10-Q 1 0001.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 ------------- OR ---- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ----------------- to ------------- Commission Registrant, State of Incorporation, I.R.S. Employer File Number Address and Telephone Number Identification No. ----------- ----------------------------------- ------------------ 1-6047 GPU, Inc. 13-5516989 (a Pennsylvania corporation) 300 Madison Avenue Morristown, New Jersey 07962-1911 Telephone (973) 401-8200 1-3141 Jersey Central Power & Light Company 21-0485010 (a New Jersey corporation) 2800 Pottsville Pike Reading, Pennsylvania 19640-0001 Telephone (610) 929-3601 1-446 Metropolitan Edison Company 23-0870160 (a Pennsylvania corporation) 2800 Pottsville Pike Reading, Pennsylvania 19640-0001 Telephone (610) 929-3601 1-3522 Pennsylvania Electric Company 25-0718085 (a Pennsylvania corporation) 2800 Pottsville Pike Reading, Pennsylvania 19640-0001 Telephone (610) 929-3601 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of each of the registrant's classes of voting stock, as of July 31, 2000, was as follows: Shares Registrant Title Outstanding ---------- ----- ----------- GPU, Inc. Common Stock, $2.50 par value 121,285,419 Jersey Central Power & Light Company Common Stock, $10 par value 15,371,270 Metropolitan Edison Company Common Stock, no par value 859,500 Pennsylvania Electric Company Common Stock, $20 par value 5,290,596 GPU, Inc. and Subsidiary Companies Quarterly Report on Form 10-Q June 30, 2000 Table of Contents Page PART I - Financial Information Combined Management's Discussion and Analysis of Financial Condition and Results of Operations 1 Consolidated Financial Statements: GPU, Inc. Balance Sheets 24 Statements of Income 26 Statements of Cash Flows 27 Jersey Central Power & Light Company Balance Sheets 28 Statements of Income 30 Statements of Cash Flows 31 Metropolitan Edison Company Balance Sheets 32 Statements of Income 34 Statements of Cash Flows 35 Pennsylvania Electric Company Balance Sheets 36 Statements of Income 38 Statements of Cash Flows 39 Combined Notes to Consolidated Financial Statements 40 PART II - Other Information 62 Signatures 63 The financial statements (not examined by independent accountants) reflect all adjustments (which consist of only normal recurring accruals), which are in the opinion of management, necessary for a fair statement of the results for the interim periods presented. This combined Quarterly Report on Form 10-Q is separately filed by GPU, Inc., Jersey Central Power & Light Company, Metropolitan Edison Company and Pennsylvania Electric Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. None of these registrants make any representations as to information relating to the other registrants. This combined Form 10-Q supplements and updates the 1999 Annual Report on Form 10-K, filed by the individual registrants with the Securities and Exchange Commission and should be read in conjunction therewith. This Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements made that are not historical facts are forward-looking and, accordingly, involve estimates, forecasts, risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Although such forward-looking statements have been based on reasonable assumptions, there is no assurance that the expected results will be achieved. Some of the factors that could cause actual results to differ materially include, but are not limited to: the effects of regulatory decisions; changes in law and other governmental actions and initiatives; the impact of deregulation and increased competition in the industry; industry restructuring; expected outcomes of legal proceedings; the completion of generation asset divestiture; energy prices and availability; and uncertainties involved with foreign operations including political risks and foreign currency fluctuations. GPU, Inc. and Subsidiary Companies COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GPU, Inc. owns all the outstanding common stock of three domestic electric utilities -- Jersey Central Power & Light Company (JCP&L), Metropolitan Edison Company (Met-Ed) and Pennsylvania Electric Company (Penelec). The customer service function, transmission and distribution operations and the operations of the remaining non-nuclear generating facilities of these electric utilities are conducting business under the name GPU Energy. JCP&L, Met-Ed and Penelec considered together are referred to as the "GPU Energy companies." The nuclear generation operations of GPU Energy are conducted by GPU Nuclear, Inc. (GPUN). GPU Capital, Inc. and GPU Electric, Inc. and their subsidiaries own, operate and fund the acquisition of electric distribution and gas transmission 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 (US) and foreign countries and are referred to as the "GPUI Group." Other subsidiaries of GPU, Inc. include GPU Advanced Resources, Inc. (GPU AR), which is involved in retail energy sales; GPU Telcom Services, Inc. (GPU Telcom), which is engaged in telecommunications-related businesses; MYR Group Inc. (MYR), which is a utility infrastructure construction services company; and GPU Service, Inc. (GPUS), which provides legal, accounting, financial and other services to the GPU companies. All of these companies considered together are referred to as "GPU." GPU RESULTS OF OPERATIONS EARNINGS PER SHARE CONTRIBUTION: Three Months Ended Six Months Ended (on a diluted basis) June 30, June 30, --------------------- --------------- 2000 1999 Change 2000 1999 Change ---- ---- ------- ---- ---- ------ Operations: GPU Energy companies * $ 0.45 $ 0.79 $(0.34) $ 1.24 $ 1.73 $(0.49) GPU Electric 0.27 0.10 0.17 0.56 0.39 0.17 GPUI Group -- (0.02) 0.02 0.03 0.02 0.01 GPU AR -- -- -- 0.01 0.01 -- MYR 0.01 -- 0.01 0.01 -- 0.01 GPU, Inc. (Corporate) (0.04) (0.03) (0.01) (0.08) (0.04) (0.04) ----- ----- ----- ----- ----- ----- Total operations 0.69 0.84 (0.15) 1.77 2.11 (0.34) Non-recurring items: GPU Energy companies -- (0.54) 0.54 -- (0.32) 0.32 GPU Electric (2.43) 0.08 (2.51) (2.43) 0.08 (2.51) ----- ----- ----- ----- ----- ----- Total $(1.74) $ 0.38 $(2.12) $(0.66) $ 1.87 $(2.53) ===== ===== ===== ===== ===== ===== * Includes GPU Telcom GPU's second quarter 2000 net income before non-recurring items was $84 million, or $0.69 per share, against income before non-recurring items of $106 million, or $0.84 per share in the second quarter of 1999. The lower 2000 second quarter income before non-recurring items was primarily due to the impact of electric utility restructuring in New Jersey and Pennsylvania, which has included GPU's sale of its generation facilities, higher energy costs in Pennsylvania, and lower electric delivery rates charged to customers in New Jersey. Partially offsetting the decrease was higher GPU Electric 1 earnings primarily due to the acquisition of the remaining 50% of Midlands Electricity plc (conducting business under the name GPU Power UK) in July 1999. After taking into account the 2000 and 1999 non-recurring items, GPU recorded a net loss of $211 million, or $1.74 per share, in the second quarter 2000, compared with income of $47 million, or $0.38 per share, for same quarter in 1999. The 2000 quarterly results included a non-recurring loss of $295 million after-tax, or $2.43 per share, for the sale of GPU's Australian electric transmission company, GPU PowerNet. The 1999 comparable period included a non-recurring charge of $68 million after-tax, or $0.54 per share, resulting from the New Jersey Board of Public Utilities' (NJBPU) restructuring order (Summary Order) issued to JCP&L, and a gain on the sale of the GPU Power UK supply business of $9 million after-tax, or $0.08 per share. For the six months ended June 30, 2000, income before non-recurring items was $215 million, or $1.77 per share, against $269 million, or $2.11 per share for the first half of 1999. The same factors affecting the comparable quarterly results also affected the year to date comparison. Including non-recurring items, GPU recorded a net loss for the first six months of 2000 of $80 million, or $0.66 per share, against net income of $238 million, or $1.87 per share, in the first half of 1999. The 2000 net loss was after the non-recurring charge of $295 million, or $2.43 per share, described above. Net income for the first half of 1999 was after the non-recurring items noted above for the second quarter 1999, as well as a gain of $28 million after-tax, or $0.22 per share, for the portion of the gain on the sale of Penelec's interest in the Homer City Generating Station related to wholesale operations. OPERATING REVENUES: Operating revenues for the second quarter 2000 increased $387.7 million to $1.3 billion, as compared to the second quarter 1999. For the six months ended June 30, 2000, operating revenues increased $495.4 million to $2.5 billion, as compared to the same period last year. The components of the changes are as follows: 2000 vs. 1999 (in millions) -------------------------------------- Three Months Ended Six Months Ended June 30, June 30, ------------------ ----------------- GPU Energy companies: Kilowatt-hour (KWH) revenues $ (95.2) $(287.8) Energy and restructuring-related Revenues (NJ) 115.4 179.6 Competitive transition charge (CTC) revenues (PA) (1.7) 11.6 Obligation to refund revenues (NJ) 115.0 115.0 GPU Telcom revenues 0.8 0.7 Other revenues (0.5) (1.7) ------ ------ Total GPU Energy companies 133.8 17.4 GPU Electric 162.1 372.7 GPUI Group (1.8) 4.8 GPU AR (4.5) 2.4 MYR 98.1 98.1 ------ ------ Total increase $ 387.7 $ 495.4 ====== ====== 2 GPU Energy companies Kilowatt-hour revenues The decrease for the three and six months ended June 30, 2000 was primarily due to lower generation-related revenues of approximately $136 million year to date as a result of more Pennsylvania and New Jersey customers choosing another electric energy supplier, and lower rates charged to customers in New Jersey resulting in a decrease in revenues of approximately $47 million year to date. Also contributing to the decrease is the fact that certain JCP&L revenues related to stranded cost recovery are now included under energy and restructuring-related revenues, effective August 1, 1999. Energy and restructuring-related revenues (JCP&L) ------------------------------------------------- Changes in energy and restructuring-related revenues do not affect earnings as they are offset by corresponding changes in expense. The increase for the three and six months ended June 30, 2000 was primarily due to the inclusion of revenues, effective August 1, 1999, for the recovery of stranded costs due to restructuring in New Jersey. In 1999, JCP&L changed its estimate for unbilled revenue, which resulted in the recording of additional revenues, partially offsetting the increase in the six-month period. Competitive transition charge (CTC) revenues (Met-Ed and Penelec) ----------------------------------------------------------------- CTC revenues represent Pennsylvania stranded cost recoveries permitted by the Pennsylvania Public Utility Commission (PaPUC) in accordance with Met-Ed and Penelec's final Restructuring Orders effective January 1, 1999. Changes in CTC revenues generally do not affect earnings as they are offset by corresponding changes in expense. Obligation to refund revenues (JCP&L) The increase for the three and six month periods was due to the absence this year of a reduction in operating revenues of $115 million as a result of the NJBPU's Summary Order issued to JCP&L in 1999. The Summary Order requires JCP&L to refund customers 5% from rates in effect as of April 30, 1997. GPU Electric The increase in revenues for the three and six months ended June 30, 2000 was primarily due to the inclusion of revenues from: GPU Power UK, approximately $325 million year to date; Empresa Distribuidora Electrica Regional, S.A. (Emdersa) (acquired in March 1999), approximately $33 million year to date; and GPU GasNet (acquired in June 1999), approximately $21 million year to date, partially offset by a reduction in revenues at GPU PowerNet. GPUI Group The increase for the six months ended June 30, 2000 was due in part to higher energy and capacity revenues at Empresa Guaracachi S.A. (EGSA) as a result of new generating units that began operations in June 1999. 3 GPU AR The decrease for the three months ended June 30, 2000 was due to GPU AR having fewer customers to supply electricity to compared to the same quarter last year. MYR The increase for the three and six months ended June 30, 2000 was due to the inclusion of revenues from MYR since its acquisition by GPU, Inc. in the second quarter 2000. OPERATING INCOME: Operating income for the second quarter 2000 decreased $274 million to an operating loss of $142 million, as compared to the second quarter 1999. For the six months ended June 30, 2000, operating income decreased $232.3 million to $198.3 million, as compared to the same period last year. The components of the changes are as follows: 2000 vs. 1999 (in millions) -------------------------------------- Three Months Ended Six Months Ended June 30, June 30, ------------------ ----------------- GPU Energy companies $ 32.6 $ (24.4) GPU Electric (316.9) (214.4) GPUI Group 6.2 4.2 GPU AR (0.7) (0.8) MYR 3.9 3.9 GPU, Inc. 0.9 (0.8) ------ ------ Total decrease $(274.0) $(232.3) ====== ====== GPU Energy companies The decrease was due to lower revenues as discussed above (see Operating Revenues section for additional information) and higher energy costs for Met-Ed and Penelec due to the purchase of more energy since the sale of GPU Energy's generating assets. Partially offsetting this decrease was lower operation and maintenance (O&M) expenses primarily due to the sale of GPU Energy's generating assets in 1999, lower depreciation expense due to the sale of generating assets and the effect of the impairment write-down of the Oyster Creek (Oyster Creek) nuclear generating station, which was also recorded in 1999. GPU Electric The decrease for the three and six months ended June 30, 2000 was due to the pre-tax loss of $372 million recorded in the second quarter 2000 on the sale of GPU PowerNet. Partially offsetting the decrease, for both periods, was increased operating income at GPU Power UK due primarily to the acquisition of the remaining 50% ownership in 1999, and the inclusion of Emdersa and GPU GasNet. Prior to its purchase of the remaining 50%, GPU accounted for its investment in GPU Power UK under the equity method and included its share of GPU Power UK's income in other income on the Consolidated Statements of Income. 4 Partially offsetting the decrease was a credit to income in the second quarter of 2000 of $15.9 million pre-tax resulting from a reduction in the estimated liability of certain long-term purchase obligations under natural gas supply contracts of GPU Power UK. These contracts were at fixed prices in excess of the market price of gas, and a liability was established for the estimated loss under such contracts, however, as a result of increasing gas prices during the second quarter of 2000, GPU Power UK was able to enter into matching forward sale contracts for the majority of the gas purchases. In addition, in the second quarter 2000 a pre-tax gain of $4.5 million was realized on closed out forward exchange contracts that were entered into by GPU Electric to lock in the then-current A$/US$ exchange rate on the projected remittance of Australian dollar proceeds arising from the expected sale of GPU PowerNet and GPU GasNet. GPUI Group The increase for the three and six months ended June 30, 2000 was due to the absence of an impairment loss of $6.5 million recorded in 1999 against GPU International's investment in the Lake cogeneration project. MYR The increase for the three and six months ended June 30, 2000 was due to the inclusion of MYR since its acquisition by GPU, Inc. in the second quarter 2000. OTHER INCOME AND DEDUCTIONS: Other income and deductions for the second quarter 2000 decreased $9.1 million to $33.4 million, as compared to the second quarter 1999. For the six months ended June 30, 2000, other income and deductions decreased $88.4 million to $56.5 million, as compared to the same period last year. The components of the changes are as follows: 2000 vs. 1999 (in millions) -------------------------------------- Three Months Ended Six Months Ended June 30, June 30, ------------------ ----------------- GPU Energy companies $ (4.1) $ (38.6) GPU Electric (3.5) (46.9) GPUI Group (1.9) (3.4) GPU AR 0.2 0.3 MYR 0.2 0.2 GPU, Inc. -- -- ------ ------ Total decrease $ (9.1) $ (88.4) ====== ====== GPU Energy companies The decrease for the six months ended June 30, 2000 was primarily due to the absence in 2000 of the gain of $38.3 million pre-tax on the sale of Penelec's Homer City Station. GPU Electric The decrease for the six months ended June 30, 2000 was due primarily to the consolidation of GPU Power UK since the acquisition of the remaining 5 50% ownership in 1999. Prior to that, the GPU Power UK investment was accounted for under the equity method and GPU's share of GPU Power UK's income was included in other income on the Consolidated Statements of Income. INTEREST CHARGES AND PREFERRED DIVIDENDS: Interest charges and preferred dividends for the second quarter 2000 increased $44.1 million to $141.8 million, as compared to the second quarter 1999. For the six months ended June 2000, interest charges and preferred dividends increased $93.8 million to $284.8 million, as compared to the same period last year. The components of the changes are as follows: 2000 vs. 1999 (in millions) -------------------------------------- Three Months Ended Six Months Ended June 30, June 30, ------------------ ----------------- GPU Energy companies $ (2.9) $ (11.7) GPU Electric 41.5 98.2 GPUI Group 0.6 0.9 MYR 2.4 2.4 GPU, Inc. 2.5 4.0 ------ ------ Total increase $ 44.1 $ 93.8 ====== ====== GPU Energy companies The decrease for the six months ended June 30, 2000 was primarily due to the following: in 1999, Met-Ed and Penelec redeemed all their company-obligated mandatorily redeemable preferred securities and cumulative preferred stock and Penelec redeemed $600 million of first mortgage bonds (FMBs); and in 2000, JCP&L and Met-Ed redeemed $40 million and $50 million, respectively, of FMBs. Partially offsetting these decreases were increased interest expense associated with Penelec's issuance of $350 million of senior notes in 1999 and $50 million of senior notes in April 2000; and the issuance of $100 million each of trust preferred securities by Met-Ed and Penelec, in 1999. GPU Electric The increase for the three and six months ended June 30, 2000 was primarily due to higher debt levels from the 1999 acquisitions of GPU Power UK (the remaining 50%), Emdersa and GPU GasNet, which resulted in additional interest expense of approximately $103 million year to date, partially offset by lower interest expense at GPU PowerNet. GPU, Inc. The increase for the three and six month periods was due to higher average short-debt levels in 2000. JCP&L RESULTS OF OPERATIONS JCP&L's earnings for the second quarter 2000 were $42.8 million compared to a second quarter 1999 loss of $8.2 million. Excluding a non-recurring charge of $68 million, which resulted from the NJBPU's Summary Order for 6 JCP&L, earnings for the quarter ended June 30, 1999 would have been $59.8 million. The decline in earnings on this basis was primarily due to lower revenues, resulting from lower rates charged to customers as a result of the New Jersey restructuring. Partially offsetting the decrease was lower depreciation expense due to the effect of the sale of generating assets and the impairment write-down of Oyster Creek, which was recorded in 1999. For the six months ended June 30, 2000, JCP&L's earnings were $85.9 million, compared to $43 million for the same period in 1999. Excluding the non-recurring charge discussed above, earnings for 1999 would have been $111.1 million. The decrease in earnings on this basis was due to lower revenues, as a result of lower rates charged to customers under New Jersey rate restructuring. Partially offsetting the decrease was lower depreciation expense due to the effect of the sale of generating assets and the impairment write-down of Oyster Creek, which was recorded in 1999, and a reduction in O&M expenses. OPERATING REVENUES: Operating revenues for the second quarter 2000 increased $99.2 million to, $490.2 million, as compared to the second quarter 1999. For the six months ended June 30, 2000, earnings increased $35 million, to $942.9 million, compared to the same period last year. The components of the changes are as follows: 2000 vs. 1999 (in millions) -------------------------------------- Three Months Ended Six Months Ended June 30, June 30, ------------------ ----------------- KWH revenues $(131.0) $(256.4) Energy and restructuring-related revenues 115.4 179.6 Obligation to refund revenues to customers per NJBPU Order 115.0 115.0 Other revenues (0.2) (3.2) ------ ------ Increase in revenues $ 99.2 $ 35.0 ====== ====== KWH revenues The decline for the three and six month periods was primarily due to the fact that certain revenues related to stranded cost recovery are now included under energy and restructuring-related revenues, effective August 1, 1999. The decrease was also due in part to lower rates charged to customers in New Jersey, resulting in a decrease of revenues of approximately $47 million year to date, and the effect of New Jersey customers choosing another electric energy supplier, resulting in a decrease of revenues of approximately $54 million year to date. Energy and restructuring-related revenues The increase for both periods was primarily due to the inclusion of revenues, effective August 1, 1999, for the recovery of stranded costs due to restructuring in New Jersey. In the first quarter of 1999, JCP&L changed its estimate for unbilled revenue, which resulted in the recording of additional revenues during that quarter, partially offsetting the increase in the six- 7 month period. Changes in energy and restructuring-related revenues do not affect earnings as they are offset by corresponding changes in expense. Obligation to refund revenues to customers per NJBPU Order ---------------------------------------------------------- The increase in the three and six month periods resulted from the NJBPU's Summary Order for JCP&L, which obligated JCP&L to refund to customers (from 1999 revenues) 5% of April 30, 1997 rates for service rendered from August 1, 2002 through July 31, 2003. This occurred during the second quarter of 1999. Other revenues The decrease for both periods was primarily due to lower revenue taxes, which did not have an impact on earnings. OPERATING INCOME: Operating income for the second quarter 2000 increased $88.3 million to $99.6 million, as compared to the second quarter 1999. The increase was due primarily to higher revenues, as discussed above. In addition, there was a decrease in depreciation expense, due to the effect of the sale of generating assets and the impairment write-down of Oyster Creek in 1999. For the six months ended June 30, 2000, operating income increased $71.1 million, to $195.5 million, versus the same period last year. The increase was due primarily to higher revenues, as discussed above. In addition, there was a decrease in depreciation expense, due to the effect of the sale of generating assets and the impairment write-down of Oyster Creek in 1999, and a decrease in O&M costs. OTHER INCOME AND DEDUCTIONS: Other income and deductions for the second quarter 2000 decreased $5.7 million, to a loss of $1.2 million, versus the first quarter 1999. For the six months ended June 30, 2000, there was a decline of $3.2 million, to $4.4 million, compared to the same period last year. The decrease in both periods was the result of the discount on the receivable from AmerGen Energy Company LLC (AmerGen) relating to Oyster Creek outage costs. MET-ED RESULTS OF OPERATIONS Met-Ed's earnings for the second quarter 2000 were $8.7 million, compared to second quarter 1999 earnings of $19.1 million. The decline in earnings was primarily due to higher energy costs resulting from Met-Ed's need to purchase its energy requirements on the open market, as a result of the sale of its generating assets in 1999. Partially offsetting these higher costs were lower O&M and depreciation costs, mainly due to the sale of generating assets. For the six months ended June 30, 2000, earnings were $35.2 million, compared to earnings of $51.4 million for the same period last year. The decrease in earnings was attributed primarily to higher energy purchase costs, which were offset by reductions in O&M expenses and depreciation costs. In addition, Met-Ed experienced a decline in revenues as a result of Pennsylvania rate restructuring. 8 OPERATING REVENUES: Operating revenues of $197.8 million for the second quarter 2000 were essentially the same as the second quarter 1999. Operating revenues for the six-month period ended June 30, 2000 decreased $26.3 million, to $400.9 million, as compared to same period in 1999. The components of the changes are as follows: 2000 vs. 1999 (in millions) -------------------------------------- Three Months Ended Six Months Ended June 30, June 30, ------------------ ----------------- KWH revenues $ (1.0) $ (37.7) CTC revenues 0.3 9.7 Other revenues 0.5 1.7 ------ ------ Decrease in revenues $ (0.2) $ (26.3) ====== ====== KWH revenues The decrease in the six-month period was primarily due to lower generation-related revenues of approximately $39 million as a result of more Pennsylvania customers choosing another electric energy supplier. CTC revenues CTC revenues represent Pennsylvania stranded cost recoveries permitted by the PaPUC in accordance with Met-Ed's final Restructuring Order effective January 1, 1999. Changes in CTC revenues generally do not affect earnings as they are offset by corresponding changes in expense. OPERATING INCOME: Operating income for the second quarter 2000 decreased $25.4 million, to $19.2 million, as compared to the second quarter 1999. The decrease was attributed to higher energy costs, as a result of increased energy purchases due to the sale of Met-Ed's generating assets. The decrease in operating income was partially offset by a decrease in O&M expenses and depreciation expense, mainly due to the sale of generating assets. Operating income for the six months ended June 30, 2000 decreased $46.3 million, to $74.5 million, as compared to the six months ended June 30, 1999. The decrease was attributed to lower revenues, as discussed above, as well as higher energy purchase costs. This decrease was offset by a reduction in O&M expenses and depreciation expense. OTHER INCOME AND DEDUCTIONS: Other income and deductions for the second quarter 2000 increased $6.3 million, to $8.2 million, as compared to the second quarter 1999. For the six months ended June 30, 2000, other income and deductions increased $8 million, to $11 million, versus the same period last year. The change in both periods was due primarily to an increase in interest and dividend income. 9 INTEREST CHARGES AND PREFERRED DIVIDENDS: Interest charges and preferred dividends for the second quarter 2000 decreased $1.4 million to $13.7 million, versus the second quarter 1999. Interest charges and preferred dividends for the six months ended June 30, 2000 decreased $2.5 million to $27.8 million, as compared to the same period in 1999. The decrease for both periods was primarily due to the redemption of all Met-Ed's company-obligated mandatorily redeemable preferred securities and cumulative preferred stock in 1999 (the redemption of preferred stock resulted in a loss of $0.5 million); and the retirement of $50 million of FMBs in the second quarter 2000. Partially offsetting the decrease was increased interest expense associated with the issuance of $100 million of trust preferred securities in 1999. PENELEC RESULTS OF OPERATIONS Penelec's earnings for the second quarter 2000 were $4.5 million, compared to second quarter 1999 earnings of $19.9 million. The decline in earnings was primarily due to higher energy costs resulting from Penelec's need to purchase its energy requirements on the open market, since the sale of its generating assets in 1999. Partially offsetting the higher energy costs were lower O&M expense and depreciation costs mainly due to the sale of generating assets. In addition, income tax expense was lower in the second quarter 2000, versus the same quarter last year, due in part to an adjustment made to tax expense in the second quarter 1999 related to the deregulation of generating assets in Pennsylvania. For the six months ended June 30, 2000, earnings were $31.5 million, compared to earnings of $84.6 million for the same period last year. Excluding the net gain of $27.8 million after-tax for the portion of the sale of Penelec's Homer City Station related to wholesale operations, earnings for the six months ended June 30, 1999 would have been $56.8 million. The decrease in earnings on this basis was primarily due to higher energy purchase costs, which were offset by reductions in O&M expenses and depreciation expense. In addition, the company experienced a decrease in revenues as a result of Pennsylvania rate restructuring. OPERATING REVENUES: Operating revenues for the second quarter 2000 increased $1.6 million, to $206.8 million, compared to the first quarter 1999. For the six months ended June 30, 2000, revenues decreased $24.5 million, to $426.9 million, compared to the same period last year. The components of the changes are as follows: 2000 vs. 1999 (in millions) -------------------------------------- Three Months Ended Six Months Ended June 30, June 30, ------------------ ----------------- KWH revenues $ 5.3 $ (24.4) CTC revenues (2.0) 1.9 Other revenues (1.7) (2.0) ------ ------ Increase/(Decrease) in revenues $ 1.6 $ (24.5) ====== ====== 10 KWH revenues The increase in the quarter was due to increases in KWH sales to residential and industrial customers, offset by lower generation-related revenues of approximately $3 million as result of more Pennsylvania customers choosing another electric energy supplier. The decrease for the six-month period was primarily due to lower generation-related revenues of approximately $43 million as a result of more Pennsylvania customers choosing another electric energy supplier. This decrease was partially offset by higher sales to other utilities. CTC revenues CTC revenues represent Pennsylvania stranded cost recoveries permitted by the PaPUC in accordance with Penelec's Restructuring Order effective January 1, 1999. Changes in CTC revenues generally do not affect earnings as they are offset by corresponding changes in expense. OPERATING INCOME: Operating income for the second quarter 2000 decreased $30.3 million, to $14.7 million, as compared to the second quarter 1999. The decrease was attributed primarily to higher energy costs, due to the purchase of more energy as a result of the sale of Penelec's generating assets. The decrease was partially offset by lower O&M and depreciation expenses, mainly due to the sale of generating assets. Operating income for the six months ended June 30, 2000 decreased $49.3 million, to $68.3 million, as compared to the six months ended June 30, 1999. The decrease was attributed to lower revenues, as discussed above, as well as higher energy purchase costs. This decrease was offset by a reduction in O&M expenses and depreciation expense. OTHER INCOME AND DEDUCTIONS: Other income and deductions for the second quarter 2000 decreased $3.3 million, to $3.9 million, as compared to the second quarter 1999, due primarily to a reduction in interest income. Other income and deductions for the six months ended June 30, 2000 decreased $41.4 million, to $4.7 million, versus the same period last year. The decrease was due to the absence, in 2000, of a pre-tax gain of $38.3 million, which resulted from the sale of Penelec's Homer City Station. INTEREST CHARGES AND PREFERRED DIVIDENDS: Interest charges and preferred dividends for the second quarter 2000 increased $1.3 million, to $11.1 million, due primarily to an increase in interest expense on notes payable and commercial paper. Interest charges and preferred dividends for the first half of 2000 decreased $6.4 million, to $20.2 million, as compared to the first half of 1999. The decrease was primarily due to the redemption of all Penelec's company-obligated mandatorily redeemable preferred securities and cumulative 11 preferred stock (the redemption of preferred stock resulted in a loss of $0.7 million), and the redemption of $600 million of FMBs in 1999. Partially offsetting these decreases were increased interest expense associated with the issuance of $350 million of senior notes in 1999; and the issuance of $100 million of trust preferred securities, also in 1999. INVESTMENTS IN FUCOs AND EWGs GPU, Inc. has Securities and Exchange Commission (SEC) authorization to finance investments in foreign utility companies (FUCOs) and exempt wholesale generators (EWGs) up to an aggregate amount equal to 100% of GPU's average consolidated retained earnings, or approximately $2.4 billion as of June 30, 2000. At June 30, 2000, GPU, Inc. has remaining authorization to finance approximately $614 million of additional investments in FUCOs and EWGs. GPU, Inc.'s investments in FUCOs and EWGs are made through GPU Electric and the GPUI Group. GPU ELECTRIC GPU Electric owns electric distribution and gas transmission businesses in England, Australia and Argentina. In June 2000, GPU Electric sold its electric transmission business in Australia. As a result of the sale, GPU recorded a pre-tax loss in the quarter ended June 30, 2000 of $372 million, ($295 million after-tax, or $2.43 per share), including a $94 million foreign currency loss. Through its ownership in GPU Power UK, GPU Electric also has investments in operating generating facilities located in foreign countries totaling 4,216 megawatts (MW) (of which GPU Electric's equity interest represents 1,134 MW) of capacity. At June 30, 2000, GPU, Inc.'s aggregate investment in GPU Electric was $569 million. GPU, Inc. has also guaranteed up to an additional $998 million of outstanding GPU Electric obligations. GPUI GROUP The GPUI Group has ownership interests in six operating cogeneration plants in the US totaling 1,014 MW (of which the GPUI Group's equity interest represents 496 MW) of capacity and four operating generating facilities located in foreign countries totaling 1,229 MW (of which the GPUI Group's equity interest represents 424 MW) of capacity. At June 30, 2000, GPU, Inc.'s aggregate investment in the GPUI Group was $251.8 million. GPU, Inc. has also guaranteed up to an additional $30 million of GPUI Group obligations. GPU, Inc. has concluded that continuation of this business is not consistent with its overall business strategy and that proposals are being sought for the sale of the GPUI Group's generating plants. MYR In April 2000, following the receipt of SEC approval, GPU, Inc. completed its acquisition of MYR for approximately $217.5 million. For additional information, see Note 2, Acquisitions and Dispositions. 12 LIQUIDITY AND CAPITAL RESOURCES Capital Expenditures and Investments GPU Energy companies The GPU Energy companies' capital spending for the six months ended June 30, 2000 was $160 million (JCP&L $68 million; Met-Ed $23 million; Penelec $30 million; Other $39 million), and was used primarily to expand and improve existing transmission and distribution (T&D) facilities and for new customer connections. For 2000, capital expenditures are estimated to be $349 million (JCP&L $178 million; Met-Ed $57 million; Penelec $82 million; Other $32 million), which management estimates a substantial portion will be satisfied through internally generated funds. GPU Electric GPU Electric's capital spending for the six months ended June 30, 2000 was $101.4 million, and was used primarily to fund on-going network capital replacement schedules, network improvements and new connections in GPU Power UK and Emdersa's facilities. For 2000, capital expenditures are estimated to be $201 million which will be satisfied through both internally generated funds and external financings. GPUI Group For 2000, the GPUI Group's capital spending is estimated to be $2 million, which will be satisfied through internally generated funds. In addition, in 2000 the GPUI Group made an additional investment of $4 million in Ballard Generation System, Inc., representing its final investment commitment. Financing GPU, Inc. In January 1999, the GPU, Inc. Board of Directors authorized the repurchase of up to $350 million of GPU, Inc. common stock. Through June 30, 2000, 7.2 million shares of common stock, or approximately 6% of the outstanding shares, have been repurchased under the program, at an average price of $34.28 per share. In addition, GPU, Inc. entered into a forward share repurchase agreement with Salomon Smith Barney (SSB) on March 8, 2000. Upon expiration of the agreement, GPU, Inc. has the option to purchase additional shares acquired by SSB at the forward price or net settle for cash or shares at the difference between the forward price and the then market price. As of June 30, 2000, SSB has purchased 1.9 million shares of GPU, Inc. common stock for $49.5 million under the terms of this agreement. GPU has various credit facilities in place, the most significant of which are discussed below. These credit facilities generally provide GPU with bank loans at negotiated market rates. GPU, Inc. and the GPU Energy companies have available $465 million of short-term borrowing facilities, which include a $250 million revolving credit agreement and various bank lines of credit. In addition, GPU, Inc., JCP&L, Met-Ed and Penelec can issue commercial paper in amounts of up to 13 $100 million, $150 million, $75 million and $100 million, respectively. GPU, Inc. has regulatory authority to have outstanding at any one time a total of $250 million of short-term debt under these programs. JCP&L, Met-Ed and Penelec are limited by their charters or SEC authorization to $258 million, $150 million and $150 million, respectively, of short-term debt outstanding at any one time. GPU, Inc. also has SEC approval to issue and sell up to $300 million of unsecured debentures through 2001. In April 2000, GPU, Inc. completed its acquisition of MYR, which was partially financed through the issuance of GPU, Inc. short-term debt. GPU Energy companies Met-Ed and Penelec currently have regulatory approval to issue senior notes and preferred securities through December 31, 2000 in aggregate amounts of $150 million and $157 million, respectively, of which up to $25 million for each company may consist of preferred securities. JCP&L has regulatory approval to issue senior notes in the aggregate amount of $300 million through December 31, 2000 and has filed with NJBPU to extend this authorization through 2002. Met-Ed and JCP&L intend to issue secured senior notes (collateralized by first mortgage bonds (FMBs) issued to the senior note trustee) until such time as more than 80% of the outstanding FMBs are held by the senior note trustee. At that time, the FMBs will be cancelled and the outstanding senior notes will become unsecured obligations. Penelec's senior notes are unsecured. Current plans call for the GPU Energy companies to issue senior notes during the next three years to fund the redemption of maturing senior securities, refinance outstanding senior securities and finance construction activities. The senior note indentures prohibit (subject to certain exceptions) the GPU Energy companies from issuing any debt which is senior to the senior notes. JCP&L and Met-Ed's FMB bond indentures include provisions that limit the amount of FMBs the companies may issue. JCP&L and Met-Ed's interest coverage ratios are currently in excess of their FMB indenture restrictions. JCP&L's certificate of incorporation includes provisions that limit the amount of preferred stock it may issue. JCP&L's preferred dividend coverage ratio is currently in excess of these charter restrictions. In August 1999, JCP&L filed a petition with the NJBPU requesting authorization to issue transition bonds to securitize the recovery of bondable stranded costs attributable to the projected net investment in the Oyster Creek Nuclear Generating Station (Oyster Creek) at September 1, 2000. The petition also requests that the NJBPU order provide for the imposition and collection of a usage-based non-bypassable transition bond charge (TBC) and for the transfer of the bondable transition property relating to the TBC to another entity. JCP&L has amended its petition to include securitization of the up-front decommissioning payment it has agreed to make under the Oyster Creek sale agreement. For further information, see Recent Regulatory Actions. 14 In April 2000, Penelec issued two tranches totaling $50 million of variable rate senior notes. These senior notes were converted to fixed rate obligations through interest rate swap agreements. The $25 million 2-year tranche and the $25 million 2.5-year tranche were swapped into fixed interest rates of 7.12% and 7.185%, respectively. In August 2000, Penelec issued two tranches totaling $68 million of fixed rate senior notes. The $33 million 5-year tranche and $35 million 10-year tranche have interest rates of 7.5% and 7.77%, respectively. In May and June 2000, Met-Ed redeemed a total of $50 million of maturing FMBs. JCP&L redeemed $5 million and $16.7 million stated value cumulative preferred stock pursuant to mandatory and optional sinking fund provisions in June and July 2000, respectively. Based on June 30, 2000 financial statements, Met-Ed and Penelec had retained earnings available to pay common stock dividends of $20.3 million and $25.6 million, respectively, net of amounts restricted under the companies' respective FMB indentures. In addition, Met-Ed and Penelec had capital surplus of $400 million and $285 million, respectively, which would also be available to pay common dividends, to the extent authorized by the SEC and as may be permitted under their respective FMB indentures. Met-Ed and Penelec have requested SEC approval to utilize amounts now accounted for as capital surplus to declare and pay common dividends, from time to time through December 31, 2001, so long as their common equity ratios and GPU, Inc.'s common equity ratio are not less than 30% of total capitalization. At June 30, 2000, the common equity ratios of Met-Ed, Penelec and GPU, Inc. were 41.3%, 39.1% and 31.4%, respectively. GPU Electric On June 30, 2000, GPU, Inc. completed the sale of GPU PowerNet to Singapore Power International (SPI) for A$2.1 billion (approximately US $1.26 billion). As part of the sales price, SPI assumed liability for A$230 million (US $137.8 million) of medium term notes. GPU, Inc. applied the net proceeds from the sale as follows: A$1,288 million (US $772 million) was used to repay outstanding debt; and A$579 million (US $347 million) was placed in a trust (which amount is included in Special deposits on the Consolidated Balance Sheets) to provide for the repayment of the remaining medium term notes (A$174 million/US $104 million) and outstanding commercial paper (A$405 million/US $243 million) at maturity. As a result of the sale, GPU recorded a pre-tax loss in the quarter ended June 30, 2000 of $372 million, ($295 million after-tax, or $2.43 per share), including a $94 million foreign currency loss. GPU, Inc. is still considering the possible sale of GPU GasNet, which it purchased in 1999 for approximately US $675 million. On June 2, 2000, repayment of approximately $218 million of maturing GPU GasNet bank debt was extended to September 2, 2000. GPU GasNet may further extend this loan to October 2, 2000. GPU GasNet is in the process of establishing a commercial paper program and a medium term note program to refinance this debt. GPU, Inc. has agreed to guarantee this loan, under certain conditions, if it is not repaid by August 25, 2000. GPU Capital has a $1 billion 364-day senior revolving credit agreement expiring in December 2000 supporting the issuance of commercial paper for its $1 billion commercial paper program established to fund GPU Electric acquisitions. GPU, Inc. has guaranteed GPU Capital's obligations under this program. At June 30, 2000, $916 million was outstanding under the commercial paper program, of which $701 million is included in long-term debt on the 15 Consolidated Balance Sheets since it is management's intent to reissue this amount of the commercial paper on a long-term basis. GPU Australia Holdings, Inc. has $270 million (reducing to $180 million in November 2000) available under its senior revolving credit facility which matures in November 2001. This bank credit facility and other GPU, Inc. credit facilities serve as credit support for GPU Australia Holdings' $350 million commercial paper program. GPU, Inc. has guaranteed GPU Australia Holdings' obligations under this program. Approximately $150 million of commercial paper was outstanding as of June 30, 2000. GPU Power UK maintains a British pound 150 million (approximately US $227 million) bilateral revolving credit facility with six banks for working capital purposes, which matures at various dates through June 2005. At June 30, 2000, no borrowings were outstanding under this facility. GPUI Group GPU International, Inc. has a revolving credit agreement providing for borrowings and/or letters of credit through December 2000 of up to $30 million outstanding at any one time. GPU, Inc. has guaranteed GPU International's obligations under this agreement. At June 30, 2000, no borrowings or letters of credit were outstanding under this facility. COMPETITIVE ENVIRONMENT AND RATE MATTERS GPU Business Plan The GPU Energy companies expect they will continue to serve customers in markets where there will be capped rates for varying periods and their ability to seek rate increases will be limited. In addition, inflation could adversely affect GPU since these increased costs may not be recoverable in an environment where there are capped rates. Since the GPU Energy companies have essentially exited the generation business, they will have to supply energy to customers who do not choose an alternate supplier largely from contracted and open market purchases. While management has identified and addressed market risks associated with these purchases through implementation of an energy risk management program, there can be no assurance that the GPU Energy companies will be able to fully recover the costs to supply electricity to customers who do not choose an alternate supplier. In October 1999, GPU initiated a program to enhance shareholder returns through planned cost reductions of $100 million ($55 million in 2000 and $45 million in 2001 and beyond) by increasing operating efficiency and by making investments of $40 million to $50 million to improve the reliability of its domestic utility operations. As of June 30, 2000, the planned cost reductions in 2000 for GPU Energy are generally progressing according to plan, and GPU Power UK is ahead of plan with its cost reductions. The GPU Energy companies are targeting reductions of $30 million in 2000 and an additional $40 million in 2001 and beyond. Cost reductions will be achieved by using new tools from its enterprise resource planning system to eliminate significant amounts of operational overhead expense and by improving the productivity of all its operations. GPU Power UK plans cost reductions of US $25 million in 2000 and US $5 million in 2001. These cost reductions will be achieved by eliminating activities not provided for in its new regulated rate level, which was effective in the Spring of 2000, and by realizing productivity benefits from its new systems and organization. Furthermore, the sale of GPU PowerNet advances GPU's plan to raise funds from its current investment portfolio by reducing its ownership in non-core and under-performing assets. 16 In March 2000, GPU, Inc. announced its participation in America's Fiber Network LLC (AFN), of which GPU, Inc. anticipates owning 25%. AFN is a high- speed fiber optics company with a network of more than 7,000 route miles, or 140,000 fiber miles, connecting major markets in the eastern US to secondary markets with a growing need for broadband access. GPU, Inc. anticipates investing approximately $40 million (of which $1.9 million has been invested as of June 30, 2000) in AFN through GPU Telcom, which includes existing and new fiber routes and electronic equipment. In April 2000, GPU, Inc. announced the formation of Telergy Mid-Atlantic (TMA), a joint venture between GPU Telcom and Telergy, Inc. TMA combines established telecommunications services and marketing expertise with utilities' existing fiber networks and natural positioning in retail markets. TMA's initial target markets are New Jersey and Pennsylvania, with future expansions planned for contiguous regions currently served by the network of GPU Telcom. TMA plans to offer telecommunications service and ultimately electricity, marketing them jointly to businesses, hospitals and educational institutions, among others. As of June 30, 2000, GPU, Inc. has invested $20 million in Telergy, Inc. through GPU Telcom. The GPU Energy Companies' Supply Plan As a result of the NJBPU and the PaPUC's Restructuring Orders, the GPU Energy companies are required to provide generation service to customers who do not choose an alternate supplier. (For additional information, see the Provider of Last Resort and Basic Generation Service Provider sections below.) Given that the GPU Energy companies have essentially divested their generation business, there will be increased market risks associated with providing generation service since the GPU Energy companies will have to supply energy to non-shopping customers from contracted and open market purchases. Under its order, JCP&L is permitted to recover reasonably and prudently incurred costs associated with providing basic generation service. The PaPUC's Restructuring Orders, however, generally do not allow Met-Ed and Penelec to recover their energy costs in excess of established rate caps, which are in effect for varying periods. While management has implemented an energy risk management program, there can be no assurance that the GPU Energy companies will be able to fully recover the costs to supply electricity to customers who do not choose an alternate supplier. Following the sales in 1999 of substantially all their electric generating facilities, the GPU Energy companies have 285 MW of capacity and related energy remaining to meet customer needs and an additional 619 MW of nuclear generation from Oyster Creek, the sale of which is pending (see Generation Asset Divestiture in this section). The GPU Energy companies also have contracts with non-utility generation (NUG) facilities totaling 1,610 MW (JCP&L 926 MW; Met-Ed 273 MW; Penelec 411 MW) and the GPU Energy companies have agreements with other utilities to provide for up to 1,700 MW (JCP&L 1,418 MW; Met-Ed 267 MW; Penelec 15 MW) of capacity and related energy. The GPU Energy companies have agreed to purchase all of the capacity and energy from the Three Mile Island Unit 1 (TMI-1) nuclear generating station (which they sold to AmerGen Energy Company LLC (AmerGen) in 1999) through December 31, 2001 and from Oyster Creek (following its sale) through March 31, 2003. In addition, the GPU Energy companies have the right to call the capacity of the Homer City Station (in which Penelec sold its 50% interest to a subsidiary of Edison Mission Energy in 1999) (942 MW) through May 31, 2001 and the capacity of the generating stations sold to Sithe Energies (4,117 MW) through May 31, 2002. The GPU Energy companies' remaining capacity and energy needs will be met by short- to intermediate-term commitments (one month to three years) during times of expected high energy price volatility and reliance on spot market purchases during other periods. 17 Provider of Last Resort Under the PaPUC Restructuring Orders, Met-Ed and Penelec customers have been permitted to shop for their generation supplier since January 1, 1999. The PaPUC has approved a competitive bid process to assign provider of last resort (PLR) service for 20% of Met-Ed and Penelec's retail customers on June 1, 2000, 40% on June 1, 2001, 60% on June 1, 2002 and 80% on June 1, 2003, to licensed generation suppliers referred to as Competitive Default Service (CDS). Any retail customers assigned to CDS may return to Met-Ed and Penelec as the default PLR at no additional charge. Met-Ed and Penelec may meet any remaining PLR obligation at rates not less than the lowest rate charged by the winning CDS provider, but no higher than Met-Ed and Penelec's rate cap. In February 2000, GPU Energy announced that it had not received any bids in response to its offer to auction CDS service for up to 20% of its retail customers and, as a result, it would be increasing its forward purchasing of electric power to accommodate these customers for whom it will now continue to be the default supplier. At the PaPUC's direction, Met-Ed and Penelec initiated a collaborative process in June 2000 with all interested parties from the 1998 Restructuring Orders, including the PaPUC, to address the companies' PLR risks. Despite Met-Ed and Penelec's efforts, this process was concluded without resolution of the issues surrounding the companies' PLR risk. Met-Ed and Penelec are currently considering options that include filing for rate relief under a provision of the 1998 Restructuring Orders. The provision permits Met-Ed and Penelec to file a petition request with the PaPUC seeking PLR rates exceeding existing rate cap levels if no CDS bids are received at or below the generation rate cap. There can be no assurance as to the outcome of this matter. Met-Ed and Penelec estimate that the failed CDS bid will require them to supply 550 MW of electric power more than they had planned. In addition, customers requiring approximately 600 MW of power have returned to Met-Ed and Penelec from their alternate suppliers this summer. These additional energy requirements, coupled with higher than anticipated energy prices are expected to result in GPU's Pennsylvania supply business recording a loss in 2000 of between approximately $0.20 to $0.25 per share. For the six months ended June 30, 2000, the Pennsylvania supply business has contributed approximately $0.04 per share to GPU's earnings. Met-Ed and Penelec have developed incentive programs for shopping customers in order to reduce their PLR exposure. Met-Ed and Penelec are also negotiating with large commercial and industrial customers to encourage shopping on a long-term basis and have been working with generation suppliers who are returning customers to Met-Ed and Penelec, under PLR rates, to find alternative power supply for these customers. There can be no assurance that these or other efforts to mitigate Met-Ed's and Penelec's PLR risk will be successful. Basic Generation Service Provider JCP&L is required to provide basic generation services (BGS) to retail customers who choose to remain with JCP&L as generation customers for a three-year period ending July 31, 2002. Thereafter, BGS service will be bid out at the pre-established BGS rates. JCP&L's BGS rates are pre-determined for the period through July 31, 2003. The specific details of the BGS 18 bidding process will be the subject of a future NJBPU proceeding. Any payment received or required by JCP&L resulting from the bidding process will be deferred for future refund or recovery. GPU Energy Supply Market Risk With the divestiture of essentially all their generating plants, the GPU Energy companies are in a net short position (load in excess of supply). Consequently, the GPU Energy companies must manage their purchase and sale of installed capacity and ancillary services to minimize business risk associated with their reliability obligation in the PJM Interconnection, LLC (PJM). Supply/risk management transactions will be made based on the objective of decreasing both price and volume uncertainty. The GPU Energy companies will enter into supply/hedging market instruments for hedging purposes only. Market Risk - Electricity The GPU Energy companies are generally at risk of rising prices for electricity and electricity-related commodities. These risks may differ during some months of the year. To manage these risks, the GPU Energy companies employ a portfolio approach primarily consisting of two party forward purchases and options, but may also include New York Mercantile Exchange (NYMEX) PJM electricity futures and similar instruments, as they become widely available. This portfolio includes transactions of various durations ranging from one hour to greater than one year. The GPU Energy companies' electricity market risks can be price-related, volume-related or cost-related as follows: - Price-related risk refers to the price exposure associated with having to purchase amounts of electricity, installed capacity, and ancillary services for load requirements from the PJM interchange spot market. To the extent the GPU Energy companies must rely on the PJM pool to satisfy load requirements, financial exposure exists for the difference between the PJM energy and installed capacity spot market prices and the rates paid by customers. - Volume-related risk refers to the uncertainty associated with the amount of load the GPU Energy companies are required to serve. Deregulation of the electric utility industry has resulted in the ability of their customers to purchase energy from other electric suppliers. This customer shopping, combined with weather changes, which affects customer energy usage, can affect the GPU Energy companies' position. - Cost recovery-related risk refers to the financial risk associated with the potential prudency audits of the NJBPU that are part of JCP&L's deferred energy and capacity cost recovery mechanism (Market Transition Charge). Cost recovery-related risk also refers to the prudency risk associated with future NUG cost recovery under the Restructuring Orders approved by the PaPUC and the NJBPU which require continued mitigation of above market NUG costs. 19 Market Risk - Natural Gas As part of their NUG cost mitigation program, the GPU Energy companies manage the natural gas requirements of certain NUGs that produce and sell energy to JCP&L under long-term contracts. Prudently incurred costs associated with natural gas commodity and transportation for these NUGs are included in JCP&L's BGS rates and Market Transition Charge. The GPU Energy companies employ a portfolio approach consisting of two party forward purchases and NYMEX natural gas futures contracts. The GPU Energy companies' natural gas market risks can be price-related, volume-related or cost recovery-related as follows: - Price-related risk refers to the price exposure associated with having to purchase volumes of natural gas for New Jersey NUG requirements from the spot market. - Volume-related risk refers to the uncertainty associated with the amount of natural gas required for the dispatchable NUGs. - Cost recovery-related risk refers to the financial risk associated with the potential prudency audits of the NJBPU that are part of JCP&L's BGS rates and Market Transition Charge. Generation Asset Divestiture In 1999, the GPU Energy companies completed the sales of TMI-1 and substantially all their fossil-fuel and hydroelectric generating stations. In October 1999, JCP&L agreed to sell Oyster Creek to AmerGen, a joint venture of PECO Energy and British Energy, for $10 million. GPU expects the transaction to be completed in August 2000. As part of the terms of the transaction, AmerGen will assume full responsibility for decommissioning the plant. JCP&L will transfer $430 million of decommissioning trust funds and is funding the station's outage cost, including the fuel reload, for the next refueling outage scheduled for the Fall of 2000. AmerGen will repay these outage costs (estimated at $88 million) to JCP&L in nine equal annual installments without interest, beginning one year after the closing. Recent Regulatory Actions New Jersey Restructuring In May 1999, the NJBPU issued a Summary Order with respect to JCP&L's rate unbundling, stranded cost and restructuring filings. The Summary Order provides for, among other things, customer choice of electric generation supplier beginning August 1, 1999, rate reductions for all consumers and full recovery of stranded costs. New Jersey utilities began accepting customer selection of suppliers in October 1999. The Summary Order did not address the sale of Oyster Creek, because at the time the Summary Order was issued, it was uncertain whether the plant would be sold or retired early. JCP&L is awaiting a more detailed order from the NJBPU. In August 1999, JCP&L filed a petition with the NJBPU requesting authorization to issue transition bonds to securitize the recovery of bondable stranded costs attributable to the projected net investment in 20 Oyster Creek at September 1, 2000 (for additional information, see Financing section of Liquidity and Capital Resources). During 1999, the NJBPU issued final electric restructuring and generation-related securitization orders to Public Service Electric and Gas Company (PSE&G), a non-affiliated utility. Several parties appealed these orders on a variety of grounds, including the use of deferred accounting associated with above market NUG costs and the Societal Benefit Charge, which includes recovery of nuclear decommissioning costs. In April 2000, the Appellate Division of the New Jersey Superior Court affirmed the orders. The Appellate Division's decision has been appealed to the New Jersey Supreme Court which is not expected to issue a decision before January 2001. While JCP&L's Summary Order has not been appealed, JCP&L is unable to determine the impact, if any, the appeals to PSE&G's orders will have on its restructuring order and petition for securitization or its use of deferred accounting. Pennsylvania Restructuring In 1996, Pennsylvania adopted comprehensive legislation (Customer Choice Act) which provides for the restructuring of that state's electric utility industry. In October 1998, the PaPUC issued amended Restructuring Orders, approving Settlement Agreements entered into by Met-Ed and Penelec, which, among other things, provide customer choice of electric generation supplier beginning January 1, 1999, a 1-year (1999) reduction in retail distribution rates for all consumers and recovery of a substantial portion of what otherwise would have become stranded costs, subject to the results of the generation divestitures. A final determination of stranded cost recovery will be provided for in a Phase II proceeding, which began in early 2000. In 1999, Penelec deposited a portion of the proceeds from its generation asset sale into a NUG Trust, which has a balance at June 30, 2000 of $222 million. To the extent Penelec incurs above-market NUG costs in excess of the CTC revenues allocated for such costs, Penelec may withdraw amounts from the trust. Federal Regulation In November 1997, the Federal Energy Regulatory Commission (FERC) issued an order to the PJM Power Pool which, among other things, directed the GPU Energy companies to implement a single-system transmission rate, effective April 1, 1998. The implementation of the single-system rate has not affected total transmission revenues; however, it has increased the pricing for transmission service in Met-Ed and Penelec's service territories and reduced the pricing for transmission service in JCP&L's service territory. The GPU Energy companies have requested the FERC to reconsider its ruling requiring a single-system transmission rate. The Restructuring Orders for Met-Ed and Penelec provide for a transmission and distribution rate cap exception to recover the increase in the transmission rate from Met-Ed and Penelec's retail customers in the event the FERC denies the request for reconsideration of the single-system transmission rate. The FERC's ruling may also have an effect on JCP&L's distribution rates. There can be no assurance as to the outcome of this matter. 21 Several bills have been introduced in Congress providing for a comprehensive restructuring of the electric utility industry. These bills proposed, among other things, retail choice for all utility customers, the opportunity for utilities to recover their prudently incurred stranded costs in varying degrees, and repeal of both the Public Utility Regulatory Policies Act (PURPA) and the Public Utility Holding Company Act of 1935 (PUHCA). Pending Complaint before the FERC On June 30, 2000, Allegheny Electric Cooperative (AEC), a wholesale customer, filed a complaint with the FERC against Penelec claiming, among other things, that Penelec should not be permitted to charge AEC increased purchased power costs which Penelec has incurred following Penelec's divestiture of its generation plants. Penelec has filed an answer to the complaint which, among other things, renews a previous offer to release AEC from its supplemental power contract with Penelec and shop for its generation needs. There can be no assurance as to the outcome of this matter. Nonutility Generation Agreements Pursuant to the mandates of PURPA and state regulatory directives, the GPU Energy companies have been required to enter into power purchase agreements with NUGs for the purchase of energy and capacity for terms of up to 20 years. The NJBPU Summary Order provides JCP&L assurance of full recovery of its NUG costs (including above-market NUG costs and certain buyout costs), whereas the PaPUC Restructuring Orders provide Met-Ed and Penelec assurance of full recovery of their above-market NUG costs and certain NUG buyout costs. The GPU Energy companies have recorded, on a present value basis, a total liability of $3.1 billion (JCP&L $1.5 billion; Met-Ed $0.7 billion; Penelec $0.9 billion) on the Consolidated Balance Sheets for above-market NUG costs. These amounts are offset by corresponding regulatory assets. The GPU Energy companies are continuing efforts to reduce the above-market costs of these agreements. There can be no assurance as to the extent to which these efforts will be successful. ACCOUNTING MATTERS Statement of Financial Accounting Standards No. 71 (FAS 71), "Accounting for the Effects of Certain Types of Regulation," applies to regulated utilities that have the ability to recover their costs through rates established by regulators and charged to customers. In June 1997, the Financial Accounting Standards Board's (FASB) Emerging Issues Task Force (EITF) (Issue 97-4) concluded that utilities are no longer subject to FAS 71, for the relevant portion of their business, when they know details of their individual transition plans to a competitive electric generation marketplace. The EITF also concluded that utilities can continue to carry previously recorded regulated assets, as well as any newly established regulated assets (including those related to generation), on their balance sheets if regulators have assured a regulated cash flow stream to recover the cost of these assets. 22 On May 24, 1999, the NJBPU issued a Summary Order regarding JCP&L's unbundling, stranded cost and restructuring filings which essentially deregulated the electric generation portion of JCP&L's business. Accordingly, in the second quarter of 1999, JCP&L discontinued the application of FAS 71 and adopted the provisions of Statement of Financial Accounting Standards No. 101 (FAS 101), "Regulated Enterprises - Accounting for the Discontinuation of Application of FASB Statement No. 71" and EITF Issue 97-4 with respect to its electric generation operations. In 1998, Met-Ed and Penelec, in conjunction with receiving their Restructuring Orders, discontinued the application of FAS 71 and adopted the provisions of FAS 101 and EITF 97-4 for their generation operations. The transmission and distribution portion of the GPU Energy companies' operations continue to be subject to the provisions of FAS 71. In accordance with Statement of Financial Accounting Standards No. 121 (FAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," impairment tests performed by the GPU Energy companies on the net book values of their remaining generation facilities determined that the net investment in Oyster Creek was impaired. As of June 30, 2000, this resulted in write-downs of $579 million to reflect Oyster Creek's fair market value. The total impairment amount of Oyster Creek has been reestablished as a regulatory asset since the Summary Order provides for its recovery in the restructuring process. Statement of Financial Accounting Standards 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by FAS 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" and FAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - An Amendment of FASB Statement No. 133" (collectively, FAS 133), establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In general, FAS 133 requires that companies recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. FAS 133 (as amended) excludes from its scope certain contracts that qualify as normal purchases and sales. To qualify for this exclusion, it must be probable that the contract will result in physical delivery. GPU's use of derivative instruments is intended to manage the risks of commodity price, interest rate and foreign currency fluctuations and may include such transactions as electricity and natural gas forwards and futures contracts, foreign currency swaps, interest rate swaps and options. GPU does not intend to hold or issue derivative instruments for trading purposes. To the extent that GPU's energy-related contracts fall within the scope of FAS 133, GPU will be required to include them on its balance sheet at fair value, and recognize the subsequent changes in fair value as either gains or losses in earnings or report them as a component of other comprehensive income, depending upon their intended use and designation as a hedge. GPU will adopt this statement effective January 1, 2001 and is currently in the process of evaluating the impact of its implementation. 23
GPU, INC. AND SUBSIDIARY COMPANIES Consolidated Balance Sheets In Thousands ----------------------------- June 30, December 31, 2000 1999 ------------ ------------ (Unaudited) ASSETS Utility Plant: Transmission, distribution and general plant $ 9,928,129 $11,240,218 Generation plant 535,514 526,228 ---------- ---------- Utility plant in service 10,463,643 11,766,446 Accumulated depreciation (3,962,894) (3,929,963) ---------- ---------- Net utility plant in service 6,500,749 7,836,483 Construction work in progress 210,101 170,317 Other, net 16,575 18,128 ---------- ---------- Net utility plant 6,727,425 8,024,928 ---------- ---------- Other Property and Investments: Equity investments 215,184 207,029 Goodwill, net 2,227,483 2,615,301 Nuclear decommissioning trusts, at market (Note 1) 669,796 636,284 Nuclear fuel disposal trust, at market 120,609 119,293 Other, net 543,220 716,142 ---------- ---------- Total other property and investments 3,776,292 4,294,049 ---------- ---------- Current Assets: Cash and temporary cash investments 634,439 471,548 Marketable securities 28,479 26,946 Special deposits 386,910 42,687 Accounts receivable: Customers, net 541,689 445,745 Other 233,243 185,968 Unbilled revenues 178,509 152,263 Cost and estimated earnings in excess of billings on uncompleted contracts 21,141 - Materials and supplies, at average cost or less: Construction and maintenance 76,896 100,807 Fuel 459 448 Deferred income taxes 260,947 72,249 Prepayments 156,234 141,352 ---------- ---------- Total current assets 2,518,946 1,640,013 ---------- ---------- Deferred Debits and Other Assets: Regulatory assets, net (Note 1) 4,639,953 4,716,246 Deferred income taxes 2,294,588 2,528,393 Other 501,687 494,203 ---------- ---------- Total deferred debits and other assets 7,436,228 7,738,842 ---------- ---------- Total Assets $20,458,891 $21,697,832 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 24
GPU, INC. AND SUBSIDIARY COMPANIES Consolidated Balance Sheets In Thousands ----------------------------- June 30, December 31, 2000 1999 ------------ ------------ (Unaudited) LIABILITIES AND CAPITALIZATION Capitalization: Common stock $ 331,958 $ 331,958 Capital surplus 1,014,032 1,011,721 Retained earnings 2,280,561 2,426,350 Accumulated other comprehensive income/(loss) (Note 5) (35,165) (6,341) ---------- ---------- Total 3,591,386 3,763,688 Reacquired common stock, at cost (315,000) (298,735) ---------- ---------- Total common stockholders' equity 3,276,386 3,464,953 Cumulative preferred stock: With mandatory redemption 51,500 73,167 Without mandatory redemption 12,649 12,649 Subsidiary-obligated mandatorily redeemable preferred securities 125,000 125,000 Trust preferred securities 200,000 200,000 Long-term debt 4,894,739 5,631,394 ---------- ---------- Total capitalization 8,560,274 9,507,163 ---------- ---------- Current Liabilities: Securities due within one year 588,626 581,147 Notes payable 1,297,733 1,391,071 Bank overdraft 236,536 224,585 Obligations under capital leases 39,548 48,165 Accounts payable 673,229 468,825 Billings in excess of cost and estimated earnings on uncompleted contracts 19,484 - Taxes accrued 161,981 309,509 Interest accrued 68,547 76,246 Other 619,370 732,110 ---------- ---------- Total current liabilities 3,705,054 3,831,658 ---------- ---------- Deferred Credits and Other Liabilities: Deferred income taxes 3,528,589 3,563,078 Unamortized investment tax credits 57,460 61,364 Three Mile Island Unit 2 future costs (Note 1) 504,033 496,944 Power purchase contract loss liability (Note 1) 3,156,834 3,300,878 Other 946,647 936,747 ---------- ---------- Total deferred credits and other liabilities 8,193,563 8,359,011 ---------- ---------- Commitments and Contingencies (Note 1) Total Liabilities and Capitalization $20,458,891 $21,697,832 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 25
GPU, INC. AND SUBSIDIARY COMPANIES Consolidated Statements of Income (Unaudited) In Thousands (Except Per Share Data) ----------------------------------------------- Three Months Six Months Ended June 30, Ended June 30, ---------------------- ---------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Operating Revenues $1,280,374 $ 892,700 $2,456,818 $1,961,403 --------- --------- --------- --------- Operating Expenses: Fuel 22,073 72,443 41,556 168,919 Power purchased and interchanged 471,932 266,281 883,403 512,790 Deferred costs, net (33,482) (20,226) (66,996) 144 Other operation and maintenance 411,884 273,227 669,431 513,351 Loss on sale of business 372,492 - 372,492 - Depreciation and amortization 134,432 125,851 264,027 243,095 Taxes, other than income taxes 43,046 43,097 94,595 92,444 --------- --------- --------- --------- Total operating expenses 1,422,377 760,673 2,258,508 1,530,743 --------- --------- --------- --------- Operating Income/(Loss) (142,003) 132,027 198,310 430,660 ---------- --------- --------- --------- Other Income and Deductions: Allowance for other funds used during construction 296 100 541 165 Equity in undistributed earnings of affiliates, net 2,120 23,247 5,772 76,499 Other income, net 31,032 19,153 50,210 68,234 --------- --------- --------- --------- Total other income and deductions 33,448 42,500 56,523 144,898 --------- --------- --------- --------- Income/(Loss) Before Interest Charges and Preferred Dividends (108,555) 174,527 254,833 575,558 --------- --------- --------- --------- Interest Charges and Preferred Dividends: Long-term debt and notes payable 134,162 86,428 267,076 167,552 Trust preferred securities 6,347 1,000 7,345 1,000 Subsidiary-obligated mandatorily redeemable preferred securities 7,222 5,350 14,444 Other interest 399 1,733 2,469 3,298 Allowance for borrowed funds used during construction (756) (1,036) (1,586) (1,644) Preferred stock dividends of subsidiaries, inclusive of $1,268 loss on reacquisition (6 Mos. 1999) 1,661 2,370 4,122 6,290 --------- --------- --------- --------- Total interest charges and preferred dividends 141,813 97,717 284,776 190,940 --------- --------- --------- --------- Income/(Loss) Before Income Taxes and Minority Interest (250,368) 76,810 (29,943) 384,618 Income taxes (40,164) 28,023 48,786 144,289 Minority interest net income 609 1,525 1,086 2,348 --------- --------- --------- --------- Net Income/(Loss) $ (210,813) $ 47,262 $ (79,815) $ 237,981 ========= ========= ========= ========= Basic - Earnings Per Avg. Common Share $ (1.74) $ .39 $ (.66) $ 1.88 ========= ========= ========= ========= - Avg. Common Shares Outstanding 121,199 125,701 121,284 126,670 ========= ========= ========= ========= Diluted - Earnings Per Avg. Common Share $ (1.74) $ .38 $ (.66) $ 1.87 ========= ========= ========= ========= - Avg. Common Shares Outstanding 121,314 125,951 121,389 126,932 ========= ========= ========= ========= Cash Dividends Paid Per Share $ .545 $ .530 $ 1.075 $ 1.045 ========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 26 GPU, INC. AND SUBSIDIARY COMPANIES Consolidated Statements of Cash Flows (Unaudited) In Thousands ------------------------ Six Months Ended June 30, ------------------------ 2000 1999 ---- ---- Operating Activities: Net income/(loss) $ (79,815) $ 237,981 Adjustments to reconcile income to cash provided: Depreciation and amortization 277,156 256,454 Amortization of property under capital leases 9,080 26,041 NJBPU restructuring rate order - 115,000 (Gain)/Loss on sale of business/investments 368,408 (38,339) Equity in undistributed earnings of affiliates, net of distributions received (19,886) (66,889) Deferred income taxes and investment tax credits, net 67,439 (343,327) Deferred costs, net (66,996) 411 Changes in working capital: Receivables (218,469) (92,730) Cost and estimated earnings in excess of billings on uncompleted contracts 5,789 - Materials and supplies 2,180 3,806 Special deposits and prepayments 82,146 (109,353) Payables and accrued liabilities 66,890 118,481 Billings in excess of cost and estimated earnings on uncompleted contracts (327) - Nonutility generation contract buyout costs (5,660) (40,250) Other, net (88,654) 42,953 --------- --------- Net cash provided by operating activities 399,281 110,239 --------- --------- Investing Activities: Acquisitions, net of cash acquired (220,242) (1,022,368) Capital expenditures and investments (265,903) (186,344) Proceeds from sale of business/investments 1,155,510 894,450 Contributions to decommissioning trusts (18,646) (19,302) Proceeds from nonutility generation trusts 44,809 - Trust fund established for repayment of debt (346,966) - Other, net 5,847 52,912 --------- --------- Net cash provided/(required) by investing activities 354,409 (280,652) --------- --------- Financing Activities: Issuance of long-term debt 421,169 1,614,321 Issuance of trust preferred securities - 193,070 Retirement of long-term debt (820,128) (1,463,192) Increase in notes payable, net 13,461 348,624 Capital lease principal payments (9,784) (23,756) Reacquisition of common stock (22,383) (102,582) Dividends paid on common stock (130,531) (132,534) Redemption of preferred stock of subsidiaries (21,667) (35,004) --------- --------- Net cash provided/(required) by financing activities (569,863) 398,947 --------- --------- Effect of exchange rate changes on cash (20,936) (2,835) --------- --------- Net increase in cash and temporary cash investments from above activities 162,891 225,699 Cash and temporary cash investments, beginning of year 471,548 72,755 --------- --------- Cash and temporary cash investments, end of period $ 634,439 $ 298,454 ========= ========= Supplemental Disclosure: Interest and preferred dividends paid $ 282,595 $ 191,347 ========= ========= Income taxes paid $ 150,789 $ 285,016 ========= ========= New capital lease obligations incurred $ 9,732 $ 28,396 ========= ========= Common stock dividends declared but not paid $ - $ 66,489 ========= ========= The accompanying notes are an integral part of the consolidated financial statements. 27
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY Consolidated Balance Sheets In Thousands ----------------------------- June 30, December 31, 2000 1999 ------------ ------------ (Unaudited) ASSETS Utility Plant: Transmission, distribution, and general plant $3,135,214 $3,097,150 Generation plant 510,282 504,545 --------- --------- Utility plant in service 3,645,496 3,601,695 Accumulated depreciation (1,947,437) (1,872,422) --------- --------- Net utility plant in service 1,698,059 1,729,273 Construction work in progress 106,414 80,671 Other, net 13,073 14,781 --------- --------- Net utility plant 1,817,546 1,824,725 --------- --------- Other Property and Investments: Nuclear decommissioning trusts, at market (Note 1) 419,586 394,941 Nuclear fuel disposal trust, at market 120,609 119,293 Other, net 2,756 1,252 --------- --------- Total other property and investments 542,951 515,486 --------- --------- Current Assets: Cash and temporary cash investments 53,480 68,684 Special deposits 2,479 1,035 Accounts receivable: Customers, net 160,561 164,099 Affiliates 27,053 34,992 Other 46,989 34,696 Unbilled revenues 89,643 78,251 Fuel inventory, at average cost or less 220 240 Deferred income taxes 4,439 1,652 Prepayments 69,467 23,000 --------- --------- Total current assets 454,331 406,649 --------- --------- Deferred Debits and Other Assets: Regulatory assets, net (Note 1) 2,727,532 2,810,854 Deferred income taxes 196,617 221,668 Other 56,683 31,615 --------- --------- Total deferred debits and other assets 2,980,832 3,064,137 --------- --------- Total Assets $5,795,660 $5,810,997 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 28
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY Consolidated Balance Sheets In Thousands ----------------------------- June 30, December 31, 2000 1999 ------------ ------------ (Unaudited) LIABILITIES AND CAPITALIZATION Capitalization: Common stock $ 153,713 $ 153,713 Capital surplus 510,769 510,769 Retained earnings 711,760 720,878 Accumulated other comprehensive income/(loss)(Note 5) 7 7 --------- --------- Total common stockholder's equity 1,376,249 1,385,367 Cumulative preferred stock: With mandatory redemption 51,500 73,167 Without mandatory redemption 12,649 12,649 Company-obligated mandatorily redeemable preferred securities 125,000 125,000 Long-term debt 1,133,880 1,133,760 --------- --------- Total capitalization 2,699,278 2,729,943 --------- --------- Current Liabilities: Securities due within one year 10,846 50,846 Obligations under capital leases 39,086 48,165 Accounts payable: Affiliates 110,665 60,527 Other 125,689 82,355 Taxes accrued 84,307 13,079 Interest accrued 23,815 24,523 Other 30,369 36,169 --------- --------- Total current liabilities 424,777 315,664 --------- --------- Deferred Credits and Other Liabilities: Deferred income taxes 574,710 570,568 Unamortized investment tax credits 29,205 32,114 Nuclear fuel disposal fee 152,257 148,009 Three Mile Island Unit 2 future costs (Note 1) 126,013 124,241 Power purchase contract loss liability (Note 1) 1,525,614 1,624,769 Other 263,806 265,689 --------- --------- Total deferred credits and other liabilities 2,671,605 2,765,390 --------- --------- Commitments and Contingencies (Note 1) Total Liabilities and Capitalization $5,795,660 $5,810,997 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 29
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY Consolidated Statements of Income (Unaudited) In Thousands ------------------------------------------- Three Months Six Months Ended June 30, Ended June 30, -------------------- --------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Operating Revenues $ 490,150 $ 391,025 $ 942,895 $ 907,914 -------- -------- --------- -------- Operating Expenses: Fuel 9,326 21,598 15,193 43,715 Power purchased and interchanged: Affiliates 10,977 41,639 31,253 57,588 Others 223,153 144,908 417,275 298,358 Deferral costs, net (33,482) (20,226) (66,996) 144 Other operation and maintenance 109,700 107,899 207,827 215,745 Depreciation and amortization 56,163 64,362 112,306 127,058 Taxes, other than income taxes 14,760 19,560 30,489 40,894 -------- -------- --------- -------- Total operating expenses 390,597 379,740 747,347 783,502 -------- -------- --------- -------- Operating Income 99,553 11,285 195,548 124,412 -------- -------- --------- -------- Other Income and Deductions: Allowance for other funds used during construction 297 69 513 123 Other income/(expense), net (1,501) 4,463 3,931 7,482 -------- -------- --------- -------- Total other income and deductions (1,204) 4,532 4,444 7,605 -------- -------- --------- -------- Income Before Interest Charges 98,349 15,817 199,992 132,017 -------- -------- --------- -------- Interest Charges: Long-term debt and notes payable 22,560 24,280 45,822 47,470 Company-obligated mandatorily redeemable preferred securities 2,675 2,675 5,350 5,350 Other interest 208 461 360 656 Allowance for borrowed funds used during construction (473) (454) (819) (686) -------- -------- --------- -------- Total interest charges 24,970 26,962 50,713 52,790 -------- -------- --------- -------- Income/(Loss) Before Income Taxes 73,379 (11,145) 149,279 79,227 Income taxes 28,945 (5,290) 59,275 31,385 -------- -------- --------- -------- Net Income/(Loss) 44,434 (5,855) 90,004 47,842 Preferred stock dividends 1,661 2,370 4,122 4,802 -------- -------- --------- -------- Earnings/(Loss) Available for Common Stock $ 42,773 $ (8,225) $ 85,882 $ 43,040 ======== ======== ========= ========
The accompanying notes are an integral part of the consolidated financial statements. 30 JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY Consolidated Statements of Cash Flows (Unaudited) In Thousands ------------------------- Six Months Ended June 30, ------------------------- 2000 1999 ---- ---- Operating Activities: Net income $ 90,004 $ 47,842 Adjustments to reconcile income to cash provided: Depreciation and amortization 128,800 141,578 Amortization of property under capital leases 9,080 15,237 NJBPU restructuring rate order - 115,000 Deferred income taxes and investment tax credits, net 2,690 (40,599) Deferred costs, net (66,996) 411 Changes in working capital: Receivables (6,750) (55,383) Materials and supplies (1,151) 11,797 Special deposits and prepayments (47,911) (96,850) Payables and accrued liabilities 111,921 7,058 Due to/from affiliates 58,077 (4,293) Nonutility generation contract buyout costs - (35,500) Other, net (41,697) 33,395 -------- -------- Net cash provided by operating activities 236,067 139,693 -------- -------- Investing Activities: Capital expenditures and investments (68,165) (67,305) Contributions to decommissioning trusts (14,671) (12,571) Other, net 2,299 1,860 -------- -------- Net cash required by investing activities (80,537) (78,016) -------- -------- Financing Activities: Retirement of long-term debt (40,000) - Increase in notes payable, net - 65,456 Redemption of preferred stock (21,667) (5,000) Capital lease principal payments (9,784) (12,366) Dividends paid on common stock (95,000) (95,000) Dividends paid on preferred stock (4,283) (4,708) -------- -------- Net cash required by financing activities (170,734) (51,618) -------- -------- Net increase/(decrease) in cash and temporary cash investments from above activities (15,204) 10,059 Cash and temporary cash investments, beginning of year 68,684 1,850 -------- -------- Cash and temporary cash investments, end of period $ 53,480 $ 11,909 ======== ======== Supplemental Disclosure: Interest and preferred dividends paid $ 55,469 $ 57,524 ======== ======== Income taxes paid/(refunded) $ (22,993) $ 81,027 ======== ======== New capital lease obligations incurred $ 9,732 $ 7,098 ======== ======== The accompanying notes are an integral part of the consolidated financial statements. 31
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES Consolidated Balance Sheets In Thousands ----------------------------- June 30, December 31, 2000 1999 ------------ ------------ (Unaudited) ASSETS Utility Plant: Transmission, distribution and general plant $1,517,692 $1,500,417 Generation plant 25,232 21,683 --------- --------- Utility plant in service 1,542,924 1,522,100 Accumulated depreciation (480,973) (462,709) --------- --------- Net utility plant in service 1,061,951 1,059,391 Construction work in progress 24,164 25,329 Other, net 596 643 --------- --------- Net utility plant 1,086,711 1,085,363 --------- --------- Other Property and Investments: Nuclear decommissioning trusts, at market (Note 1) 150,941 144,261 Other, net 5,357 3,010 --------- --------- Total other property and investments 156,298 147,271 --------- --------- Current Assets: Cash and temporary cash investments 16 10,899 Special deposits 161 160 Accounts receivable: Customers, net 64,720 60,188 Affiliates 132,050 77,067 Other 53,279 46,377 Unbilled revenues 31,998 28,956 Deferred income taxes 2,945 2,945 Prepayments 17,047 16,715 --------- --------- Total current assets 302,216 243,307 --------- --------- Deferred Debits and Other Assets: Regulatory assets, net (Note 1) 1,252,164 1,232,865 Deferred income taxes 728,003 738,189 Other 41,216 41,198 --------- --------- Total deferred debits and other assets 2,021,383 2,012,252 --------- --------- Total Assets $3,566,608 $3,488,193 ========== =========
The accompanying notes are an integral part of the consolidated financial statements. 32
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES Consolidated Balance Sheets In Thousands ----------------------------- June 30, December 31, 2000 1999 ------------ ------------ (Unaudited) LIABILITIES AND CAPITALIZATION Capitalization: Common stock $ 66,273 $ 66,273 Capital surplus 400,200 400,200 Retained earnings 23,741 13,581 Accumulated other comprehensive income (Note 5) 19,222 21,363 --------- --------- Total common stockholder's equity 509,436 501,417 Trust preferred securities 100,000 100,000 Long-term debt 496,884 496,883 --------- --------- Total capitalization 1,106,320 1,098,300 --------- --------- Current Liabilities: Securities due within one year 25 50,025 Notes payable 128,600 - Accounts payable: Affiliates 132,645 125,179 Other 45,271 30,106 Taxes accrued 13,421 35,976 Interest accrued 15,348 16,738 Other 10,732 18,208 --------- --------- Total current liabilities 346,042 276,232 --------- --------- Deferred Credits and Other Liabilities: Deferred income taxes 997,287 993,427 Unamortized investment tax credits 14,586 15,010 Three Mile Island Unit 2 future costs (Note 1) 251,924 248,381 Nuclear fuel disposal fee 34,383 33,430 Power purchase contract loss liability (Note 1) 729,727 735,833 Other 86,339 87,580 --------- --------- Total deferred credits and other liabilities 2,114,246 2,113,661 --------- --------- Commitments and Contingencies (Note 1) Total Liabilities and Capitalization $3,566,608 $3,488,193 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 33
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES Consolidated Statements of Income (Unaudited) In Thousands --------------------------------------------- Three Months Six Months Ended June 30, Ended June 30, -------------------- ---------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Operating Revenues $ 197,814 $ 198,010 $ 400,870 $ 427,167 -------- -------- --------- -------- Operating Expenses: Fuel - 23,514 - 49,143 Power purchased and interchanged: Affiliates 1,296 - 1,348 2,208 Others 111,566 46,039 204,064 86,997 Other operation and maintenance 38,205 54,002 66,205 105,917 Depreciation and amortization 15,941 19,191 31,745 38,320 Taxes, other than income taxes 11,593 10,641 22,976 23,707 -------- -------- --------- --------- Total operating expenses 178,601 153,387 326,338 306,292 -------- -------- --------- --------- Operating Income 19,213 44,623 74,532 120,875 -------- -------- --------- --------- Other Income and Deductions: Allowance for other funds used during construction (1) 31 28 42 Other income, net 8,249 1,903 11,020 3,036 -------- -------- --------- -------- Total other income and deductions 8,248 1,934 11,048 3,078 -------- -------- --------- -------- Income Before Interest Charges 27,461 46,557 85,580 123,953 -------- -------- --------- -------- Interest Charges: Long-term debt and notes payable 11,405 12,028 23,340 24,116 Trust preferred securities 1,837 694 3,675 694 Company-obligated mandatorily redeemable preferred securities - 2,250 4,500 Other interest 560 429 1,086 851 Allowance for borrowed funds used during construction (84) (282) (268) (458) -------- -------- --------- ------- Total interest charges 13,718 15,119 27,833 29,703 -------- -------- --------- --------- Income Before Income Taxes 13,743 31,438 57,747 94,250 Income taxes 5,076 12,296 22,587 42,276 -------- -------- --------- --------- Net Income 8,667 19,142 35,160 51,974 Preferred stock dividends - - - 66 Loss on preferred stock reacquisition - - - 542 -------- -------- --------- --------- Earnings Available for Common Stock $ 8,667 $ 19,142 $ 35,160 $ 51,366 ======== ======== ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 34 METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES Consolidated Statements of Cash Flows (Unaudited) In Thousands ------------------------- Six Months Ended June 30, ------------------------- 2000 1999 ---- ---- Operating Activities: Net income $ 35,160 $ 51,974 Adjustments to reconcile income to cash provided: Depreciation and amortization 31,616 41,302 Amortization of property under capital leases - 7,117 Deferred income taxes and investment tax credits, net 8,138 18,161 Changes in working capital: Receivables (11,435) 269 Materials and supplies - 10,036 Special deposits and prepayments (333) (52,958) Payables and accrued liabilities (16,285) (91,269) Due to/from affiliates (47,487) 52,592 Nonutility generation contract buyout costs (1,250) (1,250) Other, net (35,461) (17,502) -------- -------- Net cash provided/(required) by operating activities (37,337) 18,472 -------- -------- Investing Activities: Capital expenditures and investments (23,191) (32,321) Contributions to decommissioning trusts (3,955) (1,485) Other, net - (33) -------- -------- Net cash required by investing activities (27,146) (33,839) -------- -------- Financing Activities: Increase/(decrease) in notes payable, net 128,600 (54,640) Retirement of long-term debt (50,000) - Issuance of trust preferred securities - 96,535 Redemption of preferred stock - (12,598) Capital lease principal payments - (7,160) Dividends paid on common stock (25,000) (30,000) Dividends paid on preferred stock - (66) Contribution from parent corporation - 30,000 -------- ------- Net cash provided by financing activities 53,600 22,071 -------- ------- Net increase/(decrease) in cash and temporary cash investments from above activities (10,883) 6,704 Cash and temporary cash investments, beginning of year 10,899 442 -------- -------- Cash and temporary cash investments, end of period $ 16 $ 7,146 ======== ======== Supplemental Disclosure: Interest and preferred dividends paid $ 27,803 $ 28,112 ======== ======== Income taxes paid $ 45,736 $ 76,187 ======== ======== New capital lease obligations incurred $ - $ 14,199 ======== ======== The accompanying notes are an integral part of the consolidated financial statements. 35
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES Consolidated Balance Sheets In Thousands ----------------------------- June 30, December 31, 2000 1999 ------------ ------------ (Unaudited) ASSETS Utility Plant: Transmission, distribution and general plant $1,756,808 $1,732,386 Accumulated depreciation (575,494) (552,449) --------- --------- Net utility plant in service 1,181,314 1,179,937 Construction work in progress 34,166 30,329 Other, net 2,906 2,704 --------- --------- Net utility plant 1,218,386 1,212,970 --------- --------- Other Property and Investments: Nonutility generation trusts, at market 221,892 266,700 Nuclear decommissioning trusts, at market (Note 1) 99,269 97,082 Other, net 2,927 1,233 --------- --------- Total other property and investments 324,088 365,015 --------- --------- Current Assets: Cash and temporary cash investments 585 32,250 Special deposits 233 233 Accounts receivable: Customers, net 72,820 69,752 Affiliates 112,777 15,546 Other 31,369 24,658 Unbilled revenues 31,738 30,836 Deferred income taxes 7,589 7,589 Prepayments 15,706 15,484 --------- --------- Total current assets 272,817 196,348 --------- --------- Deferred Debits and Other Assets: Regulatory assets, net (Note 1) 660,257 672,527 Deferred income taxes 1,197,133 1,225,150 Other 23,779 23,781 --------- --------- Total deferred debits and other assets 1,881,169 1,921,458 --------- --------- Total Assets $3,696,460 $3,695,791 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 36
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES Consolidated Balance Sheets In Thousands ----------------------------- June 30, December 31, 2000 1999 ------------ ------------ (Unaudited) LIABILITIES AND CAPITALIZATION Capitalization: Common stock $ 105,812 $ 105,812 Capital surplus 285,486 285,486 Retained earnings 35,746 59,265 Accumulated other comprehensive income (Note 5) 9,542 10,619 --------- --------- Total common stockholder's equity 436,586 461,182 Trust preferred securities 100,000 100,000 Long-term debt 474,734 424,641 --------- --------- Total capitalization 1,011,320 985,823 --------- --------- Current Liabilities: Securities due within one year 13 13 Notes payable 104,400 53,600 Obligations under capital leases 462 - Accounts payable: Affiliates 134,369 66,223 Other 52,494 34,845 Taxes accrued 5,986 108,005 Interest accrued 8,938 6,588 Other 11,175 17,567 --------- --------- Total current liabilities 317,837 286,841 --------- --------- Deferred Credits and Other Liabilities: Deferred income taxes 1,230,791 1,250,490 Unamortized investment tax credits 13,669 14,240 Three Mile Island Unit 2 future costs (Note 1) 126,096 124,322 Nuclear fuel disposal fee 17,197 16,717 Power Purchase contract loss liability (Note 1) 901,493 940,276 Other 78,057 77,082 --------- --------- Total deferred credits and other liabilities 2,367,303 2,423,127 --------- --------- Commitments and Contingencies (Note 1) Total Liabilities and Capitalization $3,696,460 $3,695,791 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 37
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES Consolidated Statements of Income (Unaudited) In Thousands -------------------------------------------- Three Months Six Months Ended June 30, Ended June 30, -------------------- ---------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Operating Revenues $ 206,789 $ 205,097 $ 426,894 $ 451,346 -------- -------- --------- --------- Operating Expenses: Fuel - 16,709 - 53,253 Power purchased and interchanged: Affiliates 876 2,991 1,033 4,553 Others 120,818 54,960 225,831 93,991 Other operation and maintenance 44,425 55,215 83,231 114,618 Depreciation and amortization 13,469 18,407 25,003 41,460 Taxes, other than income taxes 12,523 11,806 23,486 25,820 -------- -------- --------- --------- Total operating expenses 192,111 160,088 358,584 333,695 -------- -------- --------- --------- Operating Income 14,678 45,009 68,310 117,651 -------- -------- --------- --------- Other Income and Deductions: Other income, net 3,858 7,192 4,705 46,101 -------- -------- --------- --------- Total other income and deductions 3,858 7,192 4,705 46,101 -------- -------- --------- --------- Income Before Interest Charges 18,536 52,201 73,015 163,752 -------- -------- --------- --------- Interest Charges: Long-term debt and notes payable 9,124 7,369 16,401 20,797 Trust preferred securities 1,835 306 3,670 306 Company-obligated mandatorily redeemable preferred securities - 2,297 - 4,594 Other interest 311 132 607 539 Allowance for borrowed funds used during construction (199) (300) (499) (500) -------- -------- --------- --------- Total interest charges 11,071 9,804 20,179 25,736 -------- -------- --------- --------- Income Before Income Taxes 7,465 42,397 52,836 138,016 Income taxes 2,926 22,452 21,355 52,581 -------- -------- --------- --------- Net Income 4,539 19,945 31,481 85,435 Preferred stock dividends - - - 154 Loss on preferred stock reacquisition - - - 726 -------- -------- --------- --------- Earnings Available for Common Stock $ 4,539 $ 19,945 $ 31,481 $ 84,555 ======== ======== ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 38 PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES Consolidated Statements of Cash Flows (Unaudited) In Thousands ------------------------- Six Months Ended June 30, ------------------------- 2000 1999 ---- ---- Operating Activities: Net income $ 31,481 $ 85,435 Adjustments to reconcile income to cash provided: Depreciation and amortization 24,702 40,958 Amortization of property under capital leases - 3,687 Gain on sale of investment - (38,252) Deferred income taxes and investment tax credits, net 12,753 (290,339) Changes in working capital: Receivables (9,779) 12,050 Materials and supplies - 33,195 Special deposits and prepayments (222) 2,867 Payables and accrued liabilities (88,410) 166,060 Due to/from affiliates (29,085) 9,842 Nonutility generation contract buyout costs (4,410) (3,500) Other, net (31,879) (50,230) -------- -------- Net cash required by operating activities (94,849) (28,227) -------- -------- Investing Activities: Capital expenditures and investments (29,452) (37,567) Proceeds from sale of investment - 894,450 Proceeds from nonutility generation trusts 44,809 - Contributions to decommissioning trusts (20) (5,246) Other, net 2,047 915 -------- -------- Net cash provided by investing activities 17,384 852,552 -------- -------- Financing Activities: Issuance of long-term debt 50,000 348,127 Issuance of trust preferred securities - 96,535 Retirement of long-term debt - (600,000) Increase/(decrease) in notes payable, net 50,800 (86,023) Redemption of preferred stock - (17,406) Capital lease principal payments - (4,230) Dividends paid on common stock (55,000) (380,000) Dividends paid on preferred stock - (154) -------- -------- Net cash provided/(required) by financing activities 45,800 (643,151) -------- -------- Net increase/(decrease) in cash and temporary cash investments from above activities (31,665) 181,174 Cash and temporary cash investments, beginning of year 32,250 2,750 -------- -------- Cash and temporary cash investments, end of period $ 585 $ 183,924 ======== ======== Supplemental Disclosure: Interest and preferred dividends paid $ 10,914 $ 39,584 ======== ======== Income taxes paid $ 115,575 $ 127,541 ======== ======== New capital lease obligations incurred $ - $ 7,099 ======== ======== The accompanying notes are an integral part of the consolidated financial statements. 39 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 function, transmission and distribution operations and the operations of the remaining non-nuclear generating facilities of these electric utilities are conducting business under the name GPU Energy. JCP&L, Met-Ed and Penelec considered together are referred to as the "GPU Energy companies." The nuclear generation operations of GPU Energy are conducted by GPU Nuclear, Inc. (GPUN). GPU Capital, Inc. and GPU Electric, Inc. and their subsidiaries own, operate and fund the acquisition of electric distribution and gas transmission 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 (US) and foreign countries and are referred to as the "GPUI Group." Other subsidiaries of GPU, Inc. include GPU Advanced Resources, Inc. (GPU AR), which is involved in retail energy sales; GPU Telcom Services, Inc. (GPU Telcom), which is engaged in telecommunications-related businesses; MYR Group Inc. (MYR), which is a utility infrastructure construction services company; and GPU Service, Inc. (GPUS), which provides legal, accounting, financial and other services to the GPU companies. All of these companies considered together are referred to as "GPU." These notes should be read in conjunction with the notes to consolidated financial statements included in the 1999 Annual Report on Form 10-K. The December 31, 1999 balance sheet data contained in the attached financial statements was derived from audited financial statements. For disclosures required by accounting principles generally accepted in the US, see the 1999 Annual Report on Form 10-K. 1. COMMITMENTS AND CONTINGENCIES COMPETITION AND THE CHANGING REGULATORY ENVIRONMENT Stranded Costs and Regulatory Restructuring Orders: -------------------------------------------------- With the current market price of electricity being below the cost of some utility-owned generation and power purchase commitments, and the ability of customers to choose their energy suppliers, certain costs, which generally would be recoverable in a regulated environment, may not be recoverable in a competitive environment. These costs are generally referred to as stranded costs. In 1998, the Pennsylvania Public Utility Commission (PaPUC) issued Restructuring Orders to Met-Ed and Penelec which, among other things, provide for Met-Ed and Penelec's recovery of a substantial portion of what otherwise would have become stranded costs, and provide for a Phase II proceeding following the completion of their generation divestitures to make a final determination of the extent of that stranded cost recovery. The Pennsylvania Supreme Court has denied an appeal filed by one intervenor in the proceeding. GPU Energy does not know whether the intervenor will seek review by the US Supreme Court. 40 On January 31, 2000, Met-Ed and Penelec submitted Phase II Reports to the PaPUC addressing actual net divestiture proceeds and reconciliation of stranded costs pursuant to the 1998 Restructuring Orders. The PaPUC and other parties, which participated in the 1998 Restructuring Orders, are currently reviewing the Reports. There can be no assurance as to the outcome of this matter. In May 1999, the NJBPU issued a Summary Order with respect to JCP&L's rate unbundling, stranded cost and restructuring filings. The Summary Order provides for, among other things, customer choice of electric generation supplier beginning August 1, 1999 and full recovery of stranded costs. The Summary Order did not address the pending sale of Oyster Creek, because at the time the Summary Order was issued, it was uncertain whether the plant would be sold or retired early. JCP&L is awaiting a final order from the NJBPU. During 1999, the NJBPU issued final electric restructuring and generation-related securitization orders to Public Service Electric and Gas Company (PSE&G), a non-affiliated utility. Several parties appealed these orders on a variety of grounds, including the use of deferred accounting associated with above market NUG costs and the Societal Benefit Charge, which includes recovery of nuclear decommissioning costs. In April 2000, the Appellate Division of the New Jersey Superior Court affirmed the orders. The Appellate Division's decision has been appealed to the New Jersey Supreme Court which is not expected to issue a decision before January 2001. While JCP&L's Summary Order has not been appealed, JCP&L is unable to determine the impact, if any, the appeals to PSE&G's orders will have on its restructuring order and petition for securitization or its use of deferred accounting. As a result of the NJBPU and the PaPUC restructuring decisions, the GPU Energy companies are required to supply electricity to customers who do not choose an alternate supplier. Given that the GPU Energy companies have essentially divested their generation business, there will be increased market risks associated with supplying that electricity, since the GPU Energy companies will have to supply electricity to non-shopping customers entirely from contracted and open market purchases. While JCP&L is permitted to recover reasonable and prudently incurred costs associated with providing basic generation service to non-shopping customers, Met-Ed and Penelec are generally unable to recover their energy costs in excess of established rate caps. Management has implemented an energy risk management program, but there can be no assurance that the GPU Energy companies will be able to fully recover the costs to supply electricity to customers who do not choose an alternate supplier. Generation Agreements: --------------------- The evolving competitive generation market has created uncertainty regarding the forecasting of the GPU Energy companies' energy supply needs, which has caused the GPU Energy companies to seek shorter-term agreements offering more flexibility. The GPU Energy companies' supply plan focuses on short- to intermediate-term commitments (one month to three years) covering times of expected high energy price volatility (that is, peak demand periods) and reliance on spot market purchases during other periods. 41 The GPU Energy companies have entered into agreements with third party suppliers to purchase capacity and energy. Payments pursuant to these agreements, which include firm commitments as well as certain assumptions regarding, among other things, call/put arrangements and the timing of the pending Oyster Creek sale, are estimated to be $650 million in 2000, $651 million in 2001, $323 million in 2002, $138 million in 2003 and $44 million in 2004. Pursuant to the mandates of the federal Public Utility Regulatory Policies Act and state regulatory directives, the GPU Energy companies have been required to enter into power purchase agreements with non-utility generators (NUGs) for the purchase of energy and capacity, which agreements have remaining terms of up to 20 years. The rates under virtually all of the GPU Energy companies' NUG agreements are substantially in excess of current and projected prices from alternative sources. The following table shows actual payments from 1998 through June 30, 2000, and estimated payments thereafter through 2005: Payments Under NUG Agreements (in millions) Total JCP&L Met-Ed Penelec 1998 788 403 174 211 1999 774 388 167 219 2000 741 385 141 215 2001 733 392 138 203 2002 736 394 141 201 2003 752 400 145 207 2004 767 404 150 213 2005 751 392 153 206 The NJBPU Summary Order provides JCP&L assurance of full recovery of its NUG costs (including above-market NUG costs and certain buyout costs), whereas the PaPUC Restructuring Orders provide Met-Ed and Penelec assurance of full recovery of their above-market NUG costs and certain NUG buyout costs. The GPU Energy companies have recorded, on a present value basis, a total liability of $3.1 billion (JCP&L $1.5 billion; Met-Ed $0.7 billion; Penelec $0.9 billion) on the Consolidated Balance Sheets for above-market NUG costs which is offset by a corresponding regulatory asset. The GPU Energy companies are continuing efforts to reduce the above-market costs of these agreements. There can be no assurance as to the extent to which these efforts will be successful. In 1997, the NJBPU approved a Stipulation of Final Settlement which, among other things, provided for the recovery of costs associated with the buyout of the Freehold Cogeneration power purchase agreement (Freehold buyout). The NJBPU approved the cost recovery of up to $135 million, over a seven-year period, on an interim basis subject to refund. The NJBPU's Summary Order provides for the continued recovery of the Freehold buyout in the Market Transition Charge (MTC), but has not altered the interim nature of such recovery, pending a final decision by the NJBPU. There can be no assurance as to the outcome of this matter. ACCOUNTING MATTERS JCP&L, in 1999, and Met-Ed and Penelec in 1998, discontinued the application of Statement of Financial Accounting Standards No. 71 (FAS 71), 42 "Accounting for the Effects of Certain Types of Regulation," and adopted the provisions of Statement of Financial Accounting Standards No. 101, "Regulated Enterprises - Accounting for the Discontinuation of Application of FASB Statement No. 71," and Emerging Issues Task Force (EITF) Issue 97-4, "Deregulation of the Pricing of Electricity - Issues Related to the Application of FAS 71 and FAS 101", with respect to their electric generation operations. The transmission and distribution portion of the GPU Energy companies' operations continue to be subject to the provisions of FAS 71. Regulatory assets, net as reflected in the June 30, 2000 and December 31, 1999 Consolidated Balance Sheets in accordance with the provisions of FAS 71 and EITF Issue 97-4 were as follows: GPU, Inc. and Subsidiary Companies (in thousands) ---------------------------- June 30, December 31, 2000 1999 ------------- ------------ Market transition charge (MTC) / basic generation service $2,287,449 $2,359,529 Competitive transition charge (CTC) 756,406 803,064 Reserve for generation divestiture 530,912 536,904 Power purchase contract loss not in CTC 369,290 369,290 Income taxes recoverable through future rates, net 283,636 280,268 Costs recoverable through distribution rates 281,363 296,842 Three Mile Island Unit 2 (TMI-2) decommissioning costs 100,869 100,794 Societal benefits charge 100,643 116,941 Net divestiture proceeds recoverable through MTC 58,077 37,542 Above-market deferred NUG costs (196,276) (252,348) Other, net 67,584 67,420 --------- --------- Total regulatory assets, net $4,639,953 $4,716,246 ========= ========= JCP&L MTC / basic generation service $2,287,449 $2,359,529 Costs recoverable through distribution rates 281,363 296,842 Societal benefits charge 100,643 116,941 Net divestiture proceeds recoverable through MTC 58,077 37,542 --------- -------- Total regulatory assets, net $2,727,532 $2,810,854 ========= ========= Met-Ed CTC $ 583,441 $ 591,316 Power purchase contract loss not in CTC 271,270 271,270 Reserve for generation divestiture 142,179 137,037 Income taxes recoverable through future rates, net 122,955 115,713 TMI-2 decommissioning costs 64,608 65,455 Other, net 67,711 52,074 --------- --------- Total regulatory assets, net $1,252,164 $1,232,865 ========= ========= Penelec Reserve for generation divestiture $ 388,733 $ 399,867 Above-market deferred NUG costs (213,312) (252,893) CTC 172,965 211,748 Income taxes recoverable through future rates, net 160,681 164,555 Power purchase contract loss not in CTC 98,020 98,020 Other, net 53,170 51,230 --------- --------- Total regulatory assets, net $ 660,257 $ 672,527 ========= ========= 43 Statement of Financial Accounting Standards 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by FAS 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" and FAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - An Amendment of FASB Statement No. 133" (collectively, FAS 133), establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In general, FAS 133 requires that companies recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. FAS 133 (as amended) excludes from its scope certain contracts that qualify as normal purchases and sales. To qualify for this exclusion, it must be probable that the contract will result in physical delivery. GPU's use of derivative instruments is intended to manage the risks of commodity price, interest rate and foreign currency fluctuations, and may include such transactions as electricity and natural gas forwards and futures contracts, foreign currency swaps, interest rate swaps and options. GPU does not intend to hold or issue derivative instruments for trading purposes. To the extent that GPU's energy-related contracts fall within the scope of FAS 133, GPU will be required to include them on its balance sheet at fair value, and recognize the subsequent changes in fair value as either gains or losses in earnings or report them as a component of other comprehensive income, depending upon their intended use and designation as a hedge. GPU will adopt this statement on January 1, 2001 and is currently in the process of evaluating the impact of its implementation. NUCLEAR FACILITIES Investments: ----------- In December 1999, the GPU Energy companies sold TMI-1 to AmerGen for approximately $100 million. In addition, in October 1999, JCP&L agreed to sell Oyster Creek to AmerGen for $10 million and reimbursement of the cost (estimated at $88 million) of the next refueling outage. JCP&L's net investment, including nuclear fuel, in Oyster Creek as of June 30, 2000 and December 31, 1999 was $10 million, reflecting the impairment write-down from the pending sale. JCP&L, Met-Ed and Penelec jointly own TMI-2, which was damaged during a 1979 accident, in the percentages of 25%, 50% and 25%. JCP&L's net investment in TMI-2 as of June 30, 2000 and December 31, 1999 was $58 million and $61 million, respectively. JCP&L is collecting revenues for TMI-2 on a basis which provides for the recovery of its remaining investment in the plant by 2008. Met-Ed and Penelec's remaining investments in TMI-2 were written off in 1998 after receiving the PaPUC's Restructuring Orders. TMI-2: ----- As a result of the 1979 TMI-2 accident, individual claims for alleged personal injury (including claims for punitive damages), which are material in amount, were asserted against GPU, Inc. and the GPU Energy companies. Approximately 2,100 of such claims were filed in the US District Court for the Middle District of Pennsylvania. Some of the claims also seek recovery for injuries from alleged emissions of radioactivity before and after the accident. 44 At the time of the TMI-2 accident, as provided for in the Price-Anderson Act, the GPU Energy companies had (a) primary financial protection in the form of insurance policies with groups of insurance companies providing an aggregate of $140 million of primary coverage, (b) secondary financial protection in the form of private liability insurance under an industry retrospective rating plan providing for up to an aggregate of $335 million in premium charges under such plan and (c) an indemnity agreement with the Nuclear Regulatory Commission (NRC) for up to $85 million, bringing their total financial protection up to an aggregate of $560 million. Under the secondary level, the GPU Energy companies are subject to a retrospective premium charge of up to $5 million per reactor, or a total of $15 million. In 1995, the US Court of Appeals for the Third Circuit ruled that the Price-Anderson Act provides coverage under its primary and secondary levels for punitive as well as compensatory damages, but that punitive damages could not be recovered against the Federal Government under the third level of financial protection. In so doing, the Court of Appeals referred to the "finite fund" (the $560 million of financial protection under the Price-Anderson Act) to which plaintiffs must resort to get compensatory as well as punitive damages. The Court of Appeals also ruled that the standard of care owed by the defendants to a plaintiff was determined by the specific level of radiation which was released into the environment, as measured at the site boundary, rather than as measured at the specific site where the plaintiff was located at the time of the accident (as the defendants proposed). The Court of Appeals also held that each plaintiff still must demonstrate exposure to radiation released during the TMI-2 accident and that such exposure had resulted in injuries. In 1996, the US Supreme Court denied petitions filed by GPU, Inc. and the GPU Energy companies to review the Court of Appeals' rulings. In 1996, the District Court granted a motion for summary judgment filed by GPU, Inc. and the GPU Energy companies, and dismissed the ten initial "test cases," which had been selected for a test case trial as well as all of the remaining 2,100 pending claims. The Court ruled that there was no evidence which created a genuine issue of material fact warranting submission of plaintiffs' claims to a jury. The plaintiffs appealed the District Court's ruling to the Court of Appeals for the Third Circuit. In November 1999, the Third Circuit affirmed the District Court's dismissal of the ten "test cases," but set aside the dismissal of the additional pending claims, remanding them to the District Court for further proceedings. In remanding these claims, the Third Circuit held that the District Court had erred in extending its summary judgment decision to the other plaintiffs and imposing on these plaintiffs the District Court's finding that radiation exposures below 10 rems were too speculative to establish a causal link to cancer. The Court of Appeals stated that the non-test case plaintiffs should be permitted to present their own individual evidence that exposure to radiation from the accident caused their cancers. In June 2000, the US Supreme Court denied petitions by GPU, Inc., the GPU Energy companies and the plaintiffs. 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. 45 NUCLEAR PLANT RETIREMENT COSTS Retirement costs for nuclear plants include decommissioning the radiological portions of the plants and the cost of removal of nonradiological structures and materials. The disposal of spent nuclear fuel is covered separately by contracts with the US Department of Energy (DOE). In 1995, a consultant to GPUN performed site-specific studies of TMI-2 and Oyster Creek (updated in 1998), that considered various decommissioning methods and estimated the cost of decommissioning the radiological portions and the cost of removal of the nonradiological portions of each plant, using the prompt removal/dismantlement method. GPUN management has reviewed the methodology and assumptions used in these studies, is in agreement with them, and believes the results are reasonable. Under NRC regulations, JCP&L is making periodic payments to complete the funding for Oyster Creek retirement costs by the end of the plant's license term of 2009. The TMI-2 funding completion date is 2014, consistent with TMI-2 remaining in long-term storage. The NRC may require an acceleration of the decommissioning funding for Oyster Creek if the pending sale is not completed and the plant is retired early. The retirement cost estimates under the 1995 site-specific studies, assuming decommissioning of TMI-2 and Oyster Creek in 2014 and 2009, respectively, are $443 million and $601 million for radiological decommissioning and $35 million and $33 million for non-radiological removal costs (net of $12.6 million spent as of June 30, 2000)(in 2000 dollars). Each of the GPU Energy companies is responsible for retirement costs in proportion to its respective ownership percentage. The ultimate cost of retiring the GPU Energy companies' nuclear facilities may be different from the cost estimates contained in these site-specific studies. Also, the cost estimates contained in these site-specific studies are significantly greater than the decommissioning funding targets established by the NRC. The 1995 Oyster Creek site-specific study was updated in 1998 in response to the previously announced potential early closure of the plant in 2000. An early shutdown would increase the retirement costs shown above to $643 million ($610 million for radiological decommissioning and $33 million for nonradiological cost of removal). Both estimates include substantial spending for an on-site dry storage facility for spent nuclear fuel and significant costs for storing the fuel until the DOE complies with the Nuclear Waste Policy Act of 1982. For additional information, see OTHER COMMITMENTS AND CONTINGENCIES section. The agreements to sell Oyster Creek to AmerGen provide, among other things, that upon financial closing, JCP&L will transfer $430 million in decommissioning trust funds to AmerGen, which will assume all liability for decommissioning Oyster Creek. The NJBPU has granted JCP&L annual revenues for Oyster Creek retirement costs of $22.5 million based on the 1995 site-specific study. In August 2000, the recovery of Oyster Creek retirement costs escalates to $34.4 million annually if the plant is retired in 2000. In the event JCP&L does not complete the pending sale of Oyster Creek, management believes that any retirement costs, in excess of those currently recognized for ratemaking purposes, should be recoverable from customers. 46 The estimated liabilities for TMI-2 future retirement costs (reflected as Three Mile Island Unit 2 future costs on the Consolidated Balance Sheets) as of June 30, 2000 and December 31, 1999 are $504 million (JCP&L $126 million; Met-Ed $252 million; Penelec $126 million) and $497 million (JCP&L $124 million; Met-Ed $249 million; Penelec $124 million), respectively. These amounts are based upon the 1995 site-specific study estimates (in 2000 and 1999 dollars, respectively) discussed above and an estimate for remaining incremental monitored storage costs of $27 million (JCP&L $7 million; Met-Ed $13 million; Penelec $7 million) as of June 30, 2000 and December 31, 1999, as a result of TMI-2 entering long-term monitored storage in 1993. Offsetting the $504 million liability as of June 30, 2000 is $182 million (JCP&L $13 million; Met-Ed $133 million; Penelec $36 million), which management believes is probable of recovery from customers and included in Regulatory assets, net on the Consolidated Balance Sheets, and $366 million (JCP&L $116 million; Met-Ed $151 million; Penelec $99 million) in trust funds for TMI-2 and included in Nuclear decommissioning trusts, at market on the Consolidated Balance Sheets. The NJBPU has granted JCP&L revenues for TMI-2 retirement costs based on the 1995 site-specific 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. As of June 30, 2000, the accident-related portion of TMI-2 radiological decommissioning costs is considered to be $78 million (JCP&L $19.5 million; Met-Ed $39 million; Penelec $19.5 million), which is based on the 1995 site-specific study estimates (in 2000 dollars). JCP&L intends to seek recovery for any increases in TMI-2 retirement costs, and Met-Ed and Penelec intend to seek recovery for any increases in the nonaccident-related portion of such costs, but recognize that recovery cannot be assured. INSURANCE GPU has insurance (subject to retentions and deductibles) for its operations and facilities including coverage for property damage, liability to employees and third parties, and loss of use and occupancy (primarily incremental replacement power costs). There is no assurance that GPU will maintain all existing insurance coverages. Losses or liabilities that are not completely insured, unless allowed to be recovered through ratemaking, could have a material adverse effect on the financial position of GPU. The decontamination liability, premature decommissioning and property damage insurance coverage for Oyster Creek totals $2.75 billion. In addition, GPU has purchased property and decontamination insurance coverage for TMI-2 totaling $150 million. In accordance with NRC regulations, these insurance policies generally require that proceeds first be used for stabilization of the reactors and then to pay for decontamination and debris removal expenses. Any remaining amounts available under the policies may then be used for repair and restoration costs and decommissioning costs. Consequently, there can be no assurance that in the event of a nuclear 47 incident, property damage insurance proceeds would be available for the repair and restoration of that station. The Price-Anderson Act limits GPU's liability to third parties for a nuclear incident at Oyster Creek to approximately $9.5 billion. Coverage for the first $200 million of such liability is provided by private insurance. The remaining coverage, or secondary financial protection, is provided by retrospective premiums payable by all nuclear reactor owners. Under secondary financial protection, a nuclear incident at any licensed nuclear power reactor in the country, including Oyster Creek, could result in an assessment of up to $88 million per incident, subject to an annual maximum payment of $10 million per incident per reactor. Although TMI-2 is exempt from this assessment, the plant is still covered by the provisions of the Price-Anderson Act. In addition to the retrospective premiums payable under the Price-Anderson Act, the GPU Energy companies are also subject to retrospective premium assessments of up to $9.5 million for insurance policies currently in effect applicable to nuclear operations and facilities. The GPU Energy companies are also subject to other retrospective premium assessments related to policies applicable to TMI-1 and Oyster Creek (GPU anticipates the sale of Oyster Creek to be completed in August 2000) prior to their sales to AmerGen. JCP&L has insurance coverage for incremental replacement power costs should an accident-related outage at Oyster Creek occur. Coverage would commence after a 12-week waiting period at $2.1 million per week for 52 weeks, decreasing to 80% of such amount for the next 110 weeks. ENVIRONMENTAL MATTERS As a result of existing and proposed legislation and regulations, and ongoing legal proceedings dealing with environmental matters, including but not limited to acid rain, water quality, ambient air quality, global warming, electromagnetic fields, and storage and disposal of hazardous and/or toxic wastes, GPU may be required to incur substantial additional costs to construct new equipment, modify or replace existing and proposed equipment, remediate, decommission or cleanup waste disposal and other sites currently or formerly used by it, including formerly owned manufactured gas plants (MGP), coal mine refuse piles and generation facilities. In addition, federal and state law provides for payment by responsible parties for damage to natural resources. GPU has been formally notified by the Environmental Protection Agency (EPA) and state environmental authorities that it is among the potentially responsible parties (PRPs) who may be jointly and severally liable to pay for the costs associated with the investigation and remediation at hazardous and/or toxic waste sites in the following number of instances (in some cases, more than one company is named for a given site): JCP&L MET-ED PENELEC GPUN GPU, INC. TOTAL ----- ------ ------- ---- --------- ----- 6 4 2 1 1 11 In addition, certain of the GPU companies have been requested to participate in the remediation or supply information to the EPA and state environmental authorities on several other sites for which they have not been 48 formally named as PRPs, although the EPA and/or state authorities may nevertheless consider them as PRPs. Certain of the GPU companies have also been named in lawsuits requesting damages (which are material in amount) for hazardous and/or toxic substances allegedly released into the environment. As of June 30, 2000, a liability of approximately $6 million was recorded for nine PRP sites where it is probable that a loss has been incurred and the amount could be reasonably estimated. The ultimate cost of remediation of all these and other hazardous waste sites will depend upon changing circumstances as site investigations continue, including (a) the existing technology required for site cleanup, (b) the remedial action plan chosen and (c) the extent of site contamination and the portion attributed to the GPU companies involved. In 1997, the EPA filed a complaint against GPU, Inc. in the US District Court for the District of Delaware for enforcement of its Unilateral Order (Order) issued against GPU, Inc. to clean up the former Dover Gas Light Company (Dover) manufactured gas production site (Site) in Dover, Delaware. Dover was part of the AGECO/AGECORP group of companies from 1929 until 1942; GPU, Inc. emerged from the AGECO/AGECORP reorganization proceedings in 1946. All of Dover's common stock, which was sold in 1942 to an unaffiliated entity, was subsequently acquired by Chesapeake Utilities Corporation (Chesapeake), which merged with Dover in 1960. Chesapeake is currently performing the cleanup at the Site. According to the complaint, the EPA is seeking (1) enforcement of the Order against GPU; (2) recovery of its past response costs; (3) a declaratory judgment that GPU is liable for any remaining cleanup costs of the Site; and (4) statutory penalties for noncompliance with the Order. The EPA has stated that it has incurred approximately $1 million of past response costs as of December 31, 1999. The EPA estimates the total Site cleanup costs at approximately $4.2 million. Consultants to Chesapeake have estimated the remaining remediation ground water costs to be approximately $11.3 million to $19 million. In accordance with its penalty policy, and in discussions with GPU, the EPA has demanded penalties calculated at a daily rate of $8,800, rather than the statutory maximum of $27,500 per day. As of June 30, 2000, if the statutory maximum were applied, the total amount of penalties would be approximately $39 million. GPU believes that it has meritorious defenses to the imposition of penalties, or that if a penalty is assessed, it should be at a lower daily rate. Chesapeake has also sued GPU, Inc. for contribution to the cleanup of the Dover Site. The US District Court for the District of Delaware has consolidated the case filed by Chesapeake with the case filed by the EPA and discovery is proceeding. There can be no assurance as to the outcome of these proceedings. In connection with the 1999 sale of its Seward Generation Station to Sithe Energies, Penelec has assumed up to $6 million of remediation costs associated with certain coal mine refuse piles which are the subject of an earlier consent decree with the Pennsylvania Department of Environmental Protection. Penelec expects recovery of these remediation costs in Phase II of its restructuring proceeding and has recorded a corresponding regulatory asset. JCP&L has entered into agreements with the NJDEP for the investigation and remediation of 17 formerly owned MGP sites. JCP&L has also entered into various cost-sharing agreements with other utilities for most of the sites. As of June 30, 2000, JCP&L has spent approximately $38 million in connection 49 with the cleanup of these sites. In addition, JCP&L has recorded an estimated environmental liability of $54 million relating to expected future costs of these sites (as well as two other properties). This estimated liability is based upon ongoing site investigations and remediation efforts, which generally involve capping the sites and pumping and treatment of ground water. Moreover, the cost to clean up these sites could be materially in excess of the $54 million due to significant uncertainties, including changes in acceptable remediation methods and technologies. In 1997, the NJBPU approved JCP&L's request to establish a Remediation Adjustment Clause for the recovery of MGP remediation costs. As a result of the NJBPU's Summary Order, effective August 1, 1999, the recovery of these costs was transferred to the Societal Benefits Charge. As of June 30, 2000, JCP&L had recorded on its Consolidated Balance Sheet a regulatory asset of $46 million. JCP&L is continuing to pursue reimbursement from its insurance carriers for remediation costs already spent and for future estimated costs. In 1994, JCP&L filed a complaint with the Superior Court of New Jersey against several of its insurance carriers, relative to these MGP sites, and has settled with all but one of those insurance carriers. OTHER COMMITMENTS AND CONTINGENCIES Class Action Litigation: ----------------------- GPU Energy In July 1999, New Jersey experienced a severe heat storm that resulted in major power outages and temporary service interruptions, which affected JCP&L's service territory. As a result, the NJBPU initiated an investigation into the reliability of the transmission and distribution systems of all New Jersey utilities and their response to power outages. This investigation was completed in April 2000, resulting in Phase I and Phase II Reports. Both Reports contain, among other things, recommendations as to certain actions that should be undertaken by JCP&L, and were adopted by NJBPU orders requiring JCP&L to act on the recommendations and to report back on such implementation. JCP&L has begun to act on these recommendations. The NJBPU order adopting the Phase II Report stated that there is not a prima facie case demonstrating that overall JCP&L provided unsafe, inadequate or improper service to its customers. In addition, two class action lawsuits were commenced in New Jersey Superior Court in July 1999 against GPU, Inc. and JCP&L, seeking both compensatory and punitive damages for alleged losses suffered due to service interruptions. The GPU defendants originally requested the Court to stay or dismiss the litigation in deference to the NJBPU's primary jurisdiction. The Court denied the motion, consolidated the two actions, and certified them as class actions on behalf of a class that includes JCP&L customers as well as "all dependents, tenants, employees, and other intended beneficiaries of customers who suffered damages as a result" of the outages. In January 2000, the Appellate Division agreed to review the trial court's decision on primary jurisdiction. In June 2000, the Appellate Division affirmed the trial court's decision recognizing, however, that future developments in the case may require a reference of certain issues to the NJBPU. The Appellate Division also stated that the NJBPU's findings could be probative but not determinative of at least some issues in the 50 litigation. In response to GPU's demand for a statement of damages, the plaintiffs have stated that they are seeking damages of $700 million, subject to the results of pre-trial discovery. GPU has notified its insurance carriers of the plaintiffs' allegations. The primary insurance carrier has stated that while the substance of the plaintiffs' allegations are covered under GPU's policy, it is reserving its rights concerning coverage as circumstances develop. There can be no assurance as to the outcome of these matters. GPU Electric As a result of the September 1998 fire and explosion at the Longford natural gas plant in Victoria, Australia, Victorian gas users (plaintiffs) have brought a class action in the Australian Federal Court against Esso Australia Limited and its affiliate (Esso), the owner and operator of the plant, for losses suffered due to the lack of natural gas supply and related damages. The plaintiffs claim that Esso was, among other things, negligent in designing, maintaining and operating the Longford plant and also assert claims under Australian fair trade practices law. Esso has joined as third party defendants the State of Victoria (State) and various State-owned entities which operated the Victorian gas industry prior to its privatization, including Transmission Pipelines Australia (TPA) and its affiliate Transmission Pipelines (Assets) Australia (TPAA). GPU, Inc., through GPU GasNet, acquired the assets of TPA and the shares of TPAA from the State in June 1999. Esso asserts that the State and the gas industry were negligent in that, among other things, they failed to ensure that the gas system would provide a secure supply of gas to users and also asserts claims under the Australian fair trade practices law. In addition, GPU GasNet and other private entities (Buyers) that purchased the Victorian gas assets from the State have joined Esso as third party defendants. Esso asserts that if the gas industry is liable as alleged, that liability has been transferred to the Buyers as part of the State's privatization process. Under the acquisition agreement with the State, GPU GasNet has indemnified TPA and the State against third party claims arising out of, among other things, the operation of TPA's business. TPA and the State have commenced proceedings against GPU GasNet to enforce the indemnity in respect of any liability that may flow to TPA as a result of Esso's claim. GPU GasNet and TPAA have filed answers denying liability to Esso, the State and TPA, which could be material. GPU GasNet and TPAA have notified their insurance carriers of this action. The insurers have reserved their rights to deny coverage. There can be no assurance as to the outcome of this matter. Investments and Guarantees: -------------------------- GPU, Inc. GPU, Inc. has made significant investments in foreign businesses and facilities through its subsidiaries, GPU Electric and the GPUI Group. As of June 30, 2000, GPU, Inc.'s investment in GPU Electric and the GPUI Group was $569 million and $252 million, respectively. As of that date, GPU, Inc. has also guaranteed an additional $998 million and $30 million (including $9 51 million of guarantees related to domestic operations) of GPU Electric and GPUI Group outstanding obligations, respectively. Although management attempts to mitigate the risks of investing in certain foreign countries by, among other things, securing political risk insurance, GPU faces additional risks inherent to operating in such locations, including foreign currency fluctuations. GPU Electric In June 2000, GPU sold GPU PowerNet for A$2.1 billion (US$1.26 billion). For further information, see Note 2, Acquisitions and Dispositions. GPU had previously announced its intention to sell all, or at least 50%, of the Australian companies, for which it paid approximately US $1.9 billion (GPU PowerNet) and US $675 million (GPU GasNet) in 1997 and 1999, respectively. GPU is still considering the possible sale of GPU GasNet. On June 2, 2000, repayment of approximately $218 million of maturing GPU GasNet bank debt was extended to September 2, 2000. GPU GasNet may further extend this loan to October 2, 2000. GPU GasNet is in the process of establishing a commercial paper program and a medium term note program to refinance this debt. GPU, Inc. has agreed to guarantee this loan, under certain conditions, if it is not repaid by August 25, 2000. Midlands Electricity plc (Midlands) (conducting business under the name GPU Power UK) has a 40% equity interest in a 586 MW power project in Pakistan (the Uch Power Project), which was originally scheduled to begin commercial operation in late 1998. In June 1999, certain Project lenders for the Uch Power Project issued notices of default to the Project sponsors (including Midlands for, among other things, failure to pay principal and interest under various loan agreements. In November 1999, the Project sponsors and lenders reached an agreement under which repayment of the construction loan will be extended, principal and interest payments deferred, and the sponsors will fund the completion of the plant through the remaining equity contribution commitments. Testing of the plant has begun, but the start of commercial operations has been further delayed pending the resolution of certain technical problems, which are being addressed. Uch has renegotiated several of the project agreements with the Government of Pakistan and its agencies. In April 2000, Uch signed a Memorandum of Understanding with Pakistani authorities, in which it agreed, among other things, to accept a reduction in the power purchase tariff averaging approximately 8% over the project term. The agreement includes options to extend the term of the project from 23 to 30 years. Commercial operations are now planned to commence by the end of August, 2000. There remains a risk that project revenues may be delayed due to the poor economic situation in Pakistan. GPU's investment in the Uch Power Project as of June 30, 2000 was approximately $37.1 million, plus a guarantee letter of credit of $5.2 million, and its share of the projected completion costs represents an additional $3.9 million commitment. Cinergy Corp. has agreed to fund up to an aggregate of $20 million of the required capital contributions and/or certain future "cash losses," which could be incurred on the Uch Power Project. Cinergy has reimbursed GPU Electric for $4.9 million of capital contributions through June 30, 2000, leaving a remaining commitment of up to $15.1 million. There can be no assurance as to the outcome of this matter. As part of the 1999 sale of the GPU Power UK supply business and the purchase of the 50% of GPU Power UK that GPU did not already own, certain 52 long-term purchase obligations under natural gas supply contracts were retained. Most of these contracts, which extend to September 2005, were at fixed prices in excess of the market price of gas, and a liability was established for the estimated loss under such contracts. However, as a result of increasing gas prices during the second quarter of 2000, GPU Power UK was able to enter into matching forward sale contracts for the majority of the gas purchases, resulting in a reduction in the estimated liability and a credit to income of $15.9 million pre-tax. The estimated liability as of June 30, 2000 was $25 million, of which approximately $19 million was "locked-in" under new forward sale contracts. GPU Power UK was still exposed to future price risk on the remaining $6 million of liabilities as of June 30, 2000. In a recent English court decision involving two unaffiliated utilities (National Grid and National Power), the court held that utilities improperly used a pension plan surplus in the UK Electricity Supply Pension Scheme to eliminate scheduled payments in respect of early retirement costs and employer contributions. The Court found that, in the case of National Grid and National Power, procedures had not been strictly followed, and as such, a liability may now exist. At a subsequent hearing, the Court refused to consider the validity or effectiveness of retrospective amendments to the plan. National Grid and National Power have appealed the Court's decision to the House of Lords. Pending the outcome of the Appeal, the requirement for any payments has been stayed. If a similar complaint were to be made against GPU Power UK, GPU Power UK's potential liability is estimated to be a maximum of British pound 63 million (US$96 million), exclusive of any applicable interest charges or penalties. The GPU Power UK section of the Electricity Supply Pension Scheme remains in substantial surplus and any payment to the plan that might ultimately prove to be necessary would be accounted for as an increase in pension assets, and would not have an immediate impact on income. However, any related penalties or interest (which could be assessed, though none are currently proposed) would adversely affect income. There can be no assurance as to the outcome of this matter. Emdersa's operating companies are subject to a number of government claims related to Value-added tax liabilities and to Social Security taxes collected in their electric rates, which aggregate approximately $22 million. The claims are generally related to transitional issues surrounding the privatization of Argentina's electricity industry. There can be no assurance as to the outcome of these matters. GPUI Group On July 9, 1999, DIAN (the Colombian national tax authority) issued a "Special Requirement" on the Termobarranquilla S.A., Empresa de Servicios Publicos (TEBSA) 1996 income tax return, which challenges the exclusion from taxable income of an inflation adjustment related to the value of assets used for power generation (EI Barranquilla, a wholly owned subsidiary of GPU Power, ABB Barranquilla, Corporacion Electrica de la Costa Atlantica and Distral Group have a 28.7%, 28.7%, 42.5% and 0.1% interest in TEBSA, respectively). The failure to give notice of this Special Requirement to the US Export Import Bank (EXIM Bank) is an event of default under the loan agreement. GPU Power also believes that other events of default exist under the loan agreements with project lenders including the Overseas Private Investments Corporation (OPIC) and a commercial bank syndicate. As a result, certain required certifications have not been delivered to EXIM Bank, OPIC and the other project lenders, which failure is, itself, an event of default 53 under the loan agreements. These issues are currently being discussed with EXIM Bank and the other project lenders. GPU Power also expects that it will be necessary to address these issues with the Government of Colombia, as well as the other partners in the TEBSA project. As of June 30, 2000, GPU Power has an investment of approximately $84.4 million in TEBSA and is committed to make additional standby equity contributions of $21.3 million, which GPU, Inc. has guaranteed. The total outstanding senior debt of the TEBSA project is $399 million and, in addition, GPU International has guaranteed the obligations of the operators of the TEBSA project, up to a maximum of $5 million, under the project's operations and maintenance agreement. There can be no assurance as to the outcome of these matters. GPU Telcom In March 2000, GPU, Inc. announced its participation in America's Fiber Network LLC (AFN), of which GPU, Inc. anticipates owning 25%. AFN is a high-speed fiber optics company with a network of more than 7,000 route miles, or 140,000 fiber miles, connecting major markets in the eastern US to secondary markets with a growing need for broadband access. GPU, Inc. anticipates investing approximately $40 million (of which $1.9 million has been invested as of June 30, 2000) in AFN through GPU Telcom, which includes existing and new fiber routes and electronic equipment. In April 2000, GPU, Inc. announced the formation of Telergy Mid-Atlantic (TMA), a joint venture between GPU Telcom and Telergy, Inc. TMA combines established telecommunication services and marketing expertise with utilities' existing fiber networks and natural positioning in serving retail markets. GPU, Inc. has invested $20 million in Telergy, Inc. through GPU Telcom. Other: ----- JCP&L and Public Service Electric & Gas Company (PSE&G) each hold a 50% undivided ownership interest in Yards Creek Pumped Storage Facility (Yards Creek). In December 1998, JCP&L filed a petition with the New Jersey Board of Public Utilities (NJBPU) seeking a declaratory order that PSE&G's right of first refusal to purchase JCP&L's ownership interest at its current book value under a 1964 agreement between the companies is void and unenforceable. Management believes that the fair market value of JCP&L's ownership interest in Yards Creek is substantially in excess of its June 30, 2000 book value of $22 million. There can be no assurance as to the outcome of this matter. Concurrent with GPU's July 1999 acquisition of the 50% of GPU Power UK which it did not already own, GPU began to evaluate existing restructuring plans and formulate additional plans to reduce operating expenses and achieve ongoing cost reductions. As of December 31, 1999, GPU had identified and approved a cost reduction plan. At the acquisition date, GPU Power UK had recorded a liability of $28.6 million related to previous cost reduction plans. GPU retained $25.7 million of this liability, related to contractual termination and other severance benefits for 276 employees identified in a 1999 business process reengineering project. GPU identified an additional 355 employees (234 in Engineering Services, 38 in metering, 21 in Network Services and 62 from other specific functions) to be terminated as part of the plan and recorded an additional liability of $39.3 million. A net charge of $18.2 million for GPU's 50% share of these adjustments was included in expense in 1999 and the other 50% was recorded in Goodwill as a purchase accounting adjustment. 54 In 2000, a change in the investment return assumptions, due to better than expected investment performance, resulted in a reduction of approximately $6.9 million to $22.6 million in the estimated liability for the remaining 459 employees at December 31, 1999. Consequently, goodwill was credited for $3.4 million (50% of the change in estimate) and $3.5 million was credited to income. Also in 2000, $14.2 million was paid to 338 employees. The remaining severance liability of $7.5 million at June 30, 2000 reflects the above transactions as well as currency translation adjustments and the impact of five employees who were retained and is included in Other current liabilities on the Consolidated Balance Sheets. Management expects the plan will be substantially completed by September 2000. GPU AR has entered into contracts to supply electricity to retail customers through June 2002. In connection with meeting its supply obligations, GPU AR has entered into purchase commitments for energy and capacity with payment obligations totaling approximately $22.5 million as of June 30, 2000. GPU, Inc. has guaranteed up to $19.1 million of these payments. In accordance with the Nuclear Waste Policy Act of 1982 (NWPA), the GPU Energy companies have entered into contracts with, and have been paying fees to, the DOE for the future disposal of spent nuclear fuel in a repository or interim storage facility. AmerGen has assumed all liability for disposal costs related to spent fuel generated after its purchase of TMI-1 and has agreed to assume this liability for Oyster Creek following its purchase of that plant. In 1996, the DOE notified the GPU Energy companies and other standard contract holders that it would be unable to begin acceptance of spent nuclear fuel for disposal by 1998, as mandated by the NWPA. The DOE requested recommendations from contract holders for handling the delay. The DOE's inability to accept spent nuclear fuel could have a material impact on GPU's results of operations, as additional costs may be incurred to build and maintain interim on-site storage at Oyster Creek. In June 1997, a consortium of electric utilities, including GPUN, filed a license application with the NRC seeking permission to build an interim above-ground disposal facility for spent nuclear fuel in Utah. There can be no assurance as to the outcome of these matters. GPU, Inc. and consolidated affiliates have approximately 15,500 employees worldwide, of whom 11,500 are employed in the US, 3,500 are in the United Kingdom (UK) and the remaining 500 are in South America and Australia. The majority of the US workforce is employed by the GPU Energy companies (5,600) and MYR (5,500), of which approximately 3,300 and 4,800, respectively, are represented by unions for collective bargaining purposes. In the UK, approximately 3,100 GPU Power UK employees are represented by unions, and the terms and conditions of various bargaining agreements are generally reviewed annually, on April 1. JCP&L, Met-Ed and Penelec's collective bargaining agreements with the International Brotherhood of Electrical Workers expire on October 31, 2002, May 1, 2003 and May 14, 2002, respectively. Penelec's collective bargaining agreement with the Utility Workers Union of America expires on June 30, 2001. During the normal course of the operation of its businesses, in addition to the matters described above, GPU is from time to time involved in disputes, claims and, in some cases, as a defendant in litigation in which compensatory and punitive damages are sought by the public, customers, contractors, vendors and other suppliers of equipment and services and by employees alleging unlawful employment practices. While management does not expect that the outcome of these matters will have a material effect on GPU's 55 financial position or results of operations, there can be no assurance that this will continue to be the case. 2. ACQUISITIONS AND DISPOSITIONS MYR Group Inc. Acquisition In April 2000, GPU, Inc. completed its acquisition of MYR Group Inc. (MYR) for approximately $217.5 million. The fair value of the assets acquired totaled approximately $154.7 million and the amount of liabilities assumed totaled approximately $99.7 million. MYR, a suburban Chicago-based infrastructure construction services company, is the fifth largest specialty contractor in the US. MYR provides a complete range of power line and commercial/industrial electrical construction services for electric utilities, telecommunications providers, commercial and industrial facilities and government agencies across the US. MYR also builds cellular towers for the wireless communications market. The acquisition was partially financed through the issuance of GPU, Inc. short-term debt and was accounted for under the purchase method of accounting. The total acquisition cost exceeded the estimated value of net assets by $162.5 million. This excess is considered goodwill and is being amortized on a straight-line basis over 40 years. The following is a summary of significant accounting policies for MYR's construction services business: Revenue Recognition ------------------- MYR recognizes revenue on construction contracts using the percentage-of-completion accounting method determined in each case by the ratio of cost incurred to date on the contract (excluding uninstalled direct materials) to management's estimate of the contract's total cost. Contract cost includes all direct material, subcontract and labor costs and those indirect costs related to contract performance, such as supplies, tool repairs and depreciation. MYR charges selling, general, and administrative costs, including indirect costs associated with maintaining district offices, to expense as incurred. Provisions for estimated losses on uncompleted contracts are recorded in the period in which such losses are determined. Changes in estimated revenues and costs are recognized in the periods in which such estimates are revised. Significant claims are included in revenue in accordance with industry practice. The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues recognized in excess of amounts billed. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts," represents amounts billed in excess of revenues recognized. Classification of Current Assets and Current Liabilities ---------------------------------------------------------- The length of MYR's contracts vary, with some larger contracts exceeding one year. In accordance with industry practice, MYR includes in current assets and current liabilities amounts realizable and payable under contracts which may extend beyond one year. 56 GPU PowerNet Sale On June 30, 2000, GPU, Inc. sold GPU PowerNet to Singapore Power International (SPI) for A$2.1 billion (approximately US $1.26 billion). As part of the sales price, SPI assumed liability for A$230 million (US$137.8 million) of medium term notes. GPU applied the net proceeds from the sale as follows: A$1,288 million (US$772 million) was used to repay debt; and $A579 million (US$347 million) was placed in a trust (which is included in Special deposits on the Consolidated Balance Sheets) to provide for the repayment of the remaining medium term notes (A$174 million/US$104 million) and outstanding commercial paper (A$405 million/US$243 million) at maturity. As a result of the sale, GPU recorded in Operating expenses on the Consolidated Statements of Income, a pre-tax loss in the quarter ended June 30, 2000 of $372 million($295 million after-tax, or $2.43 per share), including a $94 million foreign currency loss. Pending Sale of Oyster Creek In 1999, the GPU Energy companies sold Three Mile Island Unit 1 (TMI-1) nuclear generating station and substantially all of their fossil and hydroelectric generating stations. In October 1999, JCP&L agreed to sell Oyster Creek to AmerGen Energy Company, LLC (AmerGen), a joint venture of PECO Energy and British Energy, for $10 million and reimbursement of the cost (estimated at $88 million) of the next scheduled refueling outage. The Oyster Creek plant was written down to its fair market value in 1999, consistent with its sale price. The write-down of the plant asset was deferred as a regulatory asset pending separate and further review by the NJBPU. 3. ACCOUNTING FOR DERIVATIVE INSTRUMENTS GPU's use of derivative instruments is intended primarily to manage the risk of interest rate, foreign currency and commodity price fluctuations. GPU does not intend to hold or issue derivative instruments for trading purposes. Commodity Derivatives: --------------------- The GPU Energy companies use futures contracts to manage the risk of fluctuations in the market price of electricity and natural gas. These contracts qualify for hedge accounting treatment under current accounting rules since price movements of the commodity derivatives are highly correlated with the underlying hedged commodities and the transactions are designated as hedges at inception. Accordingly, under the deferral method of accounting, gains and losses related to commodity derivatives are recognized in Power purchased and interchanged in the Consolidated Statements of Income when the hedged transaction closes or if the commodity derivative is no longer sufficiently correlated. Prior to income or loss recognition, deferred gains and losses relating to these transactions are recorded in Current Assets or Current Liabilities in the Consolidated Balance Sheets. Interest Rate Swap Agreements: ----------------------------- GPU Electric uses interest rate swap agreements to manage the risk of increases in variable interest rates. As of June 30, 2000, these agreements covered approximately $549 million of debt, including commercial paper, and were scheduled to expire on various dates through November 2007. Differences 57 between amounts paid and received under interest rate swaps are recorded as adjustments to the interest expense of the underlying debt since the swaps are related to specific assets, liabilities or anticipated transactions. All of the agreements effectively convert variable rate debt, including commercial paper, to fixed rate debt. For the quarter ended June 30, 2000, fixed rate interest expense incurred in connection with the swap agreements exceeded the variable rate interest expense that would have been incurred had the swaps not been in place by approximately $380 thousand. Due to the sale of GPU PowerNet, the amount of debt subject to interest rate swaps at GPU Electric declined from $1,299 million at March 31, 2000 to $549 million at June 30, 2000. Swap positions associated with the retired debt were closed out, and swap breakage costs of $2.1 million pre-tax were included as part of the loss on the sale of GPU PowerNet. In April 2000, Penelec issued a total of $50 million of variable rate senior notes as unsecured medium-term notes. These variable rate securities were converted to fixed rate obligations through interest rate swap agreements. Currency Swap Agreements: ------------------------ GPU Electric uses currency swap agreements to manage currency risk caused by fluctuations in the US dollar exchange rate related to debt issued in the US by Avon Energy Partners Holdings (Avon). These swap agreements effectively convert principal and interest payments on this US dollar debt to fixed sterling principal and interest payments, and expire on the maturity dates of the bonds. Interest expense is recorded based on the fixed sterling interest rate. As of June 30, 2000, these currency swap agreements covered British pound 561 million (US $850 million) of debt. Interest expense would have been British pound 9.4 million (US $14.3 million) as compared to British pound 9.8 million (US $14.9 million) for the quarter ended June 30, 2000 had these agreements not been in place. Gain on Forward Foreign Exchange Contracts: ------------------------------------------- In connection with its previously announced intention to sell its Australian assets, GPU Electric entered into forward foreign exchange contracts in order to lock in the then-current A$/US$ exchange rate on the projected remittance of Australian dollar proceeds arising from the expected sale of GPU PowerNet and GPU GasNet. On May 24, 2000, GPU announced that it had declined all bids submitted in connection with the sale process. Consequently, GPU Electric closed out its forward foreign exchange positions, and recognized a pre-tax gain of $4.5 million in the second quarter of 2000. Indexed Swap Agreement: ---------------------- In June 1998, Onondaga Cogeneration L.P. (Onondaga), a GPU International, Inc. subsidiary, and Niagara Mohawk Power Corporation (NIMO) renegotiated their existing power purchase agreement and entered into a 10-year power put indexed swap agreement. The power put agreement gives Onondaga the right, but not the obligation, to sell energy and capacity to NIMO at a proxy market price up to the specified contract quantity. 58 Under the indexed swap agreement, Onondaga pays NIMO the market price of energy and capacity and NIMO pays Onondaga a contract price which is fixed for the first two years and then adjusted monthly, according to an indexing formula, for the remaining term. As of June 30, 2000, the unamortized balance of the swap contract was valued at $51.7 million, and was included in Other - Deferred Debits and Other Assets on the Consolidated Balance Sheets. This valuation was derived using the discounted estimated cash flows related to payments expected to be received by Onondaga. A corresponding amount was recorded in deferred revenue (which is included in Other - Current Liabilities on the Consolidated Balance Sheets) and will be recognized to income over a period not to exceed 10 years. Concurrent with the establishment of a competitive market for electricity in New York (Power Exchange) and meeting specific trading volume criteria, certain rights between Onondaga and NIMO expire under the power put agreement. As a result, in 2000, GPU International, Inc. expects to recognize in income all unamortized deferred revenue, including that from the indexed swap agreement, which will be largely offset by an impairment of the Onondaga facility and a provision for out-of-market gas transportation costs. 4. SEGMENT INFORMATION The following is presented in accordance with Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." GPU's reportable segments are strategic business units that are managed separately due to their different operating and regulatory environments. GPU's management evaluates the performance of its business units based upon income before extraordinary and non-recurring items. For the purpose of providing segment information, domestic electric utility operations (GPU Energy) is comprised of the three electric utility operating companies serving customers in New Jersey and Pennsylvania, as well as GPU Generation, Inc. (sold in late 1999), GPUN, GPU Telcom and GPUS. For additional information on GPU's organizational structure and businesses, see preface to the Notes to Consolidated Financial Statements. 59
Business Segment Data (in thousands) Income Interest Before Extra- Depreciation Charges and Income Tax ordinary and Capital Operating and Preferred Expense/ Non-recurring Total Expenditures Revenues Amortization Dividends (Benefit)(a) Items Assets(b) and Investments -------- ------------ --------- ------------ ----- --------- --------------- For the six months ended June 30, 2000 Domestic Segments: Electric Utility Operations (GPU Energy) $1,730,089 $ 169,356 $ 102,847 $102,722 $ 151,819 $13,383,056 $ 158,362 Independ Power Prod (GPU International) 43,692 4,700 416 73 (446) 361,276 4,266 Electric Retail Energy Sales (GPU AR) 39,874 - - 848 1,221 22,940 8 Construction Services (MYR) (e) 99,532 1,311 2,389 1,147 613 328,926 1,284 ------- ------ ------ ------ ------ --------- ------ Subtotal 1,913,187 175,367 105,652 104,790 153,207 14,096,198 163,920 ------- ------ ------ ------ ------ --------- ------ Foreign Segments: Electric/Gas Utility Operations: (GPU Electric) Electric Distribution - United Kingdom 325,106 52,376 91,451 29,795 49,978 4,425,427 74,937 Electric Distribution - Argentina 81,614 7,663 12,749 6,881 2,942 609,301 18,091 Electric Transmission - Australia (d) 90,007 19,947 46,822 (10,921) 9,242 489,023 4,993 Gas Transmission - Australia 27,183 5,520 21,114 (6,675) 5,672 725,347 3,389 Independ Power Prod - S. America (GPU Power) 21,082 3,154 2,183 2,408 4,344 244,530 73 ------- ------ ------ ------ ------ --------- ------ Subtotal 544,992 88,660 174,319 21,488 72,178 6,493,628 101,483 ------- ------ ------ ------ ------ --------- ------ Corporate and Eliminations (1,361) - 4,805 - (10,200) (130,935) 500 ------- ------ ------ ------ ------ --------- ------ Consolidated Total $2,456,818 $ 264,027 $ 284,776 $126,278 $ 215,185 $20,458,891 $ 265,903 ========== ========== ========== ======== ========== =========== ========== For the six months ended June 30, 1999 Domestic Segments: Electric Utility Operations (GPU Energy) $1,712,716 $ 206,963 $114,519 163,060 $ 219,584 $13,224,051 $ 138,721 Independ Power Prod (GPU International) 42,197 4,649 619 182 (847) 359,374 596 Electric Retail Energy Sales (GPU AR) 37,521 - - 1,032 1,581 24,630 - ------- ------ ------ ------ ------ --------- ------ Subtotal 1,792,434 211,612 115,138 164,274 220,318 13,608,055 139,317 ------- ------ ------ ------ ------ --------- ------ Foreign Segments: Electric/Gas Utility Operations: (GPU Electric) Electric Distribution - United Kingdom 603 - 9,835 2,171 44,348(c) 4,687,476 - Electric Distribution - Argentina 48,999 6,190 8,008 1,986 (72) 579,907 10,851 Electric Transmission - Australia (d) 95,912 21,367 52,526 4,462 5,985 1,824,309 3,984 Gas Transmission - Australia 5,721 1,227 3,589 422 (222) 795,527 2,168 Independ Power Prod - S. America (GPU Power) 17,734 2,699 1,363 2,272 3,515 238,644 30,024 ------- ------ ------ ------ ------ --------- ------ Subtotal 168,969 31,483 75,321 11,313 53,554 8,125,863 47,027 ------- ------ ------ ------ ------ --------- ------ Corporate and Eliminations - - 481 - (5,353) (36,086) - ------- ------ ------ ------ ------ --------- ------ Consolidated Total $1,961,403 $ 243,095 $ 190,940 $175,587 $ 268,519 $21,697,832 $ 186,344 ========== ========== ========== ======== ========== =========== ==========
(a) Represents income taxes on income before extraordinary and non-recurring items. (b) The comparative 1999 Total Assets is as of December 31, 1999. (c) Includes equity in net income of investee accounted for under the equity method of $73.5 million, for the period prior to the consolidation of GPU Power UK. (d) Represents GPU PowerNet, which was sold in June 2000. (e) MYR was acquired in May 2000. 60 5. COMPREHENSIVE INCOME For the six months ended June 30, 2000 and 1999, comprehensive income is summarized below. (in thousands) Six months Ended June 30, GPU, Inc. and Subsidiary Companies 2000 1999 ---------------------------------- ---- ---- Net income/(loss) $ (79,815) $ 237,981 --------- -------- Other comprehensive income/(loss), net of tax: Net unrealized gains/(loss) on investments 13,028 (4,758) Foreign currency translation (41,852) 8,169 -------- -------- Total other comprehensive income/(loss) (28,824) 3,411 -------- -------- Comprehensive income/(loss) $(108,639) $ 241,392 ========= ======== JCP&L Net income $ 90,004 $ 47,842 -------- -------- Other comprehensive income/(loss), net of tax: Net unrealized gains/(loss) on investments - - -------- -------- Comprehensive income $ 90,004 $ 47,842 ======== ======== Met-Ed Net income $ 35,160 $ 51,974 -------- -------- Other comprehensive income/(loss), net of tax: Net unrealized gains/(loss) on investments (2,141) 2,816 -------- -------- Comprehensive income $ 33,019 $ 54,790 ======== ======== Penelec Net income $ 31,481 $ 85,435 -------- -------- Other comprehensive income/(loss), net of tax: Net unrealized gains/(loss) on investments (1,076) 1,337 -------- -------- Comprehensive income $ 30,405 $ 86,772 ======== ======== 61 PART II ITEM 1 - LEGAL PROCEEDINGS Information concerning the current status of certain legal proceedings instituted against GPU, Inc. and the GPU Energy companies discussed in Part I of this report in Combined Notes to Consolidated Financial Statements is incorporated herein by reference and made a part hereof. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (4) Instruments defining the rights of security holders, including indentures A - First Supplemental Indenture between Met-Ed and United States Trust Company of New York, dated August 1, 2000. B - First Supplemental Indenture between Penelec and United States Trust Company of New York, dated August 1, 2000. (12) Statements Showing Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends Based on SEC Regulation S-K, Item 503 A - JCP&L B - Met-Ed C - Penelec (27) Financial Data Schedules A - GPU, Inc. and Subsidiary Companies B - JCP&L C - Met-Ed D - Penelec (b) Reports on Form 8-K GPU, Inc.: --------- Dated June 21, 2000, under Item 5 (Other Events). Dated June 30, 2000, under Item 5 (Other Events). Dated August 3, 2000, under Item 5 (Other Events). Jersey Central Power & Light Company: ------------------------------------ Dated August 3, 2000, under Item 5 (Other Events). Metropolitan Edison Company: --------------------------- Dated August 3, 2000, under Item 5 (Other Events). Pennsylvania Electric Company: ----------------------------- Dated August 3, 2000, under Item 5 (Other Events). 62 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. GPU, INC. August 4, 2000 By: /s/ B. L. Levy --------------- B. L. Levy, Senior Vice President and Chief Financial Officer August 4, 2000 By: /s/ P. E. Maricondo ------------------- P. E. Maricondo, Vice President and Comptroller (principal accounting officer) JERSEY CENTRAL POWER & LIGHT COMPANY METROPOLITAN EDISON COMPANY PENNSYLVANIA ELECTRIC COMPANY August 4, 2000 By: /s/ M. J. Chesser ------------------ M. J. Chesser, President and Chief Executive Officer August 4, 2000 By: /s/ M. P. O'Flynn ------------------ M. P. O'Flynn, Vice President- Finance and Rates & Comptroller (principal accounting officer) 63