businesses, in addition to
the matters described above, GPU is from time to time involved in disputes,
claims and, in some cases, as a defendant in litigation in which compensatory
and punitive damages are sought by the public, customers, contractors, vendors
and other suppliers of equipment and services and by employees alleging unlawful
employment practices. While management does not expect that the outcome of these
matters will have a material effect on GPU's financial position or results of
operations, there can be no assurance that this will continue to be the case.
<PAGE>
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Item 6(b) 1
Page 26 of 26
2. ACCOUNTING FOR EXTRAORDINARY AND NON-RECURRING ITEMS
JCP&L Restructuring Write-off
Historically, the rates an electric utility charges its customers have been
based on the utility's costs of operation. As a result, the GPU Energy companies
were required to account for the economic effects of cost-based ratemaking
regulation under the provisions of FAS 71. FAS 71 requires regulated entities,
in certain circumstances, to defer, as regulatory assets, the impact on
operations of costs expected to be recovered in future rates.
In response to the continuing deregulation of the electric utility
industry, the Securities and Exchange Commission (SEC) has questioned the
continued applicability of FAS 71 by investor-owned utilities with respect to
their electric generation operations. In response to these concerns, the FASB's
EITF concluded in June 1997 that utilities are no longer subject to FAS 71, for
the relevant portion of their business, when they know details of their
individual transition plans. The EITF also concluded that utilities can continue
to carry previously recorded regulated assets, as well as any newly established
regulated assets (including those related to generation), on their balance
sheets if regulators have guaranteed a regulated cash flow stream to recover the
cost of these assets. Concurrent with the receipt of PaPUC Restructuring Orders
in 1998, Met-Ed and Penelec discontinued the application of FAS 71 and adopted
the provisions of FAS 101 and EITF 97-4 for their electric generation
operations.
On May 24, 1999, the NJBPU issued a Summary Order regarding JCP&L's
unbundling, stranded cost and restructuring filings. The Summary Order, among
other things, essentially removes from regulation the costs associated with
providing electric generation service to New Jersey customers, effective August
1, 1999. Accordingly, JCP&L has discontinued the application of FAS 71 and has
adopted the provisions of FAS 101 and EITF 97-4 with respect to its electric
generation operations, effective with the second quarter of 1999. The
transmission and distribution portion of JCP&L's operations will continue to be
subject to the provisions of FAS 71.
For the quarter ended June 30, 1999, JCP&L has recorded a reduction in
operating revenues of $115 million relating to the Summary Order which resulted
in an after-tax charge to earnings of $68 million, or $0.54 per share. This
reduction reflects JCP&L's obligation to refund to customers (from 1999
revenues) 5% of April 30, 1997 rates for service rendered on or after August 1,
2002.
Since JCP&L is no longer subject to FAS 71 for the generation portion of
its business, GPU performed an impairment test on Oyster Creek in accordance
with FAS 121. This test determined that JCP&L's net investment in Oyster Creek,
including plant, nuclear fuel and materials and supplies inventories, was
impaired based on the April 30, 1999 net book value. This investment was written
down by $630 million (pre-tax) to reflect its fair market value. This
impairment, which was recorded as an extraordinary deduction, was reversed and
reestablished as a regulatory asset since the Summary Order provides for rate
recovery.
