Amendment No. 4 to
SEC File No. 70-9457
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-l
DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 ("Act")
PENNSYLVANIA ELECTRIC COMPANY ("Penelec")
2800 Pottsville Pike
Reading, Pennsylvania 19605
(Name of company filing this statement and address
of principal executive office)
GPU, INC. ("GPU")
(Name of top registered holding company parent of applicant)
Terrance G. Howson, Douglas E. Davidson, Esq.
Vice President and Treasurer Berlack, Israels & Liberman LLP
Mary A. Nalewako, Secretary 120 West 45th Street
Michael J. Connolly, New York, New York 10036
Vice President - Law
GPU Service, Inc.
300 Madison Avenue
Morristown, New Jersey 07962
Scott L. Guibord, Secretary W. Edwin Ogden, Esq.
Pennsylvania Electric Company Ryan, Russell, Ogden &
2800 Pottsville Pike Seltzer LLP
Reading, Pennsylvania 19605 1100 Berkshire Boulevard
Reading, Pennsylvania 19610-0219
(Names and addresses of agents for service)
<PAGE>
Penelec hereby amends its Declaration on Form U-1, docketed in
SEC File No. 70-9457 as follows:
1. By completing Item 2 thereof to read in its entirety as follows:
ITEM 2. FEES COMMISSIONS AND EXPENSES.
Penelec estimates that the fees, commissions and expenses to be
incurred in connection with the proposed transactions will be as follows:
Legal Fees:
Berlack, Israels & Liberman LLP $5,000
Ryan, Russell, Ogden & Seltzer LLP $1,000
Miscellaneous $1,500
------
$7,500
2. By removing the last sentence of paragraph A of Item 4 and
replacing it with the following:
Penelec and CEI filed the requisite notification and report forms
pursuant to the HSR Act with respect to the sale of the Seneca
Interest on April 20, 1999 with the Federal Trade Commission ("FTC")
and the Department of Justice ("DOJ"). The FTC and the DOJ granted
Penelec and CEI early termination of the statutory waiting period on
May 5, 1999.
3. By filing the following exhibits and financial statements in Item
6 thereof:
(a) Exhibits
D-2 - PaPUC Certificate of Public Convenience
D-3 - Application for License Transfer filed by
Penelec with the FERC
F-1 - Opinion of Berlack, Israels & Liberman LLP
-2-
<PAGE>
F-2 - Opinion of Ryan, Russell, Ogden & Seltzer LLP
G - Financial Data Schedules
H - GPU actual and pro forma capitalization ratios
as at March 31, 1999
(b) Financial Statements:
1-A - Penelec Consolidated Balance Sheets, actual and
pro forma, as at March 31, 1999, and Consolidated
Statements of Income, actual and pro forma, and
Statement of Retained Earnings, for the 12 months
ended March 31, 1999; pro forma journal entries
1-B - GPU Consolidated Balance Sheets, actual and pro
forma, as at March 31, 1999, and Consolidated
Statements of Income, actual and pro forma, and
Statement of Retained Earnings, for the 12 months
ended March 31, 1999; pro forma journal entries
-3-
<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.
PENNSYLVANIA ELECTRIC COMPANY
By: /s/ T. G. Howson
-----------------------------
T. G. Howson
Vice President and Treasurer
Date: July 2, 1999
-4-
EXHIBITS TO BE FILED BY EDGAR
(a) Exhibits
D-2 - PaPUC Certificate of Public Convenience
D-3 - Application for License Transfer filed by
Penelec with the FERC
F-1 - Opinion of Berlack, Israels & Liberman LLP
F-2 - Opinion of Ryan, Russell, Ogden & Seltzer LLP
G - Financial Data Schedules
H - GPU actual and pro forma capitalization ratios
as at March 31, 1999
(b) Financial Statements:
1-A - Penelec Consolidated Balance Sheets, actual and
pro forma, as at March 31, 1999, and Consolidated
Statements of Income, actual and pro forma, and
Statement of Retained Earnings, for the 12 months
ended March 31, 1999; pro forma journal entries
1-B - GPU Consolidated Balance Sheets, actual and pro
forma, as at March 31, 1999, and Consolidated
Statements of Income, actual and pro forma, and
Statement of Retained Earnings, for the 12 months
ended March 31, 1999; pro forma journal entries
EXHIBIT D-2
PENNSYLVANIA PUBLIC UTILITY COMMISSION
P.O. BOX 3265
HARRISBURG, PA 17105-3265
June 21, 1999
John F. Povilaitis, Esquire
Ryan, Russell, Ogden & Seltzer, LLP
800 North Third Street, Suite 101
Harrisburg, PA 17102-2025
Re: Application of Metropolitan Edison Company for
Approval of its Restructuring Plan Under
Section 2806 of the Public Utility Code
Docket No. R-00974008
Application of Pennsylvania Electric Company for
Approval of its Restructuring Plan Under
Section 2806 of the Public Utility Code
Docket No. R-00974009
Dear Mr. Povilaitis:
By letter dated May 11, 1999, Pennsylvania Electric Company (Penelec)
requests the issuance of a certificate of public convenience under Section
1102(a) of the Public Utility Code with regard to the transfer of its 20%
ownership interest in the Seneca Pumped Storage Generating Station (Seneca).
Noting that Penelec entered into Purchase and Sale Agreement ("PSA") on October
30, 1998 to sell its interest in Seneca to FE Acquisition Corp. (FEAC), the May
11, 1999 letter seeks the issuance of the necessary certificate to Cleveland
Electric Illuminating Company (CEI), to whom FEAC has assigned all of its
rights, obligations and interests under the PSA. According to Penelec, the
issuance of this certificate would evidence the Commission's prior regulatory
approval for the transfer of generation assets and liabilities to third parties.
In particular, the May 11, 1999 letter references the Commission's Order entered
on October 20, 1998 at the above-captioned docket as expressly authorizing and
approving this transfer and sale.
We note that comments in response to the May 11, 1999 letter requesting
the issuance of this certificate have been filed by interested parties.
Nevertheless, the comments do not suggest that the issuance of the certificate
would go beyond the prior
<PAGE>
authorizations contained in the Commission's October 20, 1998 Order expressly
approving "all aspects of the Companies' transfer of their generation assets and
liabilities, along with the granting of the approvals, licenses and certificates
of public convenience required under the Public Utility Code regarding the
transfer or assignment of the Companies' generating assets and liabilities . . .
. including but not limited to approvals under Chapters 5, 11, 19, 21 and 28 of
Public Utility Code." October 20, 1998 Order at page 23, Ordering Paragraph 3.
Therefore, pursuant to Section 1102(a)(3) of the Public Utility Code and
consistent with the prior authorization contained in the Commission's October
20, 1998 Order, enclosed please find a certificate of public convenience
authorizing the transfer of Penelec's 20% ownership interest in the Seneca
Pumped Storage Generating Station to Cleveland Electric Illuminating Company.
Very truly yours,
/s/ James J. McNulty
--------------------
James J. McNulty
Secretary
cc: All Parties of Record w/o enclosure
Karen Oill Moury, Deputy Chief Counsel
2
<PAGE>
PENNSYLVANIA
PUBLIC UTILITY COMMISSION
IN THE MATTER OF THE APPLICATION OF: R-00974009
Application of Pennsylvania Electric Company for approval of the transfer
and sale of its 20% interest in the Seneca Pumped Storage Generating Station to
Cleveland Electric Illuminating Company.
The Pennsylvania Public Utility Commission hereby certifies that after an
investigation and/or hearing, it has, by its report and order made and entered,
found and determined that the granting of the application is necessary or proper
for service, accommodation, convenience and safety of the public and hereby
issues to the applicant this CERTIFICATE OF PUBLIC CONVENIENCE evidencing the
Commission's approval.
In Witness Whereof, the PENNSYLVANIA PUBLIC UTILITY COMMISSION has caused
these presents to be signed and sealed, and duly attested by its Secretary at
its office in the city of Harrisburg this 21st day of June 1999.
(seal)
/s/ James J. McNulty
--------------------
Secretary
3
Exhibit D-3
UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
The Cleveland Electric Illuminating Company )
and )
Pennsylvania Electric Company, )
(Transferors) )
)
and )Project No. 2280
) (Seneca)
The Cleveland Electric Illuminating Company, )
(Transferee). )
JOINT APPLICATION FOR APPROVAL
OF PARTIAL TRANSFER OF LICENSE
Pursuant to section 8 of the Federal Power Act ("FPA"), 16 U.S.C. section
801, and Part 9 of the Regulations of the Federal Energy Regulatory Commission
("Commission"), 18 C.F.R. Part 9 (1998), The Cleveland Electric Illuminating
Company ("CEI") and Pennsylvania Electric Company ("Penelec") (and hereinafter
referred to together as "Transferors"), licensees for the Seneca Pumped Storage
Generating Station ("Project"), hereby apply for an order authorizing the
transfer of that portion of the license held by Penelec to CEI.
<PAGE>
Located on the Allegheny River in Warren County, Pennsylvania at the U.S.
Army Corps of Engineers Allegheny River Reservoir Project and having installed
capacity of 451.8 MW, the Project received a 50-year license from the Federal
Power Commission ("FPC") in 1965. Pennsylvania Electric Company, 34 F.P.C. 1567
(1965). Penelec currently owns a 20% undivided interest in the Project. The
remaining 80% undivided interest is owned by CEI, a wholly-owned subsidiary of
FirstEnergy Corp. ("FirstEnergy"). Together with its affiliated companies within
the GPU, Inc. holding company system, Penelec is involved in a restructuring of
its utility assets and has elected to sell all of its generating facilities.
Following a series of negotiations with FE Acquisition Corp. ("FE Acquistion"),
another subsidiary of FirstEnergy, Penelec entered into an agreement to sell its
ownership interest in the Project to FE Acquisition. Subsequent to the execution
of that agreement, FE Acquisition assigned its contractual rights to CEI. The
instant application reflects the proposed transfer of Penelec's 20% interest in
the Project directly to CEI.
In support of this application, the Transferors and the Transferee make
the following showings:
(1) CEI is incorporated under the laws of the State of Ohio, as is
FirstEnergy, which is an exempt holding company under the Public Utility
Holding Company Act of 1935. Certified copies of CEI-Transferee's Articles
of Incorporation, Code of Regulations (corporate by- laws), and evidence
of its authorization to conduct business in the Commonwealth of
Pennsylvania were submitted to the FPC as Exhibits A-1a, A-2a, and A-4a,
respectively, to the application for the Project license. Except to the
extent that the Articles of Incorporation and the Code of Regulations may
have been
-2-
<PAGE>
amended since 1965, the articles, regulations, and certificate remain in
full force and effect.
(2) CEI, as Transferee, commits to submit to the Commission certified copies
of all instruments of conveyance whereby title to Penelec's interest in
the project properties is conveyed to it, upon the completion of such
conveyance, if and when (a) the Commission shall have given its approval
to the transfer of the license proposed herein and (b) the proposed
transfer has been consummated.
(3) If and when the Commission shall have given its approval to the proposed
transfer, and upon consummation of the proposed transfer and the
completion of the conveyance of Penelec's interest in the project
properties to CEI, as Transferee, CEI will permanently retain all such
instruments of conveyance along with all license instruments and all maps,
plans, specifications, contracts, reports of engineers, accounts, books,
records and all other papers and documents relating to the original
Project and to all additions and betterments thereof.
(4) The Transferors certify that, to the best of their knowledge, they have
fully complied with the terms and conditions of the license for the
Project, as amended, that they have fully satisfied and discharged all of
their liabilities and obligations under such license to the date hereof,
and that they obligate themselves to pay all annual charges accrued under
the license to the date of transfer.
-3-
<PAGE>
(5) Contingent upon the final written approval by the Commission of the
transfer of the license and consummation of the proposed transaction, CEI,
as of the date of transfer, reaffirms its acceptance of all of the terms
and conditions of said license, as amended, and of the FPA, and, subject
to its rights as successor in interest to Penelec, agrees to continue to
be bound thereby to the same extent as though it were the sole and
original licensee thereunder.
(6) The names, titles, and addresses of the persons to whom correspondence in
regard to this application should be addressed are as follows:
For Transferors:
(a) Kevin P. Murphy
FirstEnergy Corp.
76 South Main Street
Akron, Ohio 44038
(330) 761-4208
(b) Brian J. McManus
Jones, Day, Reavis & Pogue
1450 G Street, N.W.
Washington, D.C. 20005-2008
(202) 879-5452
(c) William J. Madden, Jr. Winston & Strawn 1400 L Street, N.W.
Washington, D.C. 20012 (202) 371-5700
(d) Timothy N. Atherton
Senior Attorney
GPU Service, Inc.
1001 Broad Street
Johnstown, Pennsylvania 15907
(814) 533-8397
and
-4-
<PAGE>
For Transferee:
(a) Kevin P. Murphy
FirstEnergy Corp.
76 South Main Street
Akron, Ohio 44308
(330) 761-4208
(b) Brian J. McManus
Jones, Day, Reavis & Pogue
1450 G Street, N.W.
Washington, D.C. 20005-2008
(202) 879-5452
The foregoing individuals should be placed on the official service list to
be compiled by the Commission's Secretary in this proceeding.
(7) After the license transfer has become effective, correspondence and
communications relating to the Project should be directed to:
(a) Guy L. Pipitone
Vice President - Fossil Production
FirstEnergy Corp.
76 South Main Street
Akron, Ohio 44308
(330) 384-5799
(b) Anthony J. Alexander
Executive Vice President and General Counsel
FirstEnergy Corp.
76 South Main Street
Akron, Ohio 44308
(330) 384-5793
To the extent that this application may not technically conform to the
Commission's regulations, waiver of any such regulation is respectfully
requested.
WHEREFORE, the Transferors request that the Commission
-5-
<PAGE>
authorize the transfer of Penelec's 20% interest in the Project No. 2280 to
CEI, as Transferee.
April 1, 1999
-6-
<PAGE>
IN WITNESS WHEREOF, CEI, as Transferor, has caused its name to hereunto
signed by Guy L. Pipitone, its Vice President, and its corporate seal to be
hereunto affixed by Nancy C. Ashcom, its Corporate Secretary, thereunto duly
authorized this 26th day of March, 1999.
THE CLEVELAND ELECTRIC
ILLUMINATING COMPANY
By: /s/ Guy L. Pipitone
------------------------
Guy L. Pipitone
Vice President
Attest:
/s/ Nancy C. Ashcom
-------------------
Nancy C. Ashcom
Corporate Secretary
Corporate SEAL
-7-
<PAGE>
IN WITNESS WHEREOF, Penelec, as Transferor, has caused its name to be
hereunto signed by R. J. Toole, its Vice President, and its corporate seal to
hereunto affixed by William C. Matthews II, its Corporate Secretary, thereunto
duly authorized this 23rd day of March, 1999.
PENNSYLVANIA ELECTRIC COMPANY
By: /s/ R. J. Toole
----------------------
Attest:
/s/ William C. Matthews
-----------------------
Corporate SEAL
-8-
<PAGE>
IN WITNESS WHEREOF, CEI, as Transferee, has caused its name to be hereunto
signed by Guy L. Pipitone, its Vice President, and its corporate seal to be
hereunto affixed by Nancy C. Ashcom, its Corporate Secretary, thereunto duly
authorized this 26th day of March, 1999.
THE CLEVELAND ELECTRIC
ILLUMINATING COMPANY
By: /s/ Guy L. Pipitone
----------------------
Guy L. Pipitone
Vice President
Attest:
/s/ Nancy C. Ashcom
-------------------
Nancy C. Ashcom
Corporate Secretary
Corporate SEAL
-9-
<PAGE>
VERIFICATION
------------
The undersigned has read the foregoing application, knows the contents
hereof, and believes the statements therein to be true.
/s/ Guy L. Pipitone Dated: March 26th 1999
- ------------------------------ ------------------
Subscribed and sworn before me, a notary public of the state of Ohio, this
26th day of March, 1999.
SEAL /s/ Kevin Murphy
-------------------------------
Kevin P. Murphy
Attorney at Law
Notary Public, State of Ohio
My Commission Has No Expiration Date
Section O.R.C. 147.03
-10-
<PAGE>
VERIFICATION
------------
The undersigned has read the foregoing application, knows the contents
hereof, and believes the statements therein to be true.
/s/ R. J. Toole Dated: March 23rd, 1999
--------------- ---------------------
R. J. Toole - Vice President
Pennsylvania Electric Company
Subscribed and sworn before me, a notary public of the state of New
Jersey, this 23rd day of March, 1999.
SEAL /s/ Karin M. Beam
------------------------------------------
print name
Notary Public in and for the State of
Pennsylvania, residing at
Johnstown, Combria County
My commission expires: June 4, 2001
-11-
Exhibit F-1
July 2, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Pennsylvania Electric Company -
Declaration on Form U-1
SEC File No. 70-9457
Ladies and Gentlemen:
We have examined the Declaration on Form U-1, dated March 2, 1999,
under the Public Utility Holding Company Act of 1935 (the "Act"), filed by
Pennsylvania Electric Company ("Penelec"), a subsidiary of GPU, Inc. ("GPU"),
with the Securities and Exchange Commission and docketed in SEC File No.
70-9457, as amended by Amendment No. 1 thereto, dated March 8, 1999, Amendment
No. 2 thereto, dated March 29, 1999, Amendment No. 3 thereto, dated April 8,
1999 and Amendment No. 4 thereto, dated this date, of which this opinion is to
be a part. (The Declaration, as so amended and as thus to be amended, is
hereinafter referred to as the "Declaration".)
The Declaration contemplates, among other things, the sale of
Penelec's 20% undivided interest in the Seneca Pumped Storage Generating Station
("Seneca"), a 435 MW pumped storage hydroelectric generating facility located
near Warren, Pennsylvania to Cleveland Electric Illuminating Company
("CEI") which owns the remaining 80% of Seneca.
We have been counsel to GPU and its subsidiaries for many years. In
such capacity we have participated in various proceedings relating to the
issuance of securities by GPU and its subsidiaries, and we are familiar with the
terms of the outstanding securities of the corporations comprising the GPU
holding company system.
<PAGE>
We are members of the Bar of the State of New York and do not
purport to be expert on the laws of any jurisdiction other than the laws of the
State of New York and the federal laws of the United States. The opinions
expressed herein are limited to matters governed by the laws of the State of New
York and the federal laws of the United States. As to all matters which are
governed by the laws of the Commonwealth of Pennsylvania, we have relied on the
opinion of Ryan, Russell, Ogden & Seltzer LLP, which is being filed as Exhibit
F-2 to the Declaration.
Based upon the foregoing, and assuming that the transactions therein
proposed are carried out in accordance with the Declaration, we are of the
opinion that when the Commission shall have entered an order forthwith
permitting the Declaration to become effective,
(a) all State laws applicable to the proposed sale by Penelec
of its 20% ownership interest in Seneca will have been complied with; and
(b) the consummation of the proposed transactions will not
violate the legal rights of the holders of any securities issued by Penelec or
any "associate company" thereof, as defined in the Act.
We hereby consent to the filing of this opinion as an exhibit to the
Declaration and in any proceedings before the Commission that may be held in
connection therewith.
Very truly yours,
BERLACK, ISRAELS & LIBERMAN LLP
-2-
Exhibit F-2
July 2, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Pennsylvania Electric Company -
Declaration on Form U-1
SEC File No. 70-9457
Ladies and Gentlemen:
We have examined the Declaration on Form U-1, dated March 2, 1999,
under the Public Utility Holding Company Act of 1935 (the "Act"), filed by
Pennsylvania Electric Company ("Penelec"), a subsidiary of GPU, Inc. ("GPU"),
with the Securities and Exchange Commission and docketed in SEC File No.
70-9457, as amended by Amendment No. 1 thereto, dated March 8, 1999, Amendment
No. 2 thereto, dated March 29, 1999, Amendment No. 3 thereto, dated April 8,
1999 and Amendment No. 4 thereto, dated this date, of which this opinion is to
be a part. (The Declaration, as so amended and as thus to be amended, is
hereinafter referred to as the "Declaration".)
The Declaration contemplates, among other things, the sale of
Penelec's 20% undivided interest in the Seneca Pumped Storage Generating Station
("Seneca"), a 435 MW pumped storage hydroelectric generating facility located
near Warren, Pennsylvania to Cleveland Electric Illuminating Company
("CEI") which owns the remaining 80% of Seneca.
We have been counsel to Penelec for many years. We are members of
the Bar of the Commonwealth of Pennsylvania and do not purport to be expert on
the laws of any other jurisdiction.
Based upon and subject to the foregoing, and assuming that the
transactions therein proposed are carried out in accordance with the
Declaration, we are of the opinion that when the Commission shall have entered
an order forthwith permitting the Declaration to become effective,
<PAGE>
Securities and Exchange Commission
July 2, 1999
Page 2
(a) all Pennsylvania laws applicable to the proposed sale by
Penelec of its 20% ownership interest in Seneca will have been
complied with;
(b) Penelec is validly organized and duly existing; and
(c) the consummation of the proposed transactions will not violate
the legal rights of the holders of any securities issued by
Penelec.
We hereby consent to the filing of this opinion as an exhibit to the
Declaration and in any proceedings before the Commission that may be held in
connection therewith.
Very truly yours,
RYAN, RUSSELL, OGDEN & SELTZER LLP
<TABLE> <S> <C>
<ARTICLE> OPUR1
<CIK> 0000077227
<NAME> PENNSYLVANIA ELECTRIC 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> APR-01-1998 APR-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1999
<EXCHANGE-RATE> 1 1
<BOOK-VALUE> PER-BOOK PRO-FORMA
<TOTAL-NET-UTILITY-PLANT> 1,402,439 1,391,155
<OTHER-PROPERTY-AND-INVEST> 84,389 84,389
<TOTAL-CURRENT-ASSETS> 836,290 943,190
<TOTAL-DEFERRED-CHARGES> 2,149,241 2,161,448
<OTHER-ASSETS> 0 0
<TOTAL-ASSETS> 4,472,359 4,580,182
<COMMON> 105,812 105,812
<CAPITAL-SURPLUS-PAID-IN> 285,486 285,486
<RETAINED-EARNINGS> 261,370 <F1> 260,386 <F1>
<TOTAL-COMMON-STOCKHOLDERS-EQ> 652,668 651,684
105,000 <F2> 105,000 <F2>
0 0
<LONG-TERM-DEBT-NET> 596,434 596,434
<SHORT-TERM-NOTES> 0 63,900
<LONG-TERM-NOTES-PAYABLE> 0 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0 0
<LONG-TERM-DEBT-CURRENT-PORT> 80,012 80,012
0 0
<CAPITAL-LEASE-OBLIGATIONS> 0 0
<LEASES-CURRENT> 12,275 12,275
<OTHER-ITEMS-CAPITAL-AND-LIAB> 3,025,970 3,070,877
<TOT-CAPITALIZATION-AND-LIAB> 4,472,359 4,580,182
<GROSS-OPERATING-REVENUE> 1,014,820 1,014,820
<INCOME-TAX-EXPENSE> 32,445 31,298
<OTHER-OPERATING-EXPENSES> 834,028 834,028
<TOTAL-OPERATING-EXPENSES> 866,473 865,326
<OPERATING-INCOME-LOSS> 148,347 149,494
<OTHER-INCOME-NET> 11,969 13,149
<INCOME-BEFORE-INTEREST-EXPEN> 160,316 162,643
<TOTAL-INTEREST-EXPENSE> 62,881 <F3> 66,159 <F3>
<NET-INCOME> 78,485 <F4> 77,534 <F4>
733 733
<EARNINGS-AVAILABLE-FOR-COMM> 77,026 <F5> 76,075 <F5>
<COMMON-STOCK-DIVIDENDS> 245,000 <F6> 245,000 <F6>
<TOTAL-INTEREST-ON-BONDS> 47,450 47,450
<CASH-FLOW-OPERATIONS> (402,775) (402,775)
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
<FN>
<F1> INCLUDES ACCUMULATED OTHER COMPREHENSIVE INCOME OF $9,106.
<F2> REPRESENTS COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED
<F2> SECURITIES.
<F3> INCLUDES AMOUNT FOR COMPANY-OBLIGATED MANDATORILY REDEEMABLE
<F3> PREFERRED SECURITIES OF $9,188.
<F4> INCLUDES AN AFTER-TAX EXTRAORDINARY LOSS OF $18,950.
<F5> INCLUDES LOSS ON PREFERRED STOCK REACQUSITION OF $726.
<F6> REPRESENTS COMMON STOCK DIVIDENDS PAID TO PARENT CORPORATION.
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> OPUR1
<CIK> 0000040779
<NAME> GPU, INC.
<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> APR-01-1998 APR-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1999
<EXCHANGE-RATE> 1 1
<BOOK-VALUE> PER-BOOK PRO-FORMA
<TOTAL-NET-UTILITY-PLANT> 6,727,927 6,716,643
<OTHER-PROPERTY-AND-INVEST> 2,671,009 2,671,009
<TOTAL-CURRENT-ASSETS> 1,829,699 2,534,122
<TOTAL-DEFERRED-CHARGES> 5,705,387 5,720,112
<OTHER-ASSETS> 0 0
<TOTAL-ASSETS> 16,934,022 17,641,886
<COMMON> 331,958 331,958
<CAPITAL-SURPLUS-PAID-IN> 1,012,305 1,012,305
<RETAINED-EARNINGS> 2,389,093 <F1> 2,365,677 <F1>
<TOTAL-COMMON-STOCKHOLDERS-EQ> 3,602,116 <F2> 3,578,700 <F2>
416,500 <F3> 616,500 <F3>
37,741 37,741
<LONG-TERM-DEBT-NET> 4,333,368 4,333,368
<SHORT-TERM-NOTES> 232,378 710,871
<LONG-TERM-NOTES-PAYABLE> 0 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0 0
<LONG-TERM-DEBT-CURRENT-PORT> 431,796 431,796
2,500 2,500
<CAPITAL-LEASE-OBLIGATIONS> 0 0
<LEASES-CURRENT> 113,854 113,854
<OTHER-ITEMS-CAPITAL-AND-LIAB> 7,763,769 7,816,556
<TOT-CAPITALIZATION-AND-LIAB> 16,934,022 17,641,886
<GROSS-OPERATING-REVENUE> 4,279,416 4,279,416
<INCOME-TAX-EXPENSE> 245,873 231,089
<OTHER-OPERATING-EXPENSES> 3,344,338 3,344,338
<TOTAL-OPERATING-EXPENSES> 3,590,211 3,575,427
<OPERATING-INCOME-LOSS> 689,205 703,989
<OTHER-INCOME-NET> 136,401 137,581
<INCOME-BEFORE-INTEREST-EXPEN> 825,606 841,570
<TOTAL-INTEREST-EXPENSE> 380,293 <F4> 419,640 <F4>
<NET-INCOME> 417,065 <F5> 393,682 <F5>
0 0
<EARNINGS-AVAILABLE-FOR-COMM> 417,065 393,682
<COMMON-STOCK-DIVIDENDS> 263,561 263,561
<TOTAL-INTEREST-ON-BONDS> 177,218 177,218
<CASH-FLOW-OPERATIONS> 197,664 197,664
<EPS-BASIC> 3.25 3.08
<EPS-DILUTED> 3.25 3.07
<FN>
<F1> INCLUDES ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS) OF
<F1> ($32,047).
<F2> INCLUDES REACQUIRED COMMON STOCK OF $131,240.
<F3> INCLUDES AMOUNT FOR SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
<F3> SECURITIES OF $330,000 (ACTUAL AND PRO-FORMA) AND TRUST ORIGINATED
<F3> PREFERRED SECURITIES OF $200,000 (PRO-FORMA ONLY).
<F4> INCLUDES AMOUNT FOR SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE
<F4> PREFERRED SECURITIES OF $28,888, TRUST ORIGINATED PREFERRED SECURITIES OF
<F4> $14,500 (PRO-FORMA ONLY), PREFERRED STOCK DIVIDENDS OF SUBSIDIARIES OF
<F4> $10,920 AND LOSS ON PREFERRED STOCK REACQUISITION OF $1,268.
<F5> INCLUDES AN AFTER-TAX EXTRAORDINARY LOSS OF $25,755 AND MINORITY INTEREST
<F5> NET (INCOME)/LOSS OF ($2,493).
</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 March 31, 1999 is as follows:
Actual Pro Forma (3)
----------------- -----------------
Amount % Amount %
---------- ---- ---------- ----
Long-term debt (1) $4,765,164 52.7 $4,765,164 49.1
Notes payable 232,378 2.6 710,871 7.3
Trust originated
preferred securities - - 200,000 2.1
Subsidiary-obligated
mandatorily redeemable
preferred securities 330,000 3.6 330,000 3.4
Preferred stock (2) 126,741 1.4 126,741 1.3
Common equity 3,602,116 39.7 3,578,700 36.8
--------- ----- --------- -----
Total $9,056,399 100.0 $9,711,476 100.0
========= ===== ========= =====
(1) Includes securities due within one year of $431,796.
(2) Includes securities due within one year of $2,500.
(3) The pro forma capitalization excludes $1,034,119 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 54.0%;
Notes payable 6.6%; Trust originated preferred securities 1.8%;
Subsidiary-obligated mandatorily redeemable preferred securities 3.1%;
Preferred stock 1.2%; and Common equity 33.3%.
<TABLE>
Financial Statements
Item 6(b) 1-A
Page 1 of 36
Pennsylvania Electric Company and Subsidiaries
Consolidated Balance Sheets
Actual (unaudited) and Pro Forma (unaudited)
March 31, 1999
-------------------------------------------
<CAPTION>
(In Thousands)
ASSETS Actual Adjustments Pro Forma
------ ----------- ---------
<S> <C> <C> <C>
Utility Plant:
Utility plant in service $ 2,357,242 $ (16,265) $ 2,340,977
Accumulated depreciation (1,003,277) 5,446 (997,831)
---------- ---------- ----------
Net utility plant in service 1,353,965 (10,819) 1,343,146
Construction work in progress 23,847 (465) 23,382
Other, net 24,627 - 24,627
---------- ---------- ----------
Net utility plant 1,402,439 (11,284) 1,391,155
---------- ---------- ----------
Other Property and Investments:
Nuclear decommissioning trusts,
at market 82,099 - 82,099
Other, net 2,290 - 2,290
---------- ---------- ----------
Total other property and investments 84,389 - 84,389
---------- ---------- ----------
Current Assets:
Cash and temporary cash investments 19,123 106,900 126,023
Special deposits 612,180 - 612,180
Accounts receivable:
Customers, net 66,151 - 66,151
Other 40,814 - 40,814
Unbilled revenues 32,947 - 32,947
Materials and supplies, at average cost
or less:
Construction and maintenance 16,973 - 16,973
Fuel 7,418 - 7,418
Deferred income taxes 7,589 - 7,589
Prepayments 33,095 - 33,095
---------- ---------- ----------
Total current assets 836,290 106,900 943,190
---------- ---------- ----------
Deferred Debits and Other Assets:
Regulatory assets, net:
Competitive transition charge 321,922 - 321,922
Other regulatory assets, net 635,197 - 635,197
Deferred income taxes 1,167,038 12,207 1,179,245
Other 25,084 - 25,084
---------- ---------- ----------
Total deferred debits and
other assets 2,149,241 12,207 2,161,448
---------- ---------- ----------
Total Assets $ 4,472,359 $ 107,823 $ 4,580,182
========== ========== ==========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Financial Statements
Item 6(b) 1-A
Page 2 of 36
Pennsylvania Electric Company and Subsidiaries
Consolidated Balance Sheets
Actual (unaudited) and Pro Forma (unaudited)
March 31, 1999
-------------------------------------------
<CAPTION>
(In Thousands)
LIABILITIES AND CAPITALIZATION Actual Adjustments Pro Forma
------ ----------- ---------
<S> <C> <C> <C>
Capitalization:
Common stock $ 105,812 $ - $ 105,812
Capital surplus 285,486 - 285,486
Retained earnings 252,264 (984) 251,280
Accumulated other comprehensive income 9,106 - 9,106
---------- ---------- ----------
Total common stockholder's equity 652,668 (984) 651,684
Cumulative preferred stock - - -
Company-obligated mandatorily redeemable
preferred securities 105,000 - 105,000
Long-term debt 596,434 - 596,434
---------- ---------- ----------
Total capitalization 1,354,102 (984) 1,353,118
---------- ---------- ----------
Current Liabilities:
Securities due within one year 80,012 - 80,012
Notes payable - 63,900 63,900
Obligations under capital leases 12,275 - 12,275
Accounts payable:
Affiliates 57,998 - 57,998
Other 34,906 446 35,352
Taxes accrued 372,106 15,565 387,671
Interest accrued 10,063 3,278 13,341
Other 22,174 - 22,174
---------- ---------- ----------
Total current liabilities 589,534 83,189 672,723
---------- ---------- ----------
Deferred Credits and Other Liabilities:
Deferred income taxes 1,248,111 (3,734) 1,244,377
Unamortized investment tax credits 25,281 (70) 25,211
Three Mile Island Unit 2 future costs 121,761 - 121,761
Nuclear fuel disposal fee 16,254 - 16,254
Nonutility generation contract loss liability 994,700 - 994,700
Other 122,616 29,422 152,038
---------- ---------- ----------
Total deferred credits and other liabilities 2,528,723 25,618 2,554,341
---------- ---------- ----------
Total Liabilities and Capitalization $ 4,472,359 $ 107,823 $ 4,580,182
========== ========== ==========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
Financial Statements
Item 6(b) 1-A
Page 3 of 36
Pennsylvania Electric Company and Subsidiaries
Consolidated Statements of Income and Retained Earnings
Actual (unaudited) and Pro Forma (unaudited)
For The Twelve Months Ended March, 31, 1999
--------------------------------------------------------
(In Thousands)
Actual Adjustments Pro Forma
Operating Revenues $1,014,820 $ - $1,014,820
--------- --------- ---------
Operating Expenses:
Fuel 170,658 - 170,658
Power purchased and interchanged:
Affiliates 4,047 - 4,047
Others 217,712 - 217,712
Other operation and maintenance 274,477 - 274,477
Depreciation and amortization 107,209 - 107,209
Taxes, other than income taxes 59,925 - 59,925
--------- --------- ---------
Total operating expenses 834,028 - 834,028
--------- --------- ---------
Operating Income Before Income Taxes 180,792 - 180,792
Income taxes 32,445 (1,147) 31,298
--------- --------- ----------
Operating Income 148,347 1,147 149,494
--------- --------- ---------
Other Income and Deductions:
Other income, net 32,401 1,905 34,306
Income taxes (20,432) (725) (21,157)
--------- --------- ---------
Total other income and deductions 11,969 1,180 13,149
--------- --------- ---------
Income Before Interest Charges 160,316 2,327 162,643
--------- --------- ---------
Interest Charges:
Long-term debt 47,450 - 47,450
Company-obligated mandatorily
redeemable preferred securities 9,188 - 9,188
Other interest 7,955 3,278 11,233
Allowance for borrowed funds used
during construction (1,712) - (1,712)
--------- --------- ---------
Total interest charges 62,881 3,278 66,159
--------- --------- ---------
Income Before Extraordinary Item 97,435 (951) 96,484
Extraordinary item (net of income taxes
$11,592) (18,950) - (18,950)
--------- --------- ---------
Net Income 78,485 (951) 77,534
Preferred stock dividends 733 - 733
Loss on preferred stock reacquisition 726 - 726
--------- --------- ---------
Earnings Available for Common Stock $ 77,026 $ (951) $ 76,075
========= ========= =========
Retained Earnings:
Balance at beginning of period $ 420,237 $ (33) $ 420,204
Net income 78,485 (951) 77,534
Cash dividends declared on
common stock (245,000) - (245,000)
Cash dividends declared on cumulative
preferred stock (733) - (733)
Loss on preferred stock reacquisition (726) - (726)
Other adjustments, net 1 - 1
-------- --------- ---------
Balance at end of period $ 252,264 $ (984) $ 251,280
======== ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Financial Statements
Item 6(b) 1-A
Page 4 of 36
Pennsylvania Electric Company and Subsidiaries
Pro Forma Journal Entries
----------------------------------------------
(In Thousands)
(1)
Construction work in progress $ 446
Accounts payable $ 446
To record budgeted plant additions for
the period 4/1/99 through 6/30/99 (the
assumed date of sale).
(2)
Accumulated depreciation $ 65
Utility plant in service $ 65
To record expected plant retirements for
the period 4/1/99 through 6/30/99(the
assumed date of sale).
(3)
Retained earnings $ 57
Accumulated depreciation $ 57
To record the balance sheet effect of
depreciation expense for the period
4/1/99 through 6/30/99 (the assumed date
of sale).
(4)
Taxes accrued $ 24
Retained earnings $ 24
To record the balance sheet effect of
the income tax benefit (assuming combined
state and federal tax rate of 41.44%)for
the period 4/1/99 through 6/30/99 (the
assumed date of sale).
<PAGE>
Financial Statements
Item 6(b) 1-A
Page 5 of 36
Pennsylvania Electric Company and Subsidiaries
Pro Forma Journal Entries
----------------------------------------------
(In Thousands)
(5)
Cash and temporary cash investments $ 43,000
Electric plant purchased or sold $ 43,000
To record to account 102 the selling price of the Seneca plant.
(6)
Accumulated depreciation $ 5,438
Electric plant purchased or sold 11,673
Utility plant in service $ 16,200
Construction work in progress 911
To remove from the 102 account the book
value of the Seneca plant.
(7)
Electric plant purchased or sold $ 31,327
Other income, net $ 31,327
To record the gain on the sale of the
Seneca plant.
(8)
Income taxes (Other income & deduct.) $ 12,932
Unamortized investment tax credit 70
Deferred income taxes (noncurrent liab.) 3,734
Taxes accrued $ 16,736
To record the income tax effect of the
Seneca sale.
<PAGE>
Financial Statements
Item 6(b) 1-A
Page 6 of 36
Pennsylvania Electric Company and Subsidiaries
Pro Forma Journal Entries
----------------------------------------------
(In Thousands)
(9)
Other income, net $ 29,422
Deferred income taxes (noncurrent asset) 12,207
Deferred credits - other $ 29,422
Income taxes (Other income & deduct.) 12,207
To record deferred credits that will be
resolved during "phase II" restructuring
proceeding.
(10)
Cash and temporary cash investments $ 63,900
Notes payable $ 63,900
To record the maximum liability associated
with the proposed issuance by Penelec
of $63.9 million of short-term debt.
(Proposed limit on short-term borrowings of
$150 million less $86.1 million of
short-term borrowings outstanding at
12/31/98) (SEC File No.70-7926).
(11)
Other interest $ 3,278
Interest accrued $ 3,278
To record the maximum interest related
to the proposed issuance of short-term
debt at an assumed rate of 5.13% (SEC
File No.70-7926).
(12)
Taxes accrued $ 1,147
Income taxes $ 1,147
To reflect the income tax benefit
associated with interest payments
related to the proposed issuance of
short-term debt (SEC File No.70-7926).
<TABLE>
Financial Statements
Item 6(b) 1-B
Page 7 of 36
GPU, Inc. and Subsidiaries
Consolidated Balance Sheets
Actual (unaudited) and Pro Forma (unaudited)
March 31, 1999
--------------------------------------------
<CAPTION>
(In Thousands)
ASSETS Actual Adjustments Pro Forma
------ ----------- ---------
<S> <C> <C> <C>
Utility Plant:
Utility plant in service $10,800,600 $ (16,265) $10,784,335
Accumulated depreciation (4,373,496) 5,446 (4,368,050)
---------- ---------- ----------
Net utility plant in service 6,427,104 (10,819) 6,416,285
Construction work in progress 139,938 (465) 139,473
Other, net 160,885 - 160,885
---------- ---------- ----------
Net utility plant 6,727,927 (11,284) 6,716,643
---------- ---------- ----------
Other Property and Investments:
Equity investments 717,713 - 717,713
Goodwill, net 828,272 - 828,272
Nuclear decommissioning trusts, at market 729,984 - 729,984
Nuclear fuel deposit trust, at market 119,832 - 119,832
Other, net 275,208 - 275,208
---------- ---------- ----------
Total other property and investments 2,671,009 - 2,671,009
---------- ---------- ----------
Current Assets:
Cash and temporary cash investments 102,501 704,423 806,924
Special deposits 674,807 - 674,807
Accounts receivable:
Customers, net 285,876 - 285,876
Other 244,116 - 244,116
Unbilled revenues 141,434 - 141,434
Materials and supplies, at average
cost or less:
Construction and maintenance 161,698 - 161,698
Fuel 30,356 - 30,356
Investments held for sale 51,342 - 51,342
Deferred income taxes 35,916 - 35,916
Prepayments 101,653 - 101,653
---------- ---------- ----------
Total current assets 1,829,699 704,423 2,534,122
---------- ---------- ----------
Deferred Debits and Other Assets:
Regulatory assets, net:
Competitive transition charge 981,361 - 981,361
Other regulatory assets, net 2,242,112 - 2,242,112
Deferred income taxes 2,273,064 12,207 2,285,271
Other 208,850 2,518 211,368
---------- ---------- ----------
Total deferred debits and other assets 5,705,387 14,725 5,720,112
---------- ---------- ----------
Total Assets $16,934,022 $ 707,864 $17,641,886
========== ========== ==========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Financial Statements
Item 6(b) 1-B
Page 8 of 36
<CAPTION>
GPU, Inc. and Subsidiaries
Consolidated Balance Sheets
Actual (unaudited) and Pro Forma (unaudited)
March 31, 1999
--------------------------------------------
(In Thousands)
LIABILITIES AND CAPITALIZATION Actual Adjustments Pro Forma
- ------------------------------ ------ ----------- ---------
<S> <C> <C> <C>
apitalization:
Common stock $ 331,958 $ - $ 331,958
Capital surplus 1,012,305 - 1,012,305
Retained earnings 2,421,140 (23,416) 2,397,724
Accumulated other comprehensive income/(loss) (32,047) - (32,047)
---------- ---------- ----------
Total 3,733,356 (23,416) 3,709,940
Reacquired common stock, at cost (131,240) - (131,240)
---------- ---------- ----------
Total common stockholders' equity 3,602,116 (23,416) 3,578,700
Cumulative preferred stock:
With mandatory redemption 86,500 - 86,500
Without mandatory redemption 37,741 - 37,741
Subsidiary-obligated mandatorily redeemable
preferred securities 330,000 - 330,000
Trust originated preferred securities - 200,000 200,000
Long-term debt 4,333,368 - 4,333,368
---------- ---------- ----------
Total capitalization 8,389,725 176,584 8,566,309
---------- ---------- ----------
Current Liabilities:
Securities due within one year 434,296 - 434,296
Notes payable 232,378 478,493 710,871
Obligations under capital leases 113,854 - 113,854
Accounts payable 513,211 446 513,657
Taxes accrued 487,210 1,928 489,138
Interest accrued 70,408 24,795 95,203
Deferred energy credits 23,040 - 23,040
Other 259,776 - 259,776
---------- ---------- ----------
Total current liabilities 2,134,173 505,662 2,639,835
---------- ---------- ----------
Deferred Credits and Other Liabilities:
Deferred income taxes 2,979,334 (3,734) 2,975,600
Unamortized investment tax credits 101,057 (70) 100,987
Three Mile Island Unit 2 future costs 486,743 - 486,743
Nonutility generation contract loss liability 1,760,758 - 1,760,758
Other 1,082,232 29,422 1,111,654
---------- ---------- ----------
Total deferred credits and other liabiliti 6,410,124 25,618 6,435,742
---------- ---------- ----------
Total Liabilities and Capitalization $16,934,022 $ 707,864 $17,641,886
========== ========== ==========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Financial Statements
Item 6(b) 1-B
Page 9 of 36
<CAPTION>
GPU, Inc. and Subsidiaries
Consolidated Statements of Income and Retained Earnings
Actual (unaudited) and Pro Forma (unaudited)
For The Twelve Months Ended March 31, 1999
-------------------------------------------------------
(In Thousands)
Actual Adjustments Pro Forma
------ ----------- ---------
<S> <C> <C> <C>
Operating Revenues $4,279,416 $ - $ 4,279,416
--------- --------- ---------
Operating Expenses:
Fuel 406,881 - 406,881
Power purchased and interchanged 1,103,605 - 1,103,605
Deferral of energy and capacity costs, net (3,152) - (3,152)
Other operation and maintenance 1,113,684 - 1,113,684
Depreciation and amortization 512,190 - 512,190
Taxes, other than income taxes 211,130 - 211,130
--------- --------- ---------
Total operating expenses 3,344,338 - 3,344,338
--------- --------- ---------
Operating Income Before Income Taxes 935,078 - 935,078
Income taxes 245,873 (14,784) 231,089
--------- --------- ---------
Operating Income 689,205 14,784 703,989
--------- --------- ---------
Other Income and Deductions:
Allowance for other funds used during construction 661 - 661
Equity in undistributed earnings of affiliates 107,613 - 107,613
Other income, net 52,885 1,905 54,790
Income taxes (24,758) (725) (25,483)
--------- --------- ---------
Total other income and deductions 136,401 1,180 137,581
--------- --------- ---------
Income Before Interest Charges and
Preferred Dividends 825,606 15,964 841,570
--------- --------- ---------
Interest Charges and Preferred Dividends:
Long-term debt 311,024 - 311,024
Subsidiary-obligated mandatorily
redeemable preferred securities 28,888 - 28,888
Other interest 32,078 24,847 56,925
Allowance for borrowed funds used
during construction (3,885) - (3,885)
Dividends on trust originated preferred securities - 14,500 14,500
Preferred stock dividends of subsidiaries, inclusive
of loss on reacquisition of $1,268 in 1999 12,188 - 12,188
--------- --------- ---------
Total interest charges and preferred dividends 380,293 39,347 419,640
--------- --------- ---------
Minority interest net income 2,493 - 2,493
--------- --------- ---------
Income Before Extraordinary Item 442,820 (23,383) 419,437
Extraordinary item (net of income taxes of
$16,300) (25,755) - (25,755)
--------- --------- ---------
Net Income $ 417,065 $ (23,383) $ 393,682
========= ======== =========
Retained Earnings:
Balance at beginning of period $2,274,486 $ (33) $2,274,453
Net income 417,065 (23,383) 393,682
Cash dividends declared on common stock (263,561) - (263,561)
Other adjustments, net (6,850) - (6,850)
--------- -------- ---------
Balance at end of period $2,421,140 $ (23,416) $2,397,724
========= ======== =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 10 of 36
GPU, Inc. and Subsidiaries
Pro Forma Journal Entries
-------------------------
(In Thousands)
(1)
Construction work in progress $ 446
Accounts payable $ 446
To record budgeted plant additions for
the period 4/1/99 through 6/30/99 (the
assumed date of sale).
(2)
Accumulated depreciation $ 65
Utility plant in service $ 65
To record expected plant retirements for
the period 4/1/99 through 6/30/99 (the
assumed date of sale).
(3)
Retained earnings $ 57
Accumulated depreciation $ 57
To record the balance sheet effect of
depreciation expense for the period
4/1/99 through 6/30/99 (the assumed date
of sale).
(4)
Taxes accrued $ 24
Retained earnings $ 24
To record the balance sheet effect of
the income tax benefit (assuming
combined state and federal tax rate of
41.44%) for the period 4/1/99 through
6/30/99 (the assumed date of sale).
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 11 of 36
GPU, Inc. and Subsidiaries
Pro Forma Journal Entries
-------------------------
(In Thousands)
(5)
Cash and temporary cash investments $ 43,000
Electric plant purchased or sold $ 43,000
To record to account 102 the selling
price of the Seneca plant.
(6)
Accumulated depreciation $ 5,438
Electric plant purchased or sold 11,673
Utility plant in service $ 16,200
Construction work in progress 911
To remove from the 102 account the book
value of the Seneca plant.
(7)
Electric plant purchased or sold $ 31,327
Other income, net $ 31,327
To record the gain on the sale of the
Seneca plant.
(8)
Income taxes (Other income & deduct.) $ 12,932
Unamortized investment tax credit 70
Deferred income taxes (noncurrent liab.) 3,734
Taxes accrued $ 16,736
To record the income tax effect of the
Seneca sale.
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 12 of 36
GPU, Inc. and Subsidiaries
Pro Forma Journal Entries
-------------------------
(In Thousands)
(9)
Other income, net 29,422
Deferred income taxes (noncurrent asset) 12,207
Deferred credits - other $ 29,422
Income taxes (Other income & deduct.) 12,207
To record deferred credits that will be
resolved during "phase II" restructuring
proceeding.
(10)
Cash and temporary cash investments 478,493
Notes payable 478,493
To record the maximum liability
associated with the proposed issuance of
$100 million of commercial paper by GPU,
Inc.; and other short-term debt by GPU,
Inc., Jersey Central Power & Light and
Subsidiary (JCP&L),Metropolitan Edison
Company and Subsidiaries (Met-Ed), and
Pennsylvania Electric Company and
Subsidiaries (Penelec). (Proposed limit
on other short-term borrowings of $735.7
million less $357.2 million of
short-term borrowings outstanding at
12/31/98) (SEC File No. 70-7926).
(11)
Other interest $ 24,795
Interest accrued $ 24,795
To record the maximum interest related
to the proposed issuance of $100 million
of GPU, Inc. commercial paper at an
assumed rate of 5.15%; $80.9 million of
other short-term debt at an assumed rate
of 5.23% by GPU, Inc., $163.3 million of
other short-term debt at an assumed rate
of 5.22% by JCP&L, $70.4 million of
other short-term debt at an assumed rate
of 5.13% by Met-Ed, $63.9 million of
other short-term debt at an assumed rate
of 5.13% by Penelec (SEC File No.
70-7926).
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 13 of 36
GPU, Inc. and Subsidiaries
Pro Forma Journal Entries
-------------------------
(In Thousands)
(12)
Taxes accrued $ 8,677
Income taxes $ 8,677
To reflect the income tax benefit
associated with interest payments
related to the proposed issuance of
commercial paper by GPU, Inc. and
short-term debt by GPU, Inc., JCP&L,
Met-Ed, and Penelec (SEC File No.
70-7926).
(13)
Cash and temporary cash investments $200,000
Trust originated preferred securities $200,000
To reflect the proposed issuance of $200
million trust originated preferred
securities from time to time through
December 31, 2000 by JCP&L Capital
Trust. The trust originated preferred
securities and dividend payments are to
be unconditionally guaranteed by Jersey
Central Power & Light Company (SEC File
No. 70-9399).
(14)
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).
(15)
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).
<PAGE>
Financial Statements
Item 6(b) 1-B
Page 14 of 36
GPU, Inc. and Subsidiaries
Pro Forma Journal Entries
-------------------------
(In Thousands)
(16)
Dividends on trust originated preferred securities $14,500
Cash and temporary cash investments $ 14,500
To reflect the annual dividends paid on
the trust originated preferred
securities by JCP&L Capital Trust at an
assumed rate of 7.25% (SEC File No.
70-9399).
(17)
Taxes accrued $ 6,107
Income taxes $ 6,107
To reflect the net decrease in the
provision for Federal and State income
taxes at the rate of 40.85% attributable
to interest payments on the proposed
issuance of $206,200 subordinated
debentures by Jersey Central Power &
Light Company to JCP&L Capital II L.P.
(SEC File No. 70-9399).
<PAGE>
Financial Statements
Item 6(b)
Page 15 of 36
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
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."
These notes should be read in conjunction with the notes to consolidated
financial statements included in the 1998 Annual Report on Form 10-K. For
disclosures required by generally accepted accounting principles, see the 1998
Annual Report on Form 10-K.
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. New Jersey legislation enacted in 1999, among
other things, also provides for the recovery of 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 appeal. In the third quarter of
1998, as a result of the amended
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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 1997, JCP&L filed with the New Jersey Board of Public Utilities (NJBPU)
its proposed restructuring plan for a competitive electric marketplace in New
Jersey as required by the New Jersey Energy Master Plan (NJEMP) released by the
NJBPU. In this plan, JCP&L estimated that its total above-market costs related
to power purchase commitments and company-owned generation, on a present value
basis, was $1.6 billion excluding above-market generation costs related to
Oyster Creek. These estimates were subject to significant uncertainties
including the future market price of both electricity and other competitive
energy sources, as well as the timing of when these above-market costs become
stranded due to customers choosing another supplier. JCP&L proposed recovery of
its remaining Oyster Creek plant investment as a regulatory asset, through a
nonbypassable charge to customers. At March 31, 1999, JCP&L's net investment in
Oyster Creek was $672 million.
In 1999, New Jersey enacted legislation to deregulate the state's
electricity market. The legislation generally provides for customer choice of
electric generation supplier for all consumers beginning no later than August 1,
1999; a 5% rate reduction for all customers beginning August 1, 1999 with
another 5% rate reduction to be phased in over the next three years (which must
be maintained for one year after the end of the three year phase-in); the
aggregation of electric generation service by a government or private
aggregator; the unbundling of customer bills; the ability to recover stranded
costs and the ability to securitize stranded costs.
On April 14, 1999, JCP&L entered into a settlement agreement with several
parties to its stranded cost and rate unbundling proceedings pending before the
NJBPU. The settlement agreement, which is subject to NJBPU approval, provides,
among other things, for a 5% rate reduction commencing August 1, 1999, a 5% rate
refund from April 30, 1997 rates for service rendered on or after August 1,
2002, and for average customer shopping credits beginning at 4.9 cents per
kilowatt hour and increasing to 5.16 cents per kilowatt hour in 2003 for
customers who choose an alternate supplier. The settlement agreement also allows
for the application of the net proceeds from JCP&L's generation asset sales to
reduce stranded costs, the securitization of approximately $525 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.
If approved by the NJBPU, the settlement agreement would result in an
approximately $195 million reduction in GPU's 1999 pre-tax earnings, or about
$0.90 per share (after-tax). The NJBPU is expected to act on the settlement
agreement in May 1999. There can be no assurance as to the outcome of this
matter.
To the extent JCP&L is not permitted to recover its stranded costs in
whole or in part, it would result in the recording of liabilities for
above-market nonutility generator (NUG) costs, decommissioning costs, and
write-downs of uneconomic generation plant and regulatory assets recorded in
accordance with Statement of Financial Accounting Standards No. 71 (FAS 71),
"Accounting for the Effects of
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Certain Types of Regulation," 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). The
inability to recover these stranded costs could have a material adverse effect
on GPU's results of operations.
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 and the GPUI Group.
In March 1999, Penelec completed the sale of its 50% interest in the Homer
City Station to EME Homer City Generation, L.P., a subsidiary of Edison Mission
Energy for a purchase price of 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 November 1998, the GPU Energy companies entered into definitive
agreements with Sithe Energies and FirstEnergy Corporation 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 $604 million). The sales are expected to be completed in
mid-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 March 31, 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 NUGs for the purchase of energy and
capacity for remaining periods of up to 22 years. The following table shows
actual payments from 1996 through March 31, 1999, and estimated payments
thereafter through 2003.
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Payments Under NUG Agreements
(in millions)
Total JCP&L Met-Ed Penelec
----- ----- ------ -------
1996 $730 $370 $168 $192
1997 759 384 172 203
1998 788 403 174 211
1999 802 404 170 228
2000 816 404 169 243
2001 805 413 166 226
2002 819 425 169 225
2003 827 422 173 232
As of March 31, 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 1998 PaPUC Restructuring Orders and the legislation in New Jersey
provide for (and JCP&L's settlement agreement contemplates) full recovery of the
above-market costs of NUG agreements. 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. 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. There can be no assurance as to the
outcome of this matter.
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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.
The GPU Energy companies are recovering certain of their NUG costs
(including certain buyout costs) from customers. The Restructuring Orders
provide assurance of full recovery of these costs for Met-Ed and Penelec. Met-Ed
and Penelec recorded a liability of $1.8 billion for their above-market NUG
costs, which is fully offset by Regulatory assets, net on the Consolidated
Balance Sheets. The restructuring legislation in New Jersey includes provisions
for the recovery of costs under NUG agreements and NUG buyout costs.
ACCOUNTING MATTERS
------------------
The Met-Ed and Penelec Restructuring Orders received in 1998, essentially
deregulated the electric generation portion of Met-Ed and Penelec's businesses.
Accordingly, in 1998 Met-Ed and Penelec discontinued the application of FAS 71
and adopted the provisions of FAS 101 and EITF Issue 97-4 with respect to their
electric generation operations. The transmission and distribution portion of
Met-Ed and Penelec's operations continue to be subject to the provisions of FAS
71.
JCP&L expects to discontinue the application of FAS 71 and adopt FAS 101
and EITF Issue 97-4 for its electric generation operations no later than its
receipt of NJBPU approval of its restructuring plans, which is expected in May
1999.
Regulatory assets, net as reflected in the March 31, 1999 Consolidated
Balance Sheets in accordance with the provisions of FAS 71 and EITF Issue 97-4
were as follows:
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GPU, Inc. and Subsidiary Companies (in thousands)
March 31,
1999
---------
Competitive transition charge per PaPUC Order $ 981,361
=========
Other regulatory assets, net:
Reserve for generation divestiture (JCP&L) $ 135,700
Phase II reserve for
generation divestiture (Met-Ed and Penelec) 763,388
Income taxes recoverable through future rates 399,694
Income taxes refundable through future rates (51,505)
Net investment in TMI-2 65,049
TMI-2 decommissioning costs 116,935
Nonutility generation contract buyout costs 114,959
Unamortized property losses 78,882
Other postretirement benefits 72,454
Environmental remediation 50,347
N.J. unit tax 31,528
Unamortized loss on reacquired debt 31,024
Load and demand-side management programs 6,427
DOE enrichment facility decommissioning 28,205
Nuclear fuel disposal fee 19,857
Storm damage 29,968
Deferred nonutility generation costs
not in current rates 17,337
Future nonutility generation costs not in CTC 369,290
Public utility realty taxes (PURTA) 7,171
Other regulatory liabilities (53,274)
Other regulatory assets 8,676
---------
Total other regulatory assets, net $2,242,112
==========
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JCP&L (in thousands)
March 31,
1999
--------
Other regulatory assets, net:
Reserve for generation divestiture $ 135,700
Income taxes recoverable through future rates 141,060
Income taxes refundable through future rates (34,708)
Net investment in TMI-2 65,049
TMI-2 decommissioning costs 16,106
Nonutility generation contract buyout costs 114,959
Unamortized property losses 78,882
Other postretirement benefits 45,657
Environmental remediation 50,347
N.J. unit tax 31,528
Unamortized loss on reacquired debt 25,310
Load and demand-side management programs 6,427
DOE enrichment facility decommissioning 17,615
Nuclear fuel disposal fee 19,857
Storm damage 29,968
Other regulatory liabilities (52,927)
Other regulatory assets 3,928
---------
Total other regulatory assets, net $ 694,758
=========
Met-Ed (in thousands)
March 31,
1999
--------
Competitive transition charge per PaPUC Order $ 659,439
=========
Other regulatory assets, net:
Phase II reserve for
generation divestiture $ 424,642
Income taxes recoverable through future rates 112,425
Income taxes refundable through future rates (10,584)
TMI-2 decommissioning costs 67,776
Other postretirement benefits 26,797
Unamortized loss on reacquired debt 2,800
DOE enrichment facility decommissioning 7,198
Deferred nonutility generation costs
not in current rates 4,241
Future nonutility generation costs not in CTC 271,270
Public utility realty taxes (PURTA) 3,315
Other regulatory liabilities (83)
Other regulatory assets 2,360
---------
Total other regulatory assets, net $ 912,157
=========
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Penelec (in thousands)
March 31,
1999
--------
Competitive transition charge per PaPUC Order $ 321,922
=========
Other regulatory assets, net:
Phase II reserve for
generation divestiture 338,746
Income taxes recoverable through future rates 146,209
Income taxes refundable through future rates (6,213)
TMI-2 decommissioning costs 33,053
Unamortized loss on reacquired debt 2,914
DOE enrichment facility decommissioning 3,392
Deferred nonutility generation costs
not in current rates 13,096
Future nonutility generation costs not in CTC 98,020
Public utility realty taxes (PURTA) 3,856
Other regulatory liabilities (264)
Other regulatory assets 2,388
---------
Total other regulatory assets, net $ 635,197
=========
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.
The restructuring proceeding in New Jersey could result in substantial
disallowance of certain capital additions; the disallowance of certain stranded
costs; reduction in cost of capital allowances on certain elements of plant and
cost deferrals; and tariff rate unbundling reflecting an allocation of costs to
the transmission and distribution activities lower than that proposed by JCP&L.
Management believes that a negative outcome of that proceeding could have a
material adverse effect on GPU's earnings.
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
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
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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, 1999. GPU will adopt FAS 133 in the first
quarter of 2000 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. At March 31, 1999, 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
----- ------------
March 31, 1999
--------------
JCP&L $18 $672
Met-Ed 35 -
Penelec 17 -
-- ---
Total $70 $672
== ===
JCP&L's net investment in TMI-2 at March 31, 1999 was $65 million. 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.
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.
In addition to the continued operation of the Oyster Creek facility,
JCP&L has been exploring the sale or early retirement of the plant to mitigate
costs associated
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with its continued operation. GPU does not anticipate making a final decision on
the plant before the NJBPU rules on JCP&L's restructuring filing. If a decision
is made to retire the plant early, retirement would likely occur in 2000.
Although management believes that the current rate structure would allow for the
recovery of and return on its net investment in the plant and provide for
decommissioning costs, there can be no assurance that such costs will be fully
recoverable.
In 1998, GPU entered into definitive agreements to sell TMI-1 to AmerGen,
a joint venture between PECO Energy and British Energy. Highlights of the
agreements are presented in the Competitive Environment and Rate Matters section
of Management's Discussion and Analysis.
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 "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.
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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 $107 $331
Met-Ed 135 215 -
Penelec 68 107 -
--- --- ---
Total $271 $429 $331
=== === ===
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
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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 $349 $425 $577
Nonradiological cost of removal 86 34* 31
--- --- ---
Total $435 $459 $608
=== === ===
* Net of $12.5 million spent as of March 31, 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 $616
million ($585 million for radiological decommissioning and $31 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.
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, as well as certain Internal Revenue Service rulings, 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),
(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.
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Page 27 of 36
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.
The PaPUC has granted Met-Ed annual revenues for TMI-1 retirement costs
of $8.5 million based on both the NRC funding target for radiological
decommissioning costs and a 1988 site-specific study for nonradiological costs
of removal. The PaPUC also granted Penelec annual revenues of $4.2 million for
its share of TMI-1 retirement costs, on a basis consistent with that granted
Met-Ed. In the Restructuring Orders, the PaPUC granted recovery of an interim
level of TMI-1 decommissioning costs as part of the Competitive Transition
Charge (CTC). 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 first 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 three months ended March 31, 1999:
JCP&L $1.3 $5.6
Met-Ed 0.4 -
Penelec 0.2 -
--- ---
$1.9 $5.6
=== ===
(in millions)
Oyster
TMI-1 Creek
----- -----
Accumulated depreciation provision at March 31, 1999:
JCP&L $ 48 $284
Met-Ed 84 -
Penelec 39 -
--- ---
$171 $284
=== ===
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
March 31, 1999 are as follows:
<PAGE>
Financial Statements
Item 6(b)
Page 28 of 36
(in millions)
GPU JCP&L Met-Ed Penelec
--- ----- ------ -------
March 31, 1999 $487 $122 $243 $122
These amounts are based upon the 1995 site-specific study estimates (in 1999
dollars) 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 March 31, 1999, 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 $487 million liability at March 31, 1999 is $245 million
(JCP&L $19 million; Met-Ed $143 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 $277 million (JCP&L $107
million; Met-Ed $126 million; Penelec $44 million) in trust funds for TMI-2 and
included in Nuclear decommissioning trusts, at market on the Consolidated
Balance Sheets. Earnings on trust fund deposits are included in amounts shown on
the Consolidated Balance Sheets under Regulatory assets, net. TMI-2
decommissioning costs charged to depreciation expense in the first quarter of
1999 amounted to $1.5 million (JCP&L $573 thousand; Met-Ed $700 thousand;
Penelec $210 thousand).
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 March 31, 1999, the accident-related portion of TMI-2 radiological
decommissioning costs is considered to be $76 million (JCP&L $19 million; Met-Ed
$38 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 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
$76 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.
<PAGE>
Financial Statements
Item 6(b)
Page 29 of 36
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 17-week waiting period at $3.5
million per week, and after 23 weeks of an outage, continues for three years
beginning at $1.8 million and $2.6 million per week for the first year for
Oyster Creek and TMI-1, respectively, decreasing to 80% of such amounts for
years two and three.
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
<PAGE>
Financial Statements
Item 6(b)
Page 30 of 36
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.
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
<PAGE>
Financial Statements
Item 6(b)
Page 31 of 36
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 Court has refused to dismiss
the complaint 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 March 31, 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 March 31, 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 March 31, 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 March 31, 1999.
JCP&L has entered into agreements with the New Jersey Department of
Environmental Protection for the investigation and remediation of 17 formerly
owned MGP sites. JCP&L has also entered into various cost-sharing agreements
with other utilities for most of the sites. As of March 31, 1999, JCP&L has
spent approximately $32 million in connection with the cleanup of these sites.
In addition, JCP&L has recorded an estimated environmental liability of $52
million relating to expected future costs of these sites (as well as two other
properties). This estimated liability is based upon ongoing site investigations
and remediation efforts, which generally involve capping the sites and pumping
and treatment of ground water. Moreover, the cost to
<PAGE>
Financial Statements
Item 6(b)
Page 32 of 36
clean up these sites could be materially in excess of $52 million due to
significant uncertainties, including changes in acceptable remediation methods
and technologies.
In 1997, JCP&L's request to establish a Remediation Adjustment Clause for
the recovery of MGP remediation costs was approved by the NJBPU. At March 31,
1999, JCP&L had recorded on its Consolidated Balance Sheet a regulatory asset of
$44 million. JCP&L is continuing to pursue reimbursement from its insurance
carriers for remediation costs already spent and for future estimated costs. In
1994, JCP&L commenced litigation in the New Jersey Superior Court against
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 Electric and the GPUI Group:
- --------------------------------
At March 31, 1999, GPU Electric and the GPUI Group had investments
totaling approximately $3.2 billion and $90 million, respectively, in businesses
and facilities located in foreign countries. Although management attempts to
mitigate the risk of investing in certain foreign countries by securing
political risk insurance, GPU Electric and the GPUI Group face additional risks
inherent to operating in such locations, including foreign currency
fluctuations.
At March 31, 1999, GPU, Inc.'s aggregate investment in GPU Electric and
the GPUI Group was $398 million and $242 million, respectively; GPU, Inc. has
also guaranteed up to an additional $1.07 billion and $33 million of GPU
Electric and GPUI Group obligations, respectively. Of this amount, $1.07 billion
is included in Long-term debt and Securities due within one year on GPU's
Consolidated Balance Sheet at March 31, 1999, and $26 million relates to various
other obligations of GPU Electric and the GPUI Group.
Through its 50% ownership interest in Midlands, GPU Electric has invested
in a power project in Pakistan (Uch Power Project) which was originally
scheduled to begin commercial operation in late 1998. The Uch Power Project is a
586 MW facility of which Midlands is a 40% owner. Construction of the Uch Power
Project is complete, but commercial operation was delayed pending resolution of
a dispute with the Pakistani government. In July 1998, the Pakistani
government-owned utility issued a notice of intent to terminate certain key
project agreements. The notice asserted that various forms of corruption were
involved in the original granting of the agreements to the Uch investors by the
predecessor Pakistani government. The Uch investors, including Midlands,
strongly deny the allegations and are continuing to explore remedies to the
situation. GPU Electric believes that similar notices were received by a number
of other independent power projects in Pakistan. In December 1998, the Pakistani
government offered to withdraw these notices.
GPU Electric's current investment in the Uch Power Project is
approximately $36 million, and project lenders could require GPU Electric to
make additional capital contributions to the project of approximately $8 million
under certain conditions. There can be no assurance as to the outcome of this
matter.
<PAGE>
Financial Statements
Item 6(b)
Page 33 of 36
Lake Cogen, Ltd. (Lake), an independent power project owned by GPU
International, Inc., is pursuing legal proceedings against Florida Power
Corporation (FPC) to resolve an ongoing disagreement involving the pricing under
the power purchase agreement between Lake and FPC. In April 1999, the Lake
County Circuit Court issued an order finding that FPC breached the avoided cost
payment provisions of the power purchase agreement and ruled that FPC must pay
Lake firm power prices for all on-peak hours and as-available rates for all
off-peak hours. In addition, the court dismissed Lake's claim that FPC had
improperly determined its avoided fuel cost and, at the same time, dismissed
FPC's counterclaims against Lake. Management is currently unable to determine
the financial consequences of the ruling, and accordingly, Lake has filed a
Motion for Clarification and Reconsideration, which is currently pending.
Separately, the Florida Public Service Commission (FPSC) dismissed a petition
filed by FPC requesting that the FPSC assert jurisdiction over the contract
dispute. FPC has appealed the dismissal to the Florida Supreme Court. There can
be no assurance as to the outcome of this matter. GPU International, Inc.'s
total investment in Lake, including guaranteed lease payments, is approximately
$20 million.
Other:
- ------
GPU's capital programs, for which substantial commitments have been
incurred and which extend over several years, contemplate expenditures of $436
million (JCP&L $183 million; Met-Ed $97 million; Penelec $98 million; Other $58
million) during 1999.
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 the purchasers, upon the closings of the sales of the GPU Energy
companies' fossil generation facilities.
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.
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
<PAGE>
Financial Statements
Item 6(b)
Page 34 of 36
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 December 31, 1998, GPUN has
made payments of $6 million. JCP&L is recovering the costs to construct this
facility from customers, and $29 million has been collected to date. 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. The Siting Board
intended to return the unused funds to the generators, but the Governor has
overruled this decision. Legislation is pending in New Jersey, however, that
would mandate returning the unused funds to the generators, of which GPUN's
share is approximately $2.6 million. GPUN cannot determine at this time what
effect, if any, this matter will have on its operations.
Pennsylvania, Delaware, Maryland and West Virginia have established the
Appalachian Compact to construct a facility for the disposal of low-level
radwaste in those states, including low-level radwaste from TMI-1. To date,
pre-construction costs of $33 million, out of an estimated $88 million, have
been paid. Eleven nuclear plants have so far shared equally in the
pre-construction costs; GPUN has contributed $3 million on behalf of TMI-1.
Pennsylvania has 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
annual effect on net income of the performance standard charge at a 40% capacity
factor would be approximately $11 million before tax. While a capacity factor
below 40% would generate no specific monetary charge, it would require the issue
to be brought before the NJBPU for review. The annual measurement period, which
begins in March of each year, coincides with that used for the LEAC. The
Electric Discount and Energy Competition Act eliminates the nuclear performance
standard, effective with the implementation of retail choice on August 1, 1999.
At March 31, 1999, GPU, Inc. and consolidated affiliates had 9,263
employees worldwide (JCP&L 2,233; Met-Ed 2,618; Penelec 1,601; GPU Electric 928;
<PAGE>
Financial Statements
Item 6(b)
Page 35 of 36
the GPUI Group 133; all other companies 1,750), of which 8,300 employees were
located in the U.S. The majority of the U.S. workforce is employed by the GPU
Energy companies, of which approximately 4,400 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.
2. ACCOUNTING FOR EXTRAORDINARY AND NON-RECURRING ITEMS
Pennsylvania Restructuring Write-offs
- -------------------------------------
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 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 Financial Accounting Standards Board's (FASB)
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 to a competitive electric generation marketplace.
The EITF also concluded that utilities can continue to carry previously recorded
regulated assets, as well as any newly established regulated assets (including
those related to generation), on their balance sheets if regulators have
guaranteed a regulated cash flow stream to recover the cost of these assets.
In 1998, Met-Ed and Penelec received PaPUC Restructuring Orders
(Restructuring Orders) which, among other things, essentially remove from
regulation the costs associated with providing electric generation service to
Pennsylvania consumers, effective January 1, 1999. Accordingly, in 1998 Met-Ed
and Penelec discontinued the application of FAS 71 and adopted the provisions of
FAS 101 and EITF Issue 97-4 with respect to their electric generation
operations. The transmission and distribution portion of Met-Ed and Penelec's
operations continue to be subject to the provisions of FAS 71. JCP&L expects to
discontinue the application of FAS 71 and adopt FAS 101 and EITF Issue 97-4 for
its electric generation operations no later than its receipt of NJBPU approval
of its restructuring plans, which is expected in the second quarter
<PAGE>
Financial Statements
Item 6(b)
Page 36 of 36
of 1999. Also, as a result of the Restructuring Orders, Met-Ed and Penelec
recorded non-recurring charges for customer refunds of 1998 revenues, and for
the establishment of a sustainable energy fund.
For the twelve months ended March 31, 1999, the net effect on earnings of
the PaPUC's Restructuring Orders was as follows:
(in millions, except per share data)
Met-Ed Penelec Total
------ ------- -----
Write-off of existing Pennsylvania
generation regulatory assets $ 8.0 $ 2.8 $ 10.8
Write-off of existing FERC
generation regulatory assets 1.5 17.6 19.1
Write-off of FERC portion of TMI-1
impairment and TMI-1 decommissioning 2.0 10.2 12.2
------- ------- -------
Extraordinary loss (pre-tax)
due to FAS 101 write-off 11.5 30.6 42.1
Obligation to refund 1998 revenues 27.2 29.2 56.4
Establishment of sustainable energy fund 5.7 6.4 12.1
------- ------- -------
Total pre-tax write-off 44.4 66.2 110.6
Income tax benefit (18.4) (26.4) (44.8)
------- ------- -------
Total after-tax write-off $ 26.0 $ 39.8 $ 65.8
======= ======= =======
GPU loss per average common share
due to Pennsylvania restructuring $ 0.21 $ 0.31 $ 0.52
======= ======= =======
FAS 121 Impairment Tests on Generation Facilities
- -------------------------------------------------
In accordance with Statement of Financial Accounting Standards No. 121
(FAS 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", impairment tests performed by the GPU
Energy companies on the March 31, 1999 net book value of their generation
facilities determined that the net investment in TMI-1 was impaired, resulting
in a write-down of $518 million (pre-tax) to reflect TMI-1's fair market value.
Of the amount written down for TMI-1, $508 million was established as a
regulatory asset because management believes it is probable of recovery in the
restructuring process and $10 million (the FERC jurisdictional portion) was
charged to expense as an extraordinary item in the twelve months ended March 31,
1999.
