-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KJTVCdD8eluPJvSXQccikGrFviN55mfvRKtr1Ic7EDAED/7/VhlO9l0ZMj4kvOrL MJUEjbTqPqmyhQJnj9GYCA== 0000040779-98-000107.txt : 19981111 0000040779-98-000107.hdr.sgml : 19981111 ACCESSION NUMBER: 0000040779-98-000107 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GPU INC /PA/ CENTRAL INDEX KEY: 0000040779 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 135516989 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06047 FILM NUMBER: 98741384 BUSINESS ADDRESS: STREET 1: C/O GPU SERVICE INC STREET 2: 300 MADISON AVE CITY: MORRISTOWN STATE: NJ ZIP: 079621911 BUSINESS PHONE: 9734558200 MAIL ADDRESS: STREET 1: C/O GPU SERVICE INC STREET 2: 300 MADISON AVE CITY: MORRISTOWN STATE: NJ ZIP: 07962 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JERSEY CENTRAL POWER & LIGHT CO CENTRAL INDEX KEY: 0000053456 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 210485010 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03141 FILM NUMBER: 98741385 BUSINESS ADDRESS: STREET 1: 300 MADISON AVE CITY: MORRISTOWN STATE: NJ ZIP: 079621911 BUSINESS PHONE: 2014558200 MAIL ADDRESS: STREET 1: C/O GPU ENERGY STREET 2: 2800 POTTSVILLE PIKE CITY: READING STATE: PA ZIP: 19640-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: METROPOLITAN EDISON CO CENTRAL INDEX KEY: 0000065350 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 230870160 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-51001 FILM NUMBER: 98741386 BUSINESS ADDRESS: STREET 1: 2800 POTTSVILLE PIKE STREET 2: MUHLENBERG TOWNSHIP CITY: READING STATE: PA ZIP: 19640-0001 BUSINESS PHONE: 2159293601 MAIL ADDRESS: STREET 1: C/O ENERGY GPU ENERGY STREET 2: 2800 POTTERVILLE CITY: READING STATE: PA ZIP: 19640-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENNSYLVANIA ELECTRIC CO CENTRAL INDEX KEY: 0000077227 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 250718085 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03522 FILM NUMBER: 98741387 BUSINESS ADDRESS: STREET 1: 2800 POTTSVILLE PIKE READING STREET 2: MUHLENBERG TOWNSHIP CITY: BERKS COUNTY STATE: PA ZIP: 19640-0001 BUSINESS PHONE: 6109293601 MAIL ADDRESS: STREET 1: C/O GPU ENERGY STREET 2: 2800 POTTSVILLE PIKE CITY: READING STATE: PA ZIP: 19605-2459 10-Q 1 10Q-3RD QTR 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 September 30, 1998 ------------------------------------------------- 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) 455-8200 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 issuer's classes of voting stock, as of October 30, 1998, was as follows: Shares Registrant Title Outstanding - ---------------------------------- ---------------------------- ----------- GPU, Inc. Common Stock, $2.50 par value 127,963,926 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 September 30, 1998 Table of Contents ----------------- Page ---- PART I - Financial Information Consolidated Financial Statements: GPU, Inc. --------- Balance Sheets 3 Statements of Income 5 Statements of Cash Flows 6 Jersey Central Power & Light Company ------------------------------------ Balance Sheets 7 Statements of Income 9 Statements of Cash Flows 10 Metropolitan Edison Company --------------------------- Balance Sheets 11 Statements of Income 13 Statements of Cash Flows 14 Pennsylvania Electric Company ----------------------------- Balance Sheets 15 Statements of Income 17 Statements of Cash Flows 18 Combined Notes to Consolidated Financial Statements 19 Combined Management's Discussion and Analysis of Financial Condition and Results of Operations 51 PART II - Other Information 79 Signatures 80 --------------------------------- 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 1997 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 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; generating plant performance; fuel prices and availability; and uncertainties involved with foreign operations including political risks and foreign currency fluctuations. 2 GPU, INC. AND SUBSIDIARY COMPANIES Consolidated Balance Sheets --------------------------- In Thousands --------------------------- September 30, December 31, 1998 1997 ------------ ------------- (Unaudited) ASSETS Utility Plant: In service, at original cost $10,832,810 $11,150,677 Less, accumulated depreciation 4,341,080 4,050,165 ---------- --------- Net utility plant in service 6,491,730 7,100,512 Construction work in progress 175,499 250,050 Other, net 148,298 159,009 ---------- --------- Net utility plant 6,815,527 7,509,571 ---------- --------- Other Property and Investments: GPUI Group equity investments (Note 4) 648,304 596,679 Goodwill, net 523,756 581,364 Nuclear decommissioning trusts, at market (Note 1) 635,689 579,673 Nuclear fuel disposal trust, at market 115,423 108,652 Other, net 216,033 252,335 ---------- --------- Total other property and investments 2,139,205 2,118,703 ---------- --------- Current Assets: Cash and temporary cash investments 248,276 85,099 Special deposits 47,247 27,093 Accounts receivable: Customers, net 335,921 290,247 Other 113,992 104,441 Unbilled revenues 130,387 147,162 Materials and supplies, at average cost or less: Construction and maintenance 158,767 187,799 Fuel 34,949 40,424 Investments held for sale 22,098 106,317 Deferred income taxes 74,164 83,962 Prepayments 116,216 55,613 Other - 1,023 ---------- --------- Total current assets 1,282,017 1,129,180 ---------- --------- Deferred Debits and Other Assets: Competitive transition charge (Notes 1 & 2) 989,815 - Other regulatory assets, net (Note 1) 2,900,585 1,547,478 Deferred income taxes 1,979,072 383,169 Other 191,176 134,833 Total deferred debits and other assets 6,060,648 2,065,480 ---------- --------- Total Assets $16,297,397 $12,822,934 =========== =========== The accompanying notes are an integral part of the consolidated financial statements. 3 GPU, INC. AND SUBSIDIARY COMPANIES Consolidated Balance Sheets --------------------------- In Thousands ------------------------ September 30, December 31, 1998 1997 ------------ ------------ (Unaudited) LIABILITIES AND CAPITALIZATION Capitalization: Common stock $ 331,958 $314,458 Capital surplus 1,010,373 755,040 Retained earnings 2,278,770 2,140,712 Accumulated other comprehensive income/ (loss)(Note 6) (43,743) (29,296) -------- -------- Total 3,577,358 3,180,914 Less, reacquired common stock, at cost 78,349 80,984 ---------- ---------- Total common stockholders' equity 3,499,009 3,099,930 Cumulative preferred stock: With mandatory redemption 86,500 91,500 Without mandatory redemption 66,478 66,478 Subsidiary-obligated mandatorily redeemable preferred securities 330,000 330,000 Long-term debt 4,214,057 4,325,972 --------- --------- Total capitalization 8,196,044 7,913,880 --------- --------- Current Liabilities: Securities due within one year 264,610 631,934 Notes payable 298,393 353,214 Obligations under capital leases 129,440 138,919 Accounts payable 415,321 413,791 Taxes accrued 104,078 48,304 Interest accrued 71,343 83,947 Deferred energy credits 7,771 25,645 Other 285,721 325,681 --------- --------- Total current liabilities 1,576,677 2,021,435 --------- --------- Deferred Credits and Other Liabilities: Deferred income taxes 2,964,223 1,566,131 Unamortized investment tax credits 115,960 123,162 Three Mile Island Unit 2 future costs 464,304 448,808 Nonutility generation contract loss liability 1,810,350 - Other 1,169,839 749,518 --------- --------- Total deferred credits and other liabilities 6,524,676 2,887,619 --------- --------- Commitments and Contingencies (Note 1) Total Liabilities and Capitalization $16,297,397 $12,822,934 =========== =========== The accompanying notes are an integral part of the consolidated financial statements. 4 GPU, INC. AND SUBSIDIARY COMPANIES Consolidated Statements of Income --------------------------------- (Unaudited)
In Thousands (Except Per Share Data) Three Months Nine Months Ended September 30, Ended September 30, ------------------- -------------------- 1998 1997 1998 1997 ---- ---- ---- ----- Operating Revenues $1,168,779 $1,117,140 $3,226,975 $3,110,935 --------- --------- --------- -------- Operating Expenses: Fuel 119,692 98,704 316,745 288,730 Power purchased and interchanged 338,275 282,694 857,490 771,513 Deferral of energy costs, net (7,585) 4,900 (18,915) 11,629 Other operation and maintenance 308,836 268,027 810,064 721,867 Depreciation and amortization 127,592 125,002 389,608 355,258 Taxes, other than income taxes 56,019 95,186 170,777 271,589 --------- --------- --------- --------- Total operating expenses 942,829 874,513 2,525,769 2,420,586 --------- --------- --------- ---------- Operating Income Before Income Taxes 225,950 242,627 701,206 690,349 Income taxes 48,320 65,341 164,929 183,996 --------- --------- --------- --------- Operating Income 177,630 177,286 536,277 506,353 --------- --------- --------- -------- Other Income and Deductions: Allowance for other funds used during construction 188 274 737 935 Equity in undistributed earnings/(losses) of affiliates, net (Note 4) 12,038 (138,309) 42,882 (85,995) Other income/(expense), net 3,465 (4,759) 44,377 1,472 Income taxes (8,035) 58,477 (26,755) 46,980 --------- --------- --------- --------- Total other income and deductions 7,656 (84,317) 61,241 (36,608) --------- --------- --------- --------- Income Before Interest Charges and Preferred Dividends 185,286 92,969 597,518 469,745 --------- --------- --------- -------- Interest Charges and Preferred Dividends: Long-term debt 78,309 57,374 240,243 171,009 Subsidiary-obligated mandatorily redeemable preferred securities 7,222 7,222 21,666 21,666 Other interest 8,933 9,261 26,776 27,900 Allowance for borrowed funds used during construction (1,201) (1,104) (3,548) (3,547) Preferred stock dividends of subsidiaries 2,624 2,890 8,516 9,491 --------- --------- --------- --------- Total interest charges and preferred dividends 95,887 75,643 293,653 226,519 --------- --------- --------- --------- Minority interest net income 708 422 1,457 1,035 --------- --------- --------- -------- Income Before Extraordinary Item 88,691 16,904 302,408 242,191 Extraordinary item (net of income taxes of $178,790 and $16,300)(Notes 1 & 2) 249,355 - (25,755) - --------- --------- --------- --------- Net Income $ 338,046 $ 16,904 $ 276,653 $ 242,191 ========= ========= ========= ========== Basic - Earnings Per Avg. Common Share Before Extraordinary Item $ 0.69 $ 0.58 $ 2.38 $ 2.01 Extraordinary Item 1.96 - (0.20) - --------- --------- --------- --------- Basic - Earnings Per Avg. Common Share $ 2.65 $ 0.58 $ 2.18 $ 2.01 ========= ========= ========= ========== Avg. Common Shares Outstanding 127,940 120,762 126,796 120,694 ========= ========= ========= ========= Diluted - Earnings Per Avg. Common Share Before Extraordinary Item $ 0.69 $ 0.58 $ 2.38 $ 2.00 Extraordinary Item 1.96 - (0.20) - --------- --------- --------- --------- Diluted - Earnings Per Avg. Common Share $ 2.65 $ 0.58 $ 2.18 $ 2.00 ========= ========= ========= ========= Avg. Common Shares Outstanding 128,068 121,068 127,019 120,979 ========= ========= ========= ========= Cash Dividends Paid Per Share $ .515 $ .500 $ 1.53 $ 1.485 ========= ========= ========= ========= The accompanying notes are an integral part of the consolidated financial statements. 5
GPU, INC. AND SUBSIDIARY COMPANIES Consolidated Statements of Cash Flows ------------------------------------- (Unaudited) In Thousands ------------------------- Nine Months Ended September 30, ------------- ---------- 1998 1997 Operating Activities: Net income $ 276,653 $ 242,191 Extraordinary item (net of income tax benefit of $16,300) (Note 2) 25,755 - -------- -------- Income before extraordinary item 302,408 242,191 Adjustments to reconcile income to cash provided: Depreciation and amortization 414,688 370,769 Amortization of property under capital leases 40,323 36,867 PaPUC restructuring rate orders (Notes 1 & 2) 68,500 - Gain on sale of investments (43,600) - Equity in undistributed (earnings)/losses of affiliates, net of distributions received (30,025) 123,023 Nuclear outage maintenance costs, net 12,461 8,685 Deferred income taxes and investment tax credits, net (123,004) (68,815) Deferred energy and capacity costs, net (17,835) 11,629 Accretion income (7,380) (8,070) Allowance for other funds used during construction (737) (935) Changes in working capital: Receivables (2,986) (51,480) Materials and supplies 5,480 1,995 Special deposits and prepayments (57,113) (15,808) Payables and accrued liabilities 17,479 1,373 Nonutility generation contract buyout costs (21,667) (49,050) Other, net 15,808 (25,136) -------- -------- Net cash provided by operating activities 572,800 577,238 -------- -------- Investing Activities: Capital expenditures: GPU Energy companies (213,154) (235,941) GPUI Group (49,428) (97,565) Proceeds from sale of investments 163,768 - Contributions to decommissioning trusts (38,057) (30,764) Other, net 14,256 12,104 -------- -------- Net cash used for investing activities (122,615) (352,166) -------- -------- Financing Activities: Issuance of long-term debt 226,355 130,471 Increase/(Decrease) in notes payable, net (54,821) 60,227 Retirement of long-term debt (474,889) (166,601) Capital lease principal payments (38,695) (38,884) Issuance of common stock 269,448 - Redemption of preferred stock of subsidiaries (15,000) (20,000) Dividends paid on common stock (192,149) (179,188) Net cash required by financing activities (279,751) (213,975) -------- -------- Effect of exchange rate changes on cash (7,257) (178) -------- -------- Net increase in cash and temporary cash investments from above activities 163,177 10,919 Cash and temporary cash investments, beginning of year 85,099 31,604 -------- -------- Cash and temporary cash investments, end of period $ 248,276 $ 42,523 ======== ======== Supplemental Disclosure: Interest and preferred dividends paid $ 295,338 $ 240,524 ======== ======== Income taxes paid $ 254,411 $ 187,503 ======== ======== New capital lease obligations incurred $ 30,587 $ 39,306 ======== ======== Common stock dividends declared but not paid $ - $ - ======== ======== The accompanying notes are an integral part of the consolidated financial statements. 6 JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY Consolidated Balance Sheets In Thousands ------------------------- September 30, December 31, 1998 1997 --------- --------- (Unaudited) ASSETS Utility Plant: In service, at original cost $4,692,874 $4,671,568 Less, accumulated depreciation 2,149,280 2,007,427 Net utility plant in service 2,543,594 2,664,141 Construction work in progress 75,163 124,887 Other, net 101,183 92,654 --------- --------- Net utility plant 2,719,940 2,881,682 --------- --------- Other Property and Investments: Nuclear decommissioning trusts, at market (Note 1) 375,967 343,434 Nuclear fuel disposal trust, at market 115,423 108,652 Other, net 8,930 8,951 --------- --------- Total other property and investments 500,320 461,037 --------- --------- Current Assets: Cash and temporary cash investments 9,846 2,994 Special deposits 6,177 6,778 Accounts receivable: Customers, net 190,987 153,753 Other 29,641 18,225 Unbilled revenues 54,615 59,687 Materials and supplies, at average cost or less: Construction and maintenance 81,463 90,037 Fuel 12,687 14,260 Deferred income taxes 20,001 27,536 Prepayments 66,327 14,468 --------- --------- Total current assets 471,744 387,738 --------- --------- Deferred Debits and Other Assets: Other regulatory assets, net (Note 1) 792,969 736,476 Deferred income taxes 181,374 154,708 Other 22,444 19,909 --------- --------- Total deferred debits and other assets 996,787 911,093 --------- --------- Total Assets $4,688,791 $4,641,550 ========== ========== The accompanying notes are an integral part of the consolidated financial statements. 7 JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY Consolidated Balance Sheets In Thousands ---------------------------- September 30, December 31, 1998 1997 ------------- ------------ (Unaudited) LIABILITIES AND CAPITALIZATION Capitalization: Common stock $ 153,713 $153,713 Capital surplus 510,769 510,769 Retained earnings 942,714 875,639 --------- --------- Total common stockholder's equity 1,607,196 1,540,121 Cumulative preferred stock: With mandatory redemption 86,500 91,500 Without mandatory redemption 37,741 37,741 Company-obligated mandatorily redeemable preferred securities 125,000 125,000 Long-term debt 1,173,472 1,173,304 --------- --------- Total capitalization 3,029,909 2,967,666 --------- --------- Current Liabilities: Securities due within one year 2,512 12,511 Notes payable 72,493 115,254 Obligations under capital leases 87,929 79,419 Accounts payable: Affiliates 33,293 27,167 Other 122,415 113,822 Taxes accrued 24,886 3,966 Deferred energy credits 7,771 25,645 Interest accrued 29,693 26,021 Other 105,993 76,529 --------- --------- Total current liabilities 486,985 480,334 --------- --------- Deferred Credits and Other Liabilities: Deferred income taxes 637,256 644,562 Unamortized investment tax credits 50,775 54,675 Nuclear fuel disposal fee 139,684 134,326 Three Mile Island Unit 2 future costs 116,101 112,227 Other 228,081 247,760 --------- --------- Total deferred credits and other liabilities 1,171,897 1,193,550 --------- --------- Commitments and Contingencies (Note 1) Total Liabilities and Capitalization $4,688,791 $4,641,550 ========== ========== The accompanying notes are an integral part of the consolidated financial statements. 8 JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY Consolidated Statements of Income --------------------------------- (Unaudited)
In Thousands --------------------------------------------- Three Months Nine Months Ended September 30, Ended September 30, ------------------- --------------------- 1998 1997 1998 1997 ---- ---- ---- ----- Operating Revenues $ 647,625 $ 602,900 $1,598,853 $1,591,569 -------- -------- ---------- --------- Operating Expenses: Fuel 29,709 27,633 72,453 73,703 Power purchased and interchanged: Affiliates 31,320 7,513 46,388 14,719 Others 193,237 172,432 501,942 451,538 Deferral of energy and capacity costs, net (7,585) 4,900 (18,915) 11,629 Other operation and maintenance 140,632 115,531 354,392 331,808 Depreciation and amortization 55,435 68,940 187,114 190,178 Taxes, other than income taxes 27,796 64,050 75,330 176,878 ------- -------- -------- --------- Total operating expenses 470,544 460,999 1,218,704 1,250,453 -------- -------- -------- --------- Operating Income Before Income Taxes 177,081 141,901 380,149 341,116 Income taxes 59,748 39,374 119,099 85,466 -------- -------- -------- --------- Operating Income 117,333 102,527 261,050 255,650 -------- -------- -------- --------- Other Income and Deductions: Allowance for other funds used during construction 184 65 652 332 Other income, net 2,314 1,975 7,232 2,122 Income taxes (1,095) 1,583 (3,437) (1,244) -------- -------- -------- --------- Total other income and deductions 1,403 3,623 4,447 1,210 -------- -------- -------- --------- Income Before Interest Charges and Dividends on Preferred Securities 118,736 106,150 265,497 256,860 -------- -------- --------- --------- Interest Charges: Long-term debt 21,814 22,434 65,455 67,779 Company-obligated mandatorily redeemable preferred securities 2,675 2,675 8,025 8,025 Other interest 3,058 4,022 8,645 11,680 Allowance for borrowed funds used during construction (418) (287) (1,336) (1,491) -------- --------- -------- --------- Total interest charges 27,129 28,844 80,789 85,993 -------- -------- -------- --------- Net Income 91,607 77,306 184,708 170,867 Preferred stock dividends 2,330 2,597 7,633 8,638 -------- -------- -------- -------- Earnings Available for Common Stock $ 89,277 $ 74,709 $ 177,075 $ 162,229 ======== ======== ========== ========== The accompanying notes are an integral part of the consolidated financial statements. 9
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY Consolidated Statements of Cash Flows ------------------------------------- (Unaudited) In Thousands ----------------------- Nine Months Ended September 30, ----------------------- 1998 1997 ---- ---- Operating Activities: Net income $ 184,708 $170,867 Adjustments to reconcile income to cash provided: Depreciation and amortization 206,758 201,149 Amortization of property under capital leases 22,010 21,195 Nuclear outage maintenance costs, net 5,393 10,925 Deferred income taxes and investment tax credits, net (37,052) (29,818) Deferred energy and capacity costs, net (17,835) 11,629 Accretion income (7,380) (8,070) Allowance for other funds used during construction (652) (332) Changes in working capital: Receivables (43,577) (10,528) Materials and supplies 2,580 4,521 Special deposits and prepayments (51,259) (32,116) Payables and accrued liabilities 62,009 (14,584) Nonutility generation contract buyout costs (15,000) (30,500) Other, net 32,507 4,367 -------- --------- Net cash provided by operating activities 343,210 298,705 -------- --------- Investing Activities: Capital expenditures (111,704) (116,026) Contributions to decommissioning trusts (20,775) (13,502) Other, net (6,214) (7,603) --------- --------- Net cash used for investing activities (138,693) (137,131) --------- --------- Financing Activities: Increase/(Decrease) in notes payable, net (42,761) 75,000 Retirement of long-term debt - (80,075) Capital lease principal payments (21,965) (20,289) Redemption of preferred stock (15,000) (20,000) Dividends paid on common stock (110,000) (95,000) Dividends paid on preferred stock (7,939) (9,062) --------- --------- Net cash required by financing activities (197,665) (149,426) --------- --------- Net increase in cash and temporary cash investments from above activities 6,852 12,148 Cash and temporary cash investments, beginning of year 2,994 1,321 -------- --------- Cash and temporary cash investments, end of period $ 9,846 $ 13,469 ======== ========= Supplemental Disclosure: Interest and preferred dividends paid $ 83,893 $ 93,035 ======== ========= Income taxes paid $ 139,334 $ 91,518 ======== ========= New capital lease obligations incurred $ 30,515 $ 10,431 ======== ========== The accompanying notes are an integral part of the consolidated financial statements. 10 METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES Consolidated Balance Sheets --------------------------- In Thousands -------------------------- September 30, December 31, 1998 1997 ------------ ------------ (Unaudited) ASSETS Utility Plant: In service, at original cost $2,211,270 $2,411,810 Less, accumulated depreciation 983,516 919,771 --------- --------- Net utility plant in service 1,227,754 1,492,039 Construction work in progress 45,013 45,435 Other, net 27,725 39,056 --------- --------- Net utility plant 1,300,492 1,576,530 --------- --------- Other Property and Investments: Nuclear decommissioning trusts, at market (Note 1) 185,991 168,110 Other, net 11,990 11,958 --------- --------- Total other property and investments 197,981 180,068 --------- --------- Current Assets: Cash and temporary cash investments 3,458 6,116 Special deposits 1,038 1,055 Accounts receivable: Customers, net 68,260 65,156 Other 46,879 29,399 Unbilled revenues 38,637 39,747 Materials and supplies, at average cost or less: Construction and maintenance 24,254 38,597 Fuel 8,332 11,323 Deferred income taxes 2,945 2,945 Prepayments 12,030 6,762 --------- --------- Total current assets 205,833 201,100 --------- --------- Deferred Debits and Other Assets: Competitive transition charge (Notes 1 & 2) 657,655 - Other regulatory assets, net (Note 1) 909,840 450,687 Deferred income taxes 713,183 87,332 Other 20,622 14,069 --------- --------- Total deferred debits and other assets 2,301,300 552,088 --------- --------- Total Assets $4,005,606 $2,509,786 ========== ========== The accompanying notes are an integral part of the consolidated financial statements. 11 METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES Consolidated Balance Sheets --------------------------- In Thousands -------------------------- September 30, December 31, 1998 1997 ------------ ------------ (Unaudited) LIABILITIES AND CAPITALIZATION Capitalization: Common stock $ 66,273 $66,273 Capital surplus 370,200 370,200 Retained earnings 241,201 268,634 Accumulated other comprehensive income (Note 6) 11,595 12,487 ------- ------- Total common stockholder's equity 689,269 717,594 Cumulative preferred stock 12,056 12,056 Company-obligated mandatorily redeemable preferred securities 100,000 100,000 Long-term debt 576,903 576,924 --------- ---------- Total capitalization 1,378,228 1,406,574 --------- ---------- Current Liabilities: Securities due within one year 24 22 Notes payable 76,200 67,279 Obligations under capital leases 27,030 38,372 Accounts payable: Affiliates 57,333 62,873 Other 108,938 95,589 Taxes accrued 14,305 21,455 Interest accrued 10,335 15,903 Other 54,383 33,351 --------- ---------- Total current liabilities 348,548 334,844 --------- ---------- Deferred Credits and Other Liabilities: Deferred income taxes 968,551 412,692 Three Mile Island Unit 2 future costs 232,102 224,354 Unamortized investment tax credits 27,632 29,134 Nuclear fuel disposal fee 31,554 30,343 Nonutility generation contract loss liability 792,830 - Other 226,161 71,845 --------- ---------- Total deferred credits and other liabilities 2,278,830 768,368 --------- ---------- Commitments and Contingencies (Note 1) Total Liabilities and Capitalization $4,005,606 $2,509,786 ========== ========== The accompanying notes are an integral part of the consolidated financial statements. 12 METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES Consolidated Statements of Income (Unaudited)
In Thousands ----------------------------------------------- Three Months Nine Months Ended September 30, Ended September 30, ------------------- ---------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Operating Revenues $ 229,051 $ 248,161 $ 689,829 $ 711,975 -------- -------- --------- ---------- Operating Expenses: Fuel 28,079 23,472 80,322 69,998 Power purchased and interchanged: Affiliates 7,122 5,380 12,540 12,337 Others 68,413 59,325 168,896 164,525 Other operation and maintenance 68,586 58,219 175,871 161,251 Depreciation and amortization 29,879 26,711 82,597 78,642 Taxes, other than income taxes 13,368 15,235 44,421 44,989 -------- -------- --------- ---------- Total operating expenses 215,447 188,342 564,647 531,742 -------- -------- --------- ---------- Operating Income Before Income Taxes 13,604 59,819 125,182 180,233 Income taxes (791) 18,105 32,115 56,103 -------- -------- --------- ---------- Operating Income 14,395 41,714 93,067 124,130 -------- -------- --------- ---------- Other Income and Deductions: Allowance for other funds used during construction 4 138 85 439 Other income/(expense), net (5,417) 304 (14,798) 2,408 Income taxes 2,213 (165) 5,979 (1,087) -------- -------- --------- --------- Total other income and deductions (3,200) 277 (8,734) 1,760 -------- -------- --------- --------- Income Before Interest Charges and Dividends on Preferred Securities 11,195 41,991 84,333 125,890 -------- -------- --------- --------- Interest Charges: Long-term debt 10,623 10,981 31,870 33,275 Company-obligated mandatorily redeemable preferred securities 2,250 2,250 6,750 6,750 Other interest 2,017 1,717 6,570 5,345 Allowance for borrowed funds used during construction (151) (182) (591) (593) -------- -------- --------- --------- Total interest charges 14,739 14,766 44,599 44,777 -------- -------- --------- --------- Income Before Extraordinary Item (3,544) 27,225 39,734 81,113 Extraordinary item (net of income taxes of $128,102 and $4,708) (Notes 1 & 2) 180,475 - (6,805) - -------- -------- --------- --------- Net Income 176,931 27,225 32,929 81,113 Preferred stock dividends 120 120 362 362 -------- -------- --------- --------- Earnings Available for Common Stock $ 176,811 $ 27,105 $32,567 $ 80,751 ======== ========= ======== ========== The accompanying notes are an integral part of the consolidated financial statements. 13
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES Consolidated Statements of Cash Flows ------------------------------------- (Unaudited) In Thousands -------------------------- Nine Months Ended September 30, -------------------------- 1998 1997 ------------ ------------ (Unaudited) Operating Activities: Net income $ 32,929 $ 81,113 Extraordinary item (net of income tax benefit of $4,708) (Note 2) 6,805 - ---------- --------- Income before extraordinary item 39,734 81,113 Adjustments to reconcile income to cash provided: Depreciation and amortization 87,025 84,706 Amortization of property under capital leases 11,011 8,723 PaPUC restructuring rate orders (Notes 1 & 2) 32,900 - Nuclear outage maintenance costs, net 4,709 (1,496) Deferred income taxes and investment tax credits, net (36,848) 8,786 Allowance for other funds used during construction (85) (439) Changes in working capital: Receivables (19,474) (27,679) Materials and supplies 2,162 2,480 Special deposits and prepayments (5,251) 5,171 Payables and accrued liabilities (16,513) 7,311 Nonutility generation contract buyout costs (6,667) (13,550) Other, net 12,698 (16,665) ---------- --------- Net cash provided by operating activities 105,401 138,461 -------- -------- Investing Activities: Capital expenditures (33,356) (55,273) Contributions to decommissioning trusts (13,328) (13,315) Other, net 44 (312) ---------- --------- Net cash used for investing activities (46,640) (68,900) ---------- --------- Financing Activities: Issuance of long-term debt - 13,577 Increase in notes payable, net 8,921 14,389 Retirement of long-term debt (22) (40,020) Capital lease principal payments (9,956) (10,672) Dividends paid on common stock (60,000) (45,000) Dividends paid on preferred stock (362) (478) ---------- --------- Net cash required by financing activities (61,419) (68,204) ---------- --------- Net increase/(decrease) in cash and temporary cash investments from above activities (2,658) 1,357 Cash and temporary cash investments, beginning of year 6,116 1,901 -------- -------- Cash and temporary cash investments, end of period $ 3,458 $ 3,258 ======== ======== Supplemental Disclosure: Interest and preferred dividends paid $ 50,146 $ 52,266 ======== ======== Income taxes paid $ 60,189 $ 44,652 ======== ======== New capital lease obligations incurred $ 39 $ 18,829 ======== ======== The accompanying notes are an integral part of the consolidated financial statements. 14 PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES Consolidated Balance Sheets --------------------------- In Thousands -------------------------- September 30, December 31, 1998 1997 ------------ ------------ (Unaudited) ASSETS Utility Plant: In service, at original cost $2,763,300 $2,812,720 Less, accumulated depreciation 1,156,972 1,091,965 ---------- ---------- Net utility plant in service 1,606,328 1,720,755 Construction work in progress 47,762 69,089 Other, net 19,178 26,110 ---------- ----------- Net utility plant 1,673,268 1,815,954 ---------- ----------- Other Property and Investments: Nuclear decommissioning trusts, at market (Note 1) 73,731 68,129 Other, net 7,093 7,071 ---------- ---------- Total other property and investments 80,824 75,200 ---------- ---------- Current Assets: Cash and temporary cash investments 4,343 - Special deposits 2,530 2,449 Accounts receivable: Customers, net 68,112 71,338 Other 28,287 21,051 Unbilled revenues 37,135 47,728 Materials and supplies, at average cost or less: Construction and maintenance 40,667 47,853 Fuel 13,717 14,841 Deferred income taxes 7,589 7,589 Prepayments 35,767 29,856 ---------- ---------- Total current assets 238,147 242,705 ---------- ---------- Deferred Debits and Other Assets: Competitive transition charge (Notes 1 & 2) 332,160 - Other regulatory assets, net (Note 1) 1,197,776 360,315 Deferred income taxes 967,688 55,698 Other 13,142 13,118 ---------- ---------- Total deferred debits and other assets 2,510,766 429,131 ---------- ---------- Total Assets $4,503,005 $2,562,990 ========== ========== The accompanying notes are an integral part of the consolidated financial statements. 15 PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES Consolidated Balance Sheets In Thousands -------------------------- September 30, December 31, 1998 1997 ------------ ------------ (Unaudited) LIABILITIES AND CAPITALIZATION Capitalization: Common stock $ 105,812 $ 105,812 Capital surplus 285,486 285,486 Retained earnings 379,773 393,708 Accumulated other comprehensive income (Note 6) 5,862 6,332 ---------- ---------- Total common stockholder's equity 776,933 791,338 Cumulative preferred stock 16,681 16,681 Company-obligated mandatorily redeemable preferred securities 105,000 105,000 Long-term debt 626,434 676,444 ---------- ---------- Total capitalization 1,525,048 1,589,463 ---------- ---------- Current Liabilities: Securities due within one year 50,012 30,011 Notes payable 79,600 77,581 Obligations under capital leases 14,269 19,939 Accounts payable: Affiliates 55,178 24,811 Other 51,918 62,483 Taxes accrued 12,202 15,966 Interest accrued 10,074 20,902 Other 37,384 19,654 ---------- ---------- Total current liabilities 310,637 271,347 ---------- ---------- Deferred Credits and Other Liabilities: Deferred income taxes 1,334,711 478,182 Three Mile Island Unit 2 future costs 116,101 112,227 Unamortized investment tax credits 37,553 39,353 Nuclear fuel disposal fee 15,777 15,172 Nonutility generation contract loss liability 1,017,520 - Other 145,658 57,246 ---------- ---------- Total deferred credits and other liabilities 2,667,320 702,180 ---------- ---------- Commitments and Contingencies (Note 1) Total Liabilities and Capitalization $4,503,005 $2,562,990 ========== ========== The accompanying notes are an integral part of the consolidated financial statements. 16 PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES Consolidated Statements of Income --------------------------------- (Unaudited)
In Thousands ----------------------------------------------- Three Months Nine Months Ended September 30, Ended September 30, ------------------- ---------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Operating Revenues $ 259,354 $ 257,569 $773,364 $ 795,184 -------- --------- -------- --------- Operating Expenses: Fuel 48,418 43,205 133,519 132,421 Power purchased and interchanged: Affiliates 74 598 1,227 2,672 Others 73,820 50,937 178,632 155,450 Other operation and maintenance 81,097 71,816 206,210 190,151 Depreciation and amortization 29,332 25,534 82,716 78,935 Taxes, other than income taxes 14,854 15,808 50,875 49,629 -------- --------- --------- --------- Total operating expenses 247,595 207,898 653,179 609,258 -------- --------- --------- --------- Operating Income Before Income Taxes 11,759 49,671 120,185 185,926 Income taxes (7,013) 14,227 24,007 57,371 -------- --------- --------- --------- Operating Income 18,772 35,444 96,178 128,555 -------- --------- --------- --------- Other Income and Deductions: Allowance for other funds used during construction - 71 - 164 Other income/(expense), net (6,045) (57) (4,312) 1,198 Income taxes (2,782) (13) (3,487) (509) -------- --------- --------- --------- Total other income and deductions (8,827) 1 (7,799) 853 -------- --------- --------- --------- Income Before Interest Charges and Dividends on Preferred Securities 9,945 35,445 88,379 129,408 -------- ---------- --------- --------- Interest Charges: Long-term debt 11,948 12,453 35,922 36,672 Company-obligated mandatorily redeemable preferred securities 2,297 2,297 6,891 6,891 Other interest 2,192 1,961 6,651 6,204 Allowance for borrowed funds used during construction (632) (635) (1,621) (1,463) -------- -------- --------- --------- Total interest charges 15,805 16,076 47,843 48,304 -------- -------- --------- --------- Income Before Extraordinary Item (5,860) 19,369 40,536 81,104 Extraordinary item (net of income taxes of $50,688 and $11,592) (Notes 1 & 2) 68,880 - (18,950) - -------- -------- --------- --------- Net Income 63,020 19,369 21,586 81,104 Preferred stock dividends 174 173 521 491 -------- --------- --------- --------- Earnings Available for Common Stock $ 62,846 $ 19,196 $21,065 $ 80,613 ======== ========= ========= ========= The accompanying notes are an integral part of the consolidated financial statements. 17
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES Consolidated Statements of Cash Flows (Unaudited) In Thousands --------------------- Nine Months Ended September 30, --------------------- 1998 1997 ---- ---- Operating Activities: Net income $ 21,586 $81,104 Extraordinary item (net of income tax benefit of $11,592) (Note 2) 18,950 - -------- -------- Income before extraordinary item 40,536 81,104 Adjustments to reconcile income to cash provided: Depreciation and amortization 80,097 73,989 Amortization of property under capital leases 6,324 5,517 PaPUC restructuring rate orders (Notes 1 & 2) 35,600 - Nuclear outage maintenance costs, net 2,359 (744) Deferred income taxes and investment tax credits, net (19,382) 8,373 Allowance for other funds used during construction - (164) Changes in working capital: Receivables 6,583 (18,438) Materials and supplies 721 (5,006) Special deposits and prepayments (5,992) 1,681 Payables and accrued liabilities 12,766 (6,818) Nonutility generation contract buyout costs - (5,000) Other, net (17,098) (11,425) -------- -------- Net cash provided by operating activities 142,514 123,069 -------- -------- Investing Activities: Capital expenditures (64,869) (63,005) Contributions to decommissioning trusts (3,954) (3,947) Other, net (39) 417 -------- -------- Net cash used for investing activities (68,862) (66,535) -------- -------- Financing Activities: Issuance of long-term debt - 49,875 Increase/(Decrease) in notes payable, net 2,019 (24,151) Retirement of long-term debt (30,011) (26,010) Capital lease principal payments (5,796) (6,491) Dividends paid on common stock (35,000) (45,000) Dividends paid on preferred stock (521) (521) -------- -------- Net cash required by financing activities (69,309) (52,298) -------- -------- Net increase in cash and temporary cash investments from above activities 4,343 4,236 Cash and temporary cash investments, beginning of year - - -------- --------- Cash and temporary cash investments, end of period $ 4,343 $ 4,236 ======== ======== Supplemental Disclosure: Interest and preferred dividends paid $ 58,549 $ 56,810 ======== ======== Income taxes paid $ 53,178 $ 44,147 ======== ======== New capital lease obligations incurred $ 33 $ 10,046 ======== ======== The accompanying notes are an integral part of the consolidated financial statements. 18 GPU, Inc. and Subsidiary Companies COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GPU, Inc., a Pennsylvania corporation, is a holding company registered under the Public Utility Holding Company Act of 1935. GPU, Inc. does not directly operate any utility properties, but owns all the outstanding common stock of three domestic electric utilities serving customers in New Jersey -- Jersey Central Power & Light Company (JCP&L) -- and Pennsylvania -- Metropolitan Edison Company (Met-Ed) and Pennsylvania Electric Company (Penelec). The customer service, transmission and distribution operations of these electric utilities are conducting business under the name GPU Energy. JCP&L, Met-Ed and Penelec considered together are referred to as the "GPU Energy companies." The generation operations of the GPU Energy companies are conducted by GPU Generation, Inc. (Genco) and GPU Nuclear, Inc. (GPUN). GPU, Inc. also owns all the common stock of GPU International, Inc., GPU Power, Inc. and GPU Electric, Inc. which develop, own and operate generation, transmission and distribution facilities in the United States and in foreign countries. Collectively, these are referred to as the "GPUI Group." Other wholly-owned subsidiaries of GPU, Inc. are GPU Advanced Resources, Inc. (GPU AR), a subsidiary engaging in energy services and retail energy sales; GPU Telcom Services, Inc. (GPU Telcom), a subsidiary engaging in certain telecommunications-related businesses; and GPU Service, Inc. (GPUS), which provides certain legal, accounting, financial and other services to the GPU companies. All of these companies considered together are referred to as "GPU." These notes should be read in conjunction with the notes to consolidated financial statements included in the 1997 Annual Report on Form 10-K. The December 31, 1997 balance sheet data contained in the attached financial statements was derived from audited financial statements. For disclosures required by generally accepted accounting principles, see the 1997 Annual Report on Form 10-K. 1. COMMITMENTS AND CONTINGENCIES COMPETITION AND THE CHANGING REGULATORY ENVIRONMENT --------------------------------------------------- The Emerging Competitive Market and Stranded Costs: - --------------------------------------------------- The current market price of electricity being below the cost of some utility-owned generation and power purchase commitments, combined with the ability of some customers to choose their energy suppliers, has created the potential for stranded costs in the electric utility industry. These stranded costs, while potentially recoverable in a regulated environment, are at risk in a deregulated and competitive environment. In October 1998, the Pennsylvania Public Utility Commission (PaPUC) issued final Restructuring Orders (final Restructuring Orders), which granted Met-Ed and Penelec recovery of a substantial portion of their stranded costs. See Competitive Environment section of Management's Discussion and Analysis. In 1996, the Federal Energy Regulatory Commission (FERC) issued Order 888, which permits electric utilities to recover their legitimate and verifiable stranded costs incurred when a wholesale customer purchases power from another supplier using the utility's transmission system. In addition, 19 Pennsylvania adopted comprehensive legislation (Customer Choice Act) in 1996 which provides for the restructuring of the electric utility industry and will permit utilities the opportunity to recover their prudently incurred stranded costs through a PaPUC approved competitive transition charge (CTC), subject to certain conditions, including that utilities attempt to mitigate these costs. In June 1997, Met-Ed and Penelec filed with the PaPUC their proposed restructuring plans to implement competition and customer choice in Pennsylvania as required by the Customer Choice Act. In June 1998, the PaPUC entered restructuring rate orders (Restructuring Orders) on the restructuring plans. In the Restructuring Orders, the PaPUC, among other things, established a CTC which (a) would not ensure Met-Ed and Penelec full recovery of the costs under their contracts with nonutility generators (NUGs) as required by state and federal law; (b) disallowed certain stranded cost claims by Met-Ed and Penelec; (c) lowered unbundled transmission and distribution (T&D) rates for Met-Ed and Penelec by reallocating certain T&D costs to generation; and (d) advanced the phase-in for retail choice to January 2, 2000. Accordingly, Met-Ed and Penelec wrote-off in the second quarter, $320 million and $150 million pre-tax, respectively. In July 1998, Met-Ed and Penelec appealed the Restructuring Orders to the Commonwealth Court and filed Alternative Restructuring Plans with the PaPUC which were ultimately rejected. Met-Ed and Penelec also filed complaints in the U.S. District Court seeking both declaratory and injunctive relief challenging, among other things, the PaPUC's refusal in the Restructuring Orders to ensure full recovery of the costs of NUG contracts, as required by state and federal law. Following extended negotiations, on September 23, 1998, Met-Ed, Penelec, the PaPUC and numerous intervenors in the restructuring proceedings entered into Settlement Agreements providing for new restructuring plans. On October 16, 1998, the PaPUC adopted final Restructuring, approving the Settlement Agreements. In the third quarter, as a result of the final Restructuring Orders, Met-Ed and Penelec reversed $313 million and $142 million pre-tax, respectively, of the writeoffs recorded in the second quarter and recorded additional non-recurring charges of $38 million and $58 million pre-tax, for Met-Ed and Penelec, respectively. For additional information, see Note 2 Accounting for Non-recurring Items. In accordance with the final Restructuring Orders, Met-Ed and Penelec have agreed to dismiss all of the pending Commonwealth Court and U.S. District Court litigation. In 1997, the New Jersey Board of Public Utilities (NJBPU) released Phase II of the Energy Master Plan (NJEMP), which proposes that New Jersey electric utilities should have an opportunity to recover their stranded costs associated with generating capacity commitments and caused by electric retail competition, provided that they attempt to mitigate these costs. Legislation to deregulate New Jersey's electricity market was introduced in September 1998, and it is currently anticipated that such legislation will be enacted by the end of 1998. The proposed legislation provides for, among other things, customer choice beginning no later than June 1, 1999 and expanding to include all customers by October 1, 1999; a minimum five to ten percent rate reduction; the unbundling of customer bills; the recovery of stranded costs and the ability to securitize stranded costs. 20 In July 1997, JCP&L filed with the NJBPU its proposed restructuring plan for a competitive electric marketplace in New Jersey as required by the NJEMP. JCP&L estimates that its total above-market costs related to power purchase commitments and company-owned generation, on a present value basis at September 30, 1998, is $1.6 billion. The $1.6 billion excludes above-market generation costs related to the Oyster Creek Nuclear Generating Station (Oyster Creek). These estimates are subject to significant uncertainties including the future market price of both electricity and other competitive energy sources, as well as the timing of when these above-market costs become stranded due to customers choosing another supplier. In July 1997, JCP&L proposed, in its restructuring plan, recovery of its remaining Oyster Creek plant investment as a regulatory asset, through a nonbypassable charge to customers. At September 30, 1998, JCP&L's net investment in Oyster Creek was $688 million. Highlights of this plan are presented in the Competitive Environment section of Management's Discussion and Analysis. In February 1998, hearings with respect to JCP&L's stranded cost and unbundled rate filings were completed before an Administrative Law Judge (ALJ) and a recommended decision was issued in September. See Competitive Environment section of Management's Discussion and Analysis for highlights of the ALJ recommended decision. Also in September 1998, identical bills to deregulate New Jersey's electricity market were introduced into the state Assembly and Senate. The NJBPU is not expected to issue final decisions on JCP&L's stranded cost, unbundled rate and restructuring filings until legislation is enacted. The inability of JCP&L to recover its stranded costs in whole or in part would result in the recording of liabilities for above-market NUG costs, decommissioning costs, and writedowns of uneconomic generation plant and regulatory assets recorded in accordance with Statement of Financial Accounting Standards No. 71 (FAS 71), "Accounting for the Effects of Certain Types of Regulation." The inability to recover these stranded costs would have a material adverse effect on GPU's results of operations. In October 1997, GPU announced its intention to begin a process to sell, through a competitive bid process, up to all of the fossil-fuel and hydroelectric generating facilities owned by the GPU Energy companies. These facilities, comprised of 26 operating stations, support organizations and development sites, total approximately 5,300 MW (JCP&L 1,900 MW; Met-Ed 1,300 MW; Penelec 2,100 MW) of capacity and have a net book value of approximately $1.1 billion (JCP&L $282 million; Met-Ed $290 million; Penelec $527 million) at September 30, 1998. The net proceeds from the sale would be used to reduce the capitalization of the respective GPU Energy companies and may also be applied to reduce short-term debt, finance further acquisitions, repurchase GPU, Inc. common stock, and to reduce acquisition debt of the GPUI Group. In August 1998, Penelec and New York State Electric & Gas Corporation (NYSEG) entered into definitive agreements with Edison Mission Energy to sell the Homer City Station for a total purchase price of approximately $1.8 billion. Penelec and NYSEG each own a 50% interest in the station, and will share equally in the net sale proceeds. The sale, which is subject to various federal and state regulatory approvals, is expected to be completed in the first quarter of 1999. 21 On November 9, 1998, the GPU Energy companies entered into definitive purchase agreements with Sithe Energies and FirstEnergy Corporation to sell, with the exception of JCP&L's 50% ownership interest in the Yards Creek Pumped Storage plant, all their remaining fossil-fuel and hydroelectric generating facilities for a total purchase price of approximately $1.7 billion (JCP&L $442 million; Met-Ed $677 million; and Penelec $603 million). The sales are expected to be completed in mid-1999, subject to the timely receipt of the necessary regulatory and other approvals. Nonutility Generation Agreements: - --------------------------------- Pursuant to the requirements of the federal Public Utility Regulatory Policies Act and state regulatory directives, the GPU Energy companies have entered into power purchase agreements with NUGs for the purchase of energy and capacity for remaining periods of up to 23 years. The following table shows actual payments from 1995 through 1997, and estimated payments from 1998 through 2002. Payments Under NUG Agreements ----------------------------- (in Millions) Total JCP&L Met-Ed Penelec ----- ----- ------ ------- 1995 $670 $381 $131 $158 1996 730 370 168 192 1997 759 384 172 203 * 1998 771 389 170 212 1999 763 395 150 218 2000 852 402 206 244 2001 892 411 245 236 2002 915 423 257 235 * The 1998 amounts consist of actual payments through September 30, 1998 and estimated payments for the remainder of the year. As of September 30, 1998, NUG facilities covered by agreements having 1,681 MW (JCP&L 912 MW; Met-Ed 364 MW; Penelec 405 MW) of capacity were in service. While a few of these NUG facilities are dispatchable, most are must-run and generally obligate the GPU Energy companies to purchase, at the contract price, the output up to the contract limits. Substantially all unbuilt NUG facilities for which the GPU Energy companies have executed agreements are fully dispatchable. The emerging competitive generation market has created uncertainty regarding the forecasting of the companies' energy supply needs, which has caused the GPU Energy companies to change their supply strategy to seek shorter-term agreements offering more flexibility. The GPU Energy companies' future supply plan will likely focus on short- to intermediate-term commitments and reliance on spot market purchases. The projected cost of energy from new generation supply sources has also decreased due to improvements in power plant technologies and lower forecasted fuel prices. As a result of these developments, the rates under virtually all of the GPU Energy companies' NUG agreements for facilities currently in operation are substantially in excess of current and projected prices from alternative sources. 22 The October 1998 PaPUC final Restructuring Orders provide for, and the proposed legislation and restructuring plans in New Jersey also contemplate, full recovery of the above-market costs of NUG agreements. The GPU Energy companies will continue efforts to reduce the above-market costs of these agreements and will, where beneficial, attempt to renegotiate the prices of the agreements, offer contract buyouts and attempt to convert must-run agreements to dispatchable agreements. There can be no assurance as to the extent to which these efforts will be successful in whole or in part. In 1997, Met-Ed and Penelec issued requests for proposals (RFPs) to 24 NUG projects which currently supply a total of approximately 760 MW under power purchase agreements. The RFPs requested the NUGs to propose buyouts, buydowns and/or restructurings of current power purchase contracts in return for cash payments. In January 1998, Met-Ed and Penelec entered into definitive buyout agreements with two bidders. These agreements were contingent upon Met-Ed and Penelec obtaining a PaPUC order allowing for the full recovery of the buyout payments through retail rates. The final Restructuring Orders issued by the PaPUC in October 1998 established terms and conditions that would enable the buyout agreements to proceed. In February 1997, Met-Ed and Penelec entered into revised power purchase agreements with AES Power Corporation (AES) for 377 MW and 80 MW of capacity and related energy, respectively, related to a combined-cycle generating facility that AES plans to construct in Pennsylvania. Met-Ed and Penelec have paid $63.4 million and $5 million, respectively, to previous developers and AES to terminate the original power purchase agreements. In November 1997, in response to an offer from AES, Met-Ed and Penelec agreed to increase the contract capacity under the agreements by 163 MW. The final Restructuring Orders issued by the PaPUC in October 1998 established terms and conditions that would enable the AES power purchase agreements to proceed. The GPU Energy companies are currently recovering certain of their NUG costs (including certain buyout costs) from customers. The October 1998 final Restructuring Orders provide assurance of full recovery of these costs for Met-Ed and Penelec. Although the proposed restructuring legislation in New Jersey includes provisions for the recovery of costs under NUG agreements and certain NUG buyout costs, there can be no assurance that JCP&L will continue to be able to recover similar costs which may be incurred in the future. (See Management's Discussion and Analysis - Competitive Environment for additional discussion.) This discussion of "Nonutility Generation Agreements" contains estimates which are based on current knowledge and expectations of the outcome of future events. The estimates are subject to significant uncertainties, including changes in fuel prices, improvements in technology, the changing regulatory environment and the deregulation of the electric utility industry. Regulatory Assets, Net: - ----------------------- In June 1998, Met-Ed and Penelec received PaPUC Restructuring Orders which were subsequently amended in October 1998 by the final Restructuring Orders. The Restructuring Orders, among other things, essentially remove from regulation the costs associated with providing electric generation service to Pennsylvania consumers, effective January 1, 1999. Accordingly, Met-Ed and Penelec have discontinued the application of FAS 71 and adopted the provisions 23 of Statement of Financial Accounting Standards No. 101 (FAS 101), "Regulated Enterprises - Accounting for the Discontinuation of Application of FASB Statement No. 71" with respect to their electric generation operations, in the second quarter of 1998. The transmission and distribution portion of Met-Ed and Penelec's operations will continue to be subject to the provisions of FAS 71. See Note 2 - Accounting for Non-recurring Items. JCP&L will discontinue the application of FAS 71 and apply FAS 101 for its electric generation operations no later than when it receives NJBPU approval of its restructuring plans. Regulatory Assets, Net as reflected in the September 30, 1998 and December 31, 1997 Consolidated Balance Sheets in accordance with the provisions of FAS 71, were as follows: GPU, Inc. and Subsidiary Companies Assets (in thousands) ---------------------------- September 30, December 31, 1998 1997 ------------- ------------- Competitive transition charge per PaPUC Order $ 989,815 $ - ========= ========= Other regulatory assets, net: Reserve for generation divestiture (JCP&L) $ 132,748 $ - Phase II reserve for generation divestiture 1,360,375 - Income taxes recoverable through future rates 379,105 510,680 Income taxes refundable through future rates (54,519) (89,247) Net investment in TMI-2 68,009 83,951 TMI-2 decommissioning costs 131,737 257,180 Nonutility generation contract buyout costs 131,458 245,568 Unamortized property losses 83,385 99,532 Other postretirement benefits 74,601 89,569 Environmental remediation 44,447 90,308 N.J. unit tax 34,929 39,797 Unamortized loss on reacquired debt 33,234 40,489 Load and demand-side management programs 16,445 23,164 N.J. low-level radwaste disposal 25,685 31,479 DOE enrichment facility decommissioning 29,542 33,472 Nuclear fuel disposal fee 21,467 21,512 Storm damage 31,255 31,097 Deferred nonutility generation costs not in current rates (16,067) 24,857 Future nonutility generation costs not in CTC 375,820 - Public utility realty taxes (PURTA) 6,881 - Other regulatory liabilities (20,235) (13,959) Other regulatory assets 10,283 28,029 --------- --------- Total other regulatory assets, net $2,900,585 $1,547,478 ========= ========= 24 JCP&L Assets (in thousands) - ----- ---------------------------- September 30, December 31, 1998 1997 ------------- ------------- Other regulatory assets, net: Reserve for generation divestiture $ 132,749 $ - Income taxes recoverable through future rates 134,028 128,111 Income taxes refundable through future rates (35,964) (37,759) Net investment in TMI-2 68,009 75,541 TMI-2 decommissioning costs 29,474 30,024 Nonutility generation contract buyout costs 126,458 140,500 Unamortized property losses 83,346 94,726 Other postretirement benefits 47,317 49,807 Environmental remediation 44,447 61,324 N.J. unit tax 34,929 39,797 Unamortized loss on reacquired debt 26,655 28,729 Load and demand-side management programs 16,445 23,164 N.J. low-level radwaste disposal 25,685 31,479 DOE enrichment facility decommissioning 18,502 21,223 Nuclear fuel disposal fee 21,197 23,781 Storm damage 31,255 31,097 Other regulatory liabilities (19,311) (11,467) Other regulatory assets 7,748 6,399 --------- --------- Total other regulatory assets, net $ 792,969 $ 736,476 ========= ========= Met-Ed Assets (in thousands) - ----- ---------------------------- September 30, December 31, 1998 1997 ------------- ------------- Competitive transition charge per PaPUC Order $ 657,655 $ - ========= ========= Other regulatory assets, net: Transmission & Distribution related: Income taxes recoverable through future rates $ 111,303 $ 116,303 Income taxes refundable through future rates (11,081) (12,614) Nonutility generation contract buyout costs 5,000 12,500 Other postretirement benefits 27,284 27,436 Unamortized loss on reacquired debt 2,011 3,411 DOE enrichment facility decommissioning 7,498 8,166 Other regulatory liabilities (924) (1,014) Other regulatory assets 232 216 --------- --------- Subtotal $ 141,323 $ 154,404 --------- --------- Generation related: Income taxes recoverable through future rates $ - $ 62,624 Income taxes refundable through future rates - (9,135) Unamortized property losses 39 2,650 Other postretirement benefits - 12,326 Environmental remediation - 4,121 Unamortized loss on reacquired debt 1,131 1,918 Nuclear fuel disposal fee 151 (1,511) Other regulatory liabilities - (1,432) Other regulatory assets 321 3,227 --------- --------- Subtotal $ 1,642 $ 74,788 --------- --------- 25 Other: Phase II reserve for generation divestiture $ 423,003 $ - Net investment in TMI-2 - 1,187 TMI-2 decommissioning costs 71,103 145,103 Nonutility generation contract buyout costs - 63,868 Deferred nonutility generation costs not in current rates (7,746) 10,265 Future nonutility generation costs not in CTC 276,660 - Public utility realty taxes (PURTA) 3,130 - Other regulatory assets 725 1,072 --------- --------- Subtotal $ 766,875 $ 221,495 --------- --------- Total other regulatory assets, net $ 909,840 $ 450,687 ========= ========= Penelec Assets (in thousands) - ------- --------------------------- September 30, December 31, 1998 1997 ------------- ------------- Competitive transition charge per PaPUC Order $ 332,160 $ - ========= ========= Other regulatory assets, net: Transmission & Distribution related: Income taxes recoverable through future rates $ 133,774 $ 142,549 Income taxes refundable through future rates (7,475) (9,516) Unamortized loss on reacquired debt 2,200 4,116 DOE enrichment facility decommissioning 3,542 4,083 Other regulatory liabilities - (46) --------- --------- Subtotal $ 132,041 $ 141,186 --------- --------- Generation related: Income taxes recoverable through future rates $ - $ 61,093 Income taxes refundable through future rates - (20,223) Unamortized property losses - 2,156 Environmental remediation - 24,863 Unamortized loss on reacquired debt 1,237 2,315 Nuclear fuel disposal fee 119 (758) Other regulatory assets 343 15,964 --------- --------- Subtotal $ 1,699 $ 85,410 --------- --------- Other: Phase II reserve for generation divestiture $ 937,372 $ - Net investment in TMI-2 - 7,223 TMI-2 decommissioning costs 31,160 82,053 Nonutility generation contract buyout costs - 28,700 Deferred nonutility generation costs not in current rates (8,321) 14,592 Future nonutility generation costs not in CTC 99,160 - Public utility realty taxes (PURTA) 3,751 - Other regulatory assets 914 1,151 --------- --------- Subtotal $1,064,036 $ 133,719 --------- --------- Total other regulatory assets, net $1,197,776 $ 360,315 ========= ========= 26 Competitive transition charge: Represents the stranded cost recovery amounts allowed by the PaPUC, which are to be collected from customers of Met-Ed and Penelec, beginning January 1, 1999, over twelve-year and eleven-year transition periods, respectively. Stranded costs, as defined by the Pennsylvania Competition Act, include an electric utility's known and measurable generation-related costs, which would have been recoverable in the former regulated market, but are not recoverable in a competitive electric generation market. Reserve for generation divestiture (JCP&L): Represents generation divestiture shortfall which is probable of recovery in future rates, inclusive of divestiture transaction costs. Phase II reserve for generation divestiture (Met-Ed and Penelec): Represents generation divestiture CTC shortfall to be addressed in a Phase II rate restructuring order, inclusive of future closure costs of various ash disposal sites; amounts related to the remediation of Penelec's Seward station property; costs for a voluntary enhanced retirement program offered to Genco employees; certain income tax-related items; and divestiture transaction costs. Income taxes recoverable/refundable through future rates: Represents amounts deferred due to the implementation of FAS 109, "Accounting for Income Taxes," in 1993. Net investment in TMI-2: Represents costs that are recoverable through rates for the GPU Energy companies' remaining investment in the plant and fuel core. TMI-2 decommissioning costs: Represents costs that are recoverable through rates for the GPU Energy companies' radiological decommissioning and the cost of removal of nonradiological structures and materials in accordance with the 1995 site-specific study (in 1998 dollars). For additional information, see Nuclear Plant Retirement Costs. Nonutility generation contract buyout costs: Represents amounts incurred for terminating power purchase contracts with NUGs, for which rate recovery has been granted or is probable. Unamortized property losses: Consists mainly of costs associated with JCP&L's Forked River project, which are included in rates. Other postretirement benefits: Includes costs associated with the adoption of FAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which are deferred in accordance with Emerging Issues Task Force (EITF) Issue 92-12, "Accounting for OPEB Costs by Rate-Regulated Enterprises." Environmental remediation: Consists of amounts related to the investigation and remediation of several manufactured gas plant sites formerly owned by JCP&L, as well as several other JCP&L sites; Penelec's Seward station property; and future closure costs of various ash disposal sites for the GPU Energy companies. For additional information, see Environmental Matters. N.J. unit tax: Represents certain state taxes, with interest, for which JCP&L received NJBPU approval in 1993 to recover over a ten-year period. 27 Unamortized loss on reacquired debt: Represents premiums and expenses incurred in the early redemption of long-term debt. In accordance with FERC regulations, reacquired debt costs are amortized over the remaining original life of the retired debt. Load and demand-side management (DSM) programs: Consists of load management costs and other DSM program expenditures that are currently being recovered, with interest, through JCP&L's retail base rates and demand-side factor. Also includes provisions for lost revenues between base rate cases and performance incentives. N.J. low-level radwaste disposal: Represents the estimated assessment for the siting of a disposal facility for low-level waste from Oyster Creek, less amortization, as allowed in JCP&L's rates. Department of Energy (DOE) enrichment facility decommissioning: Represents payments to the DOE over a 15-year period which began in 1994. Nuclear fuel disposal fee: Represents amounts recoverable through rates for estimated future disposal costs for spent nuclear fuel at Oyster Creek and Three Mile Island Unit 1 (TMI-1) in accordance with the Nuclear Waste Policy Act of 1982. Storm damage: Relates to incremental noncapital costs associated with various storms in the JCP&L service territory that are not recoverable through insurance. These amounts were deferred based upon past rate recovery precedent. An annual amortization amount is included in JCP&L's retail base rates and is charged to expense. Deferred nonutility generation costs not in current rates: Represents NUG operating costs which are not reflected in Met-Ed and Penelec's current rates, for which rate recovery has been assured (see Management's Discussion and Analysis - Competitive Environment). Future nonutility generation costs not in CTC: Represents future NUG operating costs which are not presently included in Met-Ed and Penelec's CTC, for which recovery has been assured. The amounts collected will be adjusted every five years over the life of each NUG contract. Public utility realty taxes (PURTA): Represents additional assessments under the public utility realty tax, which are recoverable through Met-Ed and Penelec's state tax adjustment surcharges. Accounting Matters: - ------------------- In June 1998, Statement of Financial Accounting Standards No. 133 (FAS 133), "Accounting for Derivative Instruments and Hedging Activities" was issued. FAS 133 requires that companies recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. To comply with this statement, GPU will be required to include its derivative transactions on its balance sheet at fair value, and recognize the subsequent changes in fair value as either gains or losses in earnings or reported as a component of other comprehensive income, depending upon the intended use and designation of the derivative as a hedge. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 28 1999. GPU expects to adopt this statement in the first quarter of 2000. GPU is in the process of evaluating the impact of FAS 133. Statement of Financial Accounting Standards No. 121 (FAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," requires that regulatory assets meet the recovery criteria of FAS 71 on an ongoing basis in order to avoid a write-down. In addition, FAS 121 requires that long-lived assets, identifiable intangibles, capital leases and goodwill be reviewed for impairment whenever events occur or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. FAS 121 also requires the recognition of impairment losses when the carrying amounts of those assets are greater than the estimated cash flows expected to be generated from the use and eventual disposition of the assets. Should the restructuring proceeding in New Jersey result in substantial disallowance of certain capital additions; the disallowance of certain stranded costs; reduction in cost of capital allowances on certain elements of plant and cost deferrals; and tariff rate unbundling reflecting an allocation of costs to the transmission and distribution activities lower than that proposed by JCP&L, management believes that the outcome of that proceeding would have a material adverse effect on GPU's future earnings. NUCLEAR FACILITIES ------------------ The GPU Energy companies have made investments in three major nuclear projects -- TMI-1 and Oyster Creek, both of which are operating generation facilities, and TMI-2, which was damaged during a 1979 accident. TMI-1 and TMI-2 are jointly owned by JCP&L, Met-Ed and Penelec in the percentages of 25%, 50% and 25%, respectively. Oyster Creek is owned by JCP&L. At September 30, 1998 and December 31, 1997, the GPU Energy companies' net investment in TMI-1 and Oyster Creek, including nuclear fuel, was as follows: Net Investment (in millions) ---------------------------- TMI-1 Oyster Creek ----- ------------ September 30, 1998 ------------------ JCP&L $ 22 $688 Met-Ed 43 - Penelec 21 - --- --- Total $ 86 $688 === === Net Investment (in millions) ---------------------------- TMI-1 Oyster Creek ----- ------------ December 31, 1997 ----------------- JCP&L $155 $701 Met-Ed 300 - Penelec 147 - --- --- Total $602 $701 === === The GPU Energy companies' net investment in TMI-2 at September 30, 1998 was $68 million for JCP&L and $84 million, (JCP&L $76 million; Met-Ed $1 million; and Penelec $7 million) at December 31 1997. JCP&L is collecting revenues for TMI-2 on a basis which provides for the recovery of its remaining investment in the plant by 2008. In June 1998, Met-Ed and Penelec received 29 PaPUC Restructuring Orders which were subsequently amended in October 1998 by the final Restructuring Orders. The companies discontinued the application of FAS 71 and adopted the provisions of FAS 101 with respect to their electric generation operations in the second quarter of 1998. Accordingly, Met-Ed and Penelec wrote-off their remaining investment in TMI-2 of $1 million and $7 million, respectively. Costs associated with the operation, maintenance and retirement of nuclear plants have continued to be significant and less predictable than costs associated with other sources of generation, in large part due to changing regulatory requirements, safety standards, availability of nuclear waste disposal facilities and experience gained in the construction and operation of nuclear facilities. The GPU Energy companies may also incur costs and experience reduced output at their nuclear plants because of the prevailing design criteria at the time of construction and the age of the plants' systems and equipment. In addition, for economic or other reasons, operation of these plants for the full term of their operating licenses cannot be assured. Also, not all risks associated with the ownership or operation of nuclear facilities may be adequately insured or insurable. Consequently, the recovery of costs associated with nuclear projects, including replacement power, any unamortized investment at the end of each plant's useful life (whether scheduled or premature), the carrying costs of that investment and retirement costs, is not assured. (See Competition and the Changing Regulatory Environment.) In addition to the continued operation of the Oyster Creek facility, JCP&L has been exploring the sale or early retirement of the plant to mitigate costs associated with its continued operation. In July 1998, GPU, Inc. announced that it was unable to identify a buyer for the Oyster Creek facility. GPU does not anticipate making a final decision on the plant before the NJBPU rules on JCP&L's restructuring filing. If a decision is made to retire the plant early, retirement would likely occur in 2000. Although management believes that the current rate structure would allow for the recovery of and return on its net investment in the plant and provide for decommissioning costs, there can be no assurance that such costs will be fully recoverable. (See Management's Discussion and Analysis - Competitive Environment). In October 1998, GPU entered into definitive purchase agreements to sell TMI-1 to AmerGen Energy Company, LLC (AmerGen), a joint venture between PECO Energy and British Energy. Highlights of the agreements are presented in the Competitive Environment section of Management's Discussion and Analysis. TMI-2: - ------ As a result of the 1979 TMI-2 accident, individual claims for alleged personal injury (including claims for punitive damages), which are material in amount, have been asserted against GPU, Inc. and the GPU Energy companies. Approximately 2,100 of such claims were filed in the United States District Court for the Middle District of Pennsylvania. Some of the claims also seek recovery for injuries from alleged emissions of radioactivity before and after the accident. At the time of the TMI-2 accident, as provided for in the Price-Anderson Act, the GPU Energy companies had (a) primary financial protection in the form 30 of insurance policies with groups of insurance companies providing an aggregate of $140 million of primary coverage, (b) secondary financial protection in the form of private liability insurance under an industry retrospective rating plan providing for up to an aggregate of $335 million in premium charges under such plan, and (c) an indemnity agreement with the NRC for up to $85 million, bringing their total financial protection up to an aggregate of $560 million. Under the secondary level, the GPU Energy companies are subject to a retrospective premium charge of up to $5 million per reactor, or a total of $15 million (JCP&L $7.5 million; Met-Ed $5 million; Penelec $2.5 million). In October 1995, the U.S. Court of Appeals for the Third Circuit ruled that the Price-Anderson Act provides coverage under its primary and secondary levels for punitive as well as compensatory damages, but that punitive damages could not be recovered against the Federal Government under the third level of financial protection. In so doing, the Court of Appeals referred to the "finite fund" (the $560 million of financial protection under the Price-Anderson Act) to which plaintiffs must resort to get compensatory as well as punitive damages. The Court of Appeals also ruled that the standard of care owed by the defendants to a plaintiff was determined by the specific level of radiation which was released into the environment, as measured at the site boundary, rather than as measured at the specific site where the plaintiff was located at the time of the accident (as the defendants proposed). The Court of Appeals also held that each plaintiff still must demonstrate exposure to radiation released during the TMI-2 accident and that such exposure had resulted in injuries. In 1996, the U.S. Supreme Court denied petitions filed by GPU, Inc. and the GPU Energy companies to review the Court of Appeals' rulings. In June 1996, the District Court granted a motion for summary judgment filed by GPU, Inc. and the GPU Energy companies, and dismissed all of the 2,100 pending claims. The Court ruled that there was no evidence which created a genuine issue of material fact warranting submission of plaintiffs' claims to a jury. The plaintiffs have appealed the District Court's ruling to the Court of Appeals for the Third Circuit, before which the matter is pending. There can be no assurance as to the outcome of this litigation. Based on the above, GPU, Inc. and the GPU Energy companies believe that any liability to which they might be subject by reason of the TMI-2 accident will not exceed their financial protection under the Price-Anderson Act. NUCLEAR PLANT RETIREMENT COSTS ------------------------------ Retirement costs for nuclear plants include decommissioning the radiological portions of the plants and the cost of removal of nonradiological structures and materials. The disposal of spent nuclear fuel is covered separately by contracts with the DOE. In 1990, the GPU Energy companies submitted a report, in compliance with Nuclear Regulatory Commission (NRC) regulations, setting forth a funding plan (employing the external sinking fund method) for the decommissioning of their nuclear reactors. Under this plan, the GPU Energy companies intend to 31 complete the funding for Oyster Creek and TMI-1 by the end of the plants' license terms, 2009 and 2014, respectively. The TMI-2 funding completion date is 2014, consistent with TMI-2's remaining in long-term storage and being decommissioned at the same time as TMI-1. Based on NRC studies, a comparable funding target was developed for TMI-2 which took the accident into account. Under the NRC regulations, the funding targets (in 1998 dollars) are as follows: (in millions) Oyster TMI-1 TMI-2 Creek ----- ----- ----- JCP&L $ 47 $ 74 $319 Met-Ed 93 148 - Penelec 47 74 - --- --- --- Total $187 $296 $319 === === === The funding targets, while not considered cost estimates, are reference levels designed to assure that licensees demonstrate adequate financial responsibility for decommissioning. While the NRC regulations address activities related to the removal of the radiological portions of the plants, they do not establish residual radioactivity limits nor do they address costs related to the removal of nonradiological structures and materials. In 1995, a consultant to GPUN performed site-specific studies of TMI-1, TMI-2 and Oyster Creek, that considered various decommissioning methods and estimated the cost of decommissioning the radiological portions and the cost of removal of the nonradiological portions of each plant, using the prompt removal/dismantlement method. GPUN management has reviewed the methodology and assumptions used in these studies, is in agreement with them, and believes the results are reasonable. The NRC may require an acceleration of the decommissioning funding for Oyster Creek if the plant is retired early. The retirement cost estimates under the site-specific studies are as follows (in 1998 dollars): (in millions) Oyster TMI-1 TMI-2 Creek ----- ----- ----- Radiological decommissioning $342 $415 $402 Nonradiological cost of removal 84 34 * 39 --- --- --- Total $426 $449 $441 === === === * Net of $12.0 million spent as of September 30, 1998. Each of the GPU Energy companies is responsible for retirement costs in proportion to its respective ownership percentage. In October 1998, GPU entered into definitive agreements to sell TMI-1 to AmerGen. The agreements provide, among other things, that upon closing, the GPU Energy companies will fund the TMI-1 decommissioning trusts up to $320 million and AmerGen will assume all TMI-1 decommissioning liabilities. If all the necessary regulatory approvals, as well as certain Internal Revenue Service rulings, are obtained, then the transfer of all the TMI-1 decommissioning liabilities and expenses to AmerGen will take place at the financial closing. 32 The ultimate cost of retiring the GPU Energy companies' nuclear facilities may be different from the cost estimates contained in these site-specific studies. Such costs are subject to (a) the escalation of various cost elements (for reasons including, but not limited to, general inflation), (b) the further development of regulatory requirements governing decommissioning, (c) the technology available at the time of decommissioning, and (d) the availability of nuclear waste disposal facilities. The GPU Energy companies charge to depreciation expense and accrue retirement costs based on amounts being collected from customers. Customer collections are contributed to external trust funds. These deposits, including the related earnings, are classified as Nuclear decommissioning trusts, at market on the Consolidated Balance Sheets. Accounting for retirement costs may change based upon the FASB Exposure Draft discussed below. The FASB has issued an Exposure Draft titled "Accounting for Certain Liabilities Related to Closure or Removal of Long-Lived Assets," which includes nuclear plant retirement costs. If the Exposure Draft is adopted, Oyster Creek and TMI-1 future retirement costs would have to be recognized as a liability immediately, rather than the current industry practice of accruing these costs in accumulated depreciation over the life of the plants. A regulatory asset for amounts probable of recovery through rates would also be established. Any amounts not probable of recovery through rates would have to be charged to expense. (For TMI-2, a liability (in 1998 dollars) has already been recognized, based on the 1995 site-specific study because the plant is no longer operating (see TMI-2)). The effective date of this proposed accounting change has not yet been established. TMI-1 and Oyster Creek: - ----------------------- The NJBPU has granted JCP&L annual revenues for TMI-1 and Oyster Creek retirement costs of $2.5 million and $13.5 million, respectively. These annual revenues are based on both the NRC funding targets for radiological decommissioning costs and a site-specific study which was performed in 1988 for nonradiological costs of removal. The Stipulation of Final Settlement approved by the NJBPU in 1997 allows for JCP&L's future collection of retirement costs to increase annually to $5.2 million and $22.5 million for TMI-1 and Oyster Creek, respectively, beginning in 1998, based on the 1995 site-specific study estimates. The PaPUC has granted Met-Ed annual revenues for TMI-1 retirement costs of $8.5 million based on both the NRC funding target for radiological decommissioning costs and the 1988 site-specific study for nonradiological costs of removal. The PaPUC also granted Penelec annual revenues of $4.2 million for its share of TMI-1 retirement costs, on a basis consistent with that granted Met-Ed. As part of their restructuring plans filed with the PaPUC in June 1997, Met-Ed and Penelec have requested that these amounts be increased to reflect the estimated retirement costs contained in the 1995 site-specific study for radiological decommissioning and nonradiological costs of removal. In October 1998, Met-Ed and Penelec received final PaPUC Restructuring Orders, which granted recovery of an interim level of TMI-1 decommissioning costs as part of the CTC. This amount will be adjusted in Phase II of Met-Ed and Penelec's restructuring proceedings, once the net 33 proceeds from the nuclear, fossil-fuel and hydroelectric generation divestiture are determined. The amounts charged to depreciation expense for the nine months ended September 30, 1998 and the provisions for the future expenditure of these funds, which have been made in accumulated depreciation, are as follows: (in millions) Oyster TMI-1 Creek ----- ----- Amount expensed for the nine months ended September 30, 1998: JCP&L $ 4 $ 17 Met-Ed 6 - Penelec 3 - --- --- $ 13 $ 17 === === (in millions) Oyster TMI-1 Creek ----- ----- Accumulated depreciation provision at September 30, 1998: JCP&L $ 43 $243 Met-Ed 77 - Penelec 36 - --- --- $156 $243 Management believes that any TMI-1 and Oyster Creek retirement costs, in excess of those currently recognized for ratemaking purposes, should be recoverable from customers. TMI-2: - ------ The estimated liabilities for TMI-2 future retirement costs (reflected as Three Mile Island Unit 2 Future Costs on the Consolidated Balance Sheets) as of September 30, 1998 and December 31, 1997 are as follows: (in millions) GPU JCP&L Met-Ed Penelec --- ----- ------ ------- September 30, 1998 $464 $116 $232 $116 December 31, 1997 $449 $112 $225 $112 These amounts are based upon the 1995 site-specific study estimates (in 1998 and 1997 dollars, respectively) discussed above and an estimate for remaining incremental monitored storage costs of $16 million (JCP&L $4 million; Met-Ed $8 million; Penelec $4 million) as of September 30, 1998 and December 31, 1997, as a result of TMI-2's entering long-term monitored storage in 1993. The GPU Energy companies are incurring annual incremental monitored storage costs of approximately $1 million (JCP&L $250 thousand; Met-Ed $500 thousand; Penelec $250 thousand). Offsetting the $464 million liability at September 30, 1998 is $259 million which management believes is probable of recovery from customers and 34 included in Competitive transition charge (Met-Ed $74 million; Penelec $50 million) and Other regulatory assets, net (JCP&L $33 million; Met-Ed $71 million; Penelec $31 million) on the Consolidated Balance Sheets, and $233 million (JCP&L $91 million; Met-Ed $93 million; Penelec $49 million) in trust funds for TMI-2 and included in Nuclear decommissioning trusts, at market on the Consolidated Balance Sheets. Earnings on trust fund deposits are included in amounts shown on the Consolidated Balance Sheets under Competitive transition charge and Other regulatory assets. TMI-2 decommissioning costs charged to depreciation expense during the nine months ended September 30, 1998 amounted to $10 million (JCP&L $2 million; Met-Ed $7 million; Penelec $1 million). The NJBPU has granted JCP&L, TMI-2 decommissioning revenues for the NRC funding target and allowances for the cost of removal of nonradiological structures and materials. In addition, JCP&L is recovering its share of TMI-2's incremental monitored storage costs. The Stipulation of Final Settlement approved by the NJBPU in 1997 adjusts JCP&L's future revenues for retirement costs based on the 1995 site-specific study estimates, beginning in 1998. In October 1998, Met-Ed and Penelec received final PaPUC Restructuring Orders, which granted recovery of TMI-2 decommissioning costs as part of the CTC, but also allowed Met-Ed and Penelec to defer as a regulatory asset those amounts that are above the level provided for in the CTC. At September 30, 1998, the accident-related portion of TMI-2 radiological decommissioning costs is considered to be $73 million (JCP&L $18 million, Met-Ed $37 million; Penelec $18 million), which is the difference between the 1995 TMI-1 and TMI-2 site-specific study estimates (in 1998 dollars). In connection with rate case resolutions at the time, JCP&L, Met-Ed and Penelec made contributions to irrevocable external trusts relating to their shares of the accident-related portions of the decommissioning liability. In 1990, JCP&L contributed $15 million and in 1991, Met-Ed and Penelec contributed $40 million and $20 million, respectively, to irrevocable external trusts. These contributions were not recovered from customers and have been expensed. The GPU Energy companies will not pursue recovery from customers for any of these amounts contributed in excess of the $73 million accident-related portion referred to above. JCP&L intends to seek recovery for any increases in TMI-2 retirement costs, and Met-Ed and Penelec intend to seek recovery for any increases in the nonaccident-related portion of such costs, but recognize that recovery cannot be assured. INSURANCE --------- GPU has insurance (subject to retentions and deductibles) for its operations and facilities including coverage for property damage, liability to employees and third parties, and loss of use and occupancy (primarily incremental replacement power costs). There is no assurance that GPU will maintain all existing insurance coverages. Losses or liabilities that are not completely insured, unless allowed to be recovered through ratemaking, could have a material adverse effect on the financial position of GPU. The decontamination liability, premature decommissioning and property damage insurance coverage for the TMI station and for Oyster Creek totals $2.7 billion per site. In accordance with NRC regulations, these insurance 35 policies generally require that proceeds first be used for stabilization of the reactors and then to pay for decontamination and debris removal expenses. Any remaining amounts available under the policies may then be used for repair and restoration costs and decommissioning costs. Consequently, there can be no assurance that in the event of a nuclear incident, property damage insurance proceeds would be available for the repair and restoration of that station. The Price-Anderson Act limits GPU's liability to third parties for a nuclear incident at one of its sites to approximately $9.9 billion. Coverage for the first $200 million of such liability is provided by private insurance. The remaining coverage, or secondary financial protection, is provided by retrospective premiums payable by all nuclear reactor owners. Under secondary financial protection, a nuclear incident at any licensed nuclear power reactor in the country, including those owned by the GPU Energy companies, could result in assessments of up to $88 million per incident for each of the GPU Energy companies' two operating reactors, subject to an annual maximum payment of $10 million per incident per reactor. In addition to the retrospective premiums payable under the Price-Anderson Act, the GPU Energy companies are also subject to retrospective premium assessments of up to $26.8 million (JCP&L $16.8 million; Met-Ed $6.7 million; Penelec $3.3 million) in any one year under insurance policies applicable to nuclear operations and facilities. The GPU Energy companies have insurance coverage for incremental replacement power costs resulting from an accident-related outage at their nuclear plants. Coverage commences after a 17 week waiting period at $3.5 million per week, and after 23 weeks of an outage, continues for three years beginning at $1.8 million and $2.6 million per week for the first year for Oyster Creek and TMI-1, respectively, decreasing to 80% of such amounts for years two and three. ENVIRONMENTAL MATTERS --------------------- As a result of existing and proposed legislation and regulations, and ongoing legal proceedings dealing with environmental matters, including but not limited to acid rain, water quality, ambient air quality, global warming, electromagnetic fields, and storage and disposal of hazardous and/or toxic wastes, GPU may be required to incur substantial additional costs to construct new equipment, modify or replace existing and proposed equipment, remediate, decommission or cleanup waste disposal and other sites currently or formerly used by it, including formerly owned manufactured gas plants (MGP), coal mine refuse piles and generation facilities. To comply with Titles I and IV of the federal Clean Air Act Amendments of 1990 (Clean Air Act), the GPU Energy companies expect to spend up to $248 million (JCP&L $44 million; Met-Ed $98 million; Penelec $106 million) for air pollution control equipment by the year 2000, of which approximately $242 million (JCP&L $43 million; Met-Ed $96 million; Penelec $103 million) has already been spent. In developing their least-cost plan to comply with the Clean Air Act, the GPU Energy companies will continue to evaluate major capital investments compared to participation in the sulfur dioxide (SO2) emission allowance market, the expected nitrogen oxide (NOx) emissions trading market and the use of low-sulfur fuel or retirement of facilities. In 1994, the Ozone Transport Commission (OTC), consisting of representatives of 12 36 northeast states (including New Jersey and Pennsylvania) and the District of Columbia, proposed reductions in NOx emissions it believes necessary to meet ambient air quality standards for ozone and the statutory deadlines set by the Clean Air Act. Effective November 1997, the Pennsylvania Environmental Quality Board adopted regulations implementing the OTC's proposed NOx reductions and in December 1997, the New Jersey Department of Environmental Protection developed a proposal with the electric utility industry on a plan to implement the OTC's proposed NOx reductions. The GPU Energy companies expect that the U.S. Environmental Protection Agency (EPA) will approve state implementation plans, including those in Pennsylvania and New Jersey, and that as a result, they will spend an estimated $6 million (JCP&L $0.2 million; Met-Ed $2.8 million; Penelec $3.0 million) (included in the above total), to meet the 1999 seasonal reductions agreed upon by the OTC. The OTC has stated that it anticipates that additional NOx reductions will be necessary to meet the Clean Air Act's 2005 National Ambient Air Quality Standard for ozone. However, the specific requirements that will have to be met at that time have not been finalized. In addition, in July 1997 the EPA adopted new, more stringent rules on ozone and particulate matter. Several groups have filed suit in the U.S. Court of Appeals to overturn these new air quality standards on the grounds that, among other things, they are based on inadequate scientific evidence. Also, legislation has been introduced in the Congress that would impose a four-year moratorium on any new standards under the Clean Air Act. The GPU Energy companies are unable to determine what additional costs, if any, will be incurred if the EPA rules are upheld. GPU has been formally notified by the EPA and state environmental authorities that it is among the potentially responsible parties (PRPs) who may be jointly and severally liable to pay for the costs associated with the investigation and remediation at hazardous and/or toxic waste sites in the following number of instances (in some cases, more than one company is named for a given site): JCP&L MET-ED PENELEC GPUN GPU,INC. TOTAL ----- ------ ------- ---- -------- ----- 7 4 2 1 1 12 In addition, certain of the GPU companies have been requested to participate in the remediation or supply information to the EPA and state environmental authorities on several other sites for which they have not been formally named as PRPs, although the EPA and state authorities may nevertheless consider them as PRPs. Certain of the GPU companies have also been named in lawsuits requesting damages (which are material in amount) for hazardous and/or toxic substances allegedly released into the environment. The ultimate cost of remediation will depend upon changing circumstances as site investigations continue, including (a) the existing technology required for site cleanup, (b) the remedial action plan chosen and (c) the extent of site contamination and the portion attributed to the GPU companies involved. In 1997, the EPA filed a complaint against GPU, Inc. in the United States District Court for the District of Delaware for enforcement of its unilateral order issued against GPU, Inc. to clean up the former Dover Gas Light Company (Dover) manufactured gas production site in Dover, Delaware. Dover was part of the AGECO/AGECORP group of companies from 1929 until 1942 and GPU, Inc. emerged from the AGECO/AGECORP reorganization proceedings. All of the common stock of Dover was sold in 1942 by a member of the AGECO/AGECORP group to an 37 unaffiliated entity, and was subsequently acquired by Chesapeake Utilities Corporation. According to the complaint, the EPA is seeking up to $0.5 million in past costs, $4.2 million for work in connection with the cleanup of the Dover site and approximately $19 million in penalties. GPU, Inc. has responded to the EPA complaint stating that such claims should be dismissed because, among other things, they are barred by the operation of the Final Decree entered by the United States District Court for the Southern District of New York at the conclusion of the 1946 reorganization proceedings of AGECO/AGECORP. Chesapeake Utilities Corporation has also sued GPU, Inc. for a contribution to the cleanup of the Dover site. In December 1997, the Court refused to dismiss the complaint; GPU, Inc. has requested that the Court reconsider its decision. There can be no assurance as to the outcome of these proceedings. Pursuant to federal environmental monitoring requirements, Penelec has reported to the Pennsylvania Department of Environmental Protection (PaDEP) that contaminants from coal mine refuse piles were identified in storm water run-off at Penelec's Seward station property. Penelec signed a modified Consent Order, which became effective December 1996, that establishes a schedule for submitting a plan for long-term remediation, based on future operating scenarios. Penelec currently estimates that the remediation of the Seward station property will range from $12 million to $20 million and has a recorded liability of $12 million at September 30, 1998. These cost estimates are subject to uncertainties based on continuing discussions with the PaDEP as to the method of remediation, the extent of remediation required and available cleanup technologies. Penelec expects recovery of these remediation costs in Phase II of its restructuring proceeding and has recorded a corresponding deferred debit of approximately $12 million at September 30, 1998. In 1997, the GPU Energy companies filed with the PaDEP applications for re-permitting seven (JCP&L - one; Met-Ed - three; Penelec - three) operating ash disposal sites, including projected site closure procedures and related cost estimates. The cost estimates for the closure of these sites range from approximately $17 million to $22 million, and a liability of $17 million (JCP&L $1 million; Met-Ed $4 million; Penelec $12 million) is reflected on the Consolidated Balance Sheets at September 30, 1998. JCP&L has requested recovery of its share of closure costs in its restructuring plan filed with the NJBPU in July 1997. Met-Ed and Penelec expect recovery of these costs in Phase II of their restructuring proceedings. As a result, a deferred debit of $17 million is reflected on the Consolidated Balance Sheets at September 30, 1998. JCP&L has entered into agreements with the New Jersey Department of Environmental Protection for the investigation and remediation of 17 formerly owned MGP sites. JCP&L has also entered into various cost-sharing agreements with other utilities for most of the sites. As of September 30, 1998, JCP&L has spent approximately $30 million in connection with the cleanup of these sites. In addition, JCP&L has recorded an estimated environmental liability of $46 million relating to expected future costs of these sites (as well as two other properties). This estimated liability is based upon ongoing site investigations and remediation efforts, which generally involve capping the sites and pumping and treatment of ground water. Moreover, the cost to clean up these sites could be materially in excess of $46 million due to significant uncertainties, including changes in acceptable remediation methods and technologies. 38 In 1997, JCP&L's request to establish a Remediation Adjustment Clause for the recovery of MGP remediation costs was approved by the NJBPU as part of the Stipulation of Final Settlement. At September 30, 1998, JCP&L had recorded on its Consolidated Balance Sheet a regulatory asset of $38 million. JCP&L is continuing to pursue reimbursement from its insurance carriers for remediation costs already spent and for future estimated costs. In 1994, JCP&L filed a complaint with the Superior Court of New Jersey against several of its insurance carriers, relative to these MGP sites. Pretrial discovery is continuing. OTHER COMMITMENTS AND CONTINGENCIES ----------------------------------- GPUI Group: - ----------- At September 30, 1998, the GPUI Group had investments totaling approximately $2.4 billion in businesses and facilities located in foreign countries. Although management attempts to mitigate the risk of investing in certain foreign countries by securing political risk insurance, the GPUI Group faces additional risks inherent to operating in such locations, including foreign currency fluctuations (see Management's Discussion and Analysis - GPUI Group). At September 30, 1998, GPU, Inc.'s aggregate investment in the GPUI Group was $526 million; GPU, Inc. has also guaranteed up to an additional $996 million of GPUI Group obligations. Of this amount, $733 million is included in Long-term debt and Securities due within one year on GPU's Consolidated Balance Sheet at September 30, 1998; $30 million of that amount relates to a GPU International, Inc. (GPUI) revolving credit agreement; and $233 million relates to various other obligations of the GPUI Group. GPUI has ownership interests in three NUG projects which have long-term power purchase agreements with Niagara Mohawk Power Corporation (NIMO). In June 1998, NIMO executed a master agreement with 29 independent power producers (IPP), including GPUI, whereby each of the IPP agreements were renegotiated and resulted in lump sum payments and/or new contracts with NIMO. As a result, the three GPUI NUG projects with NIMO were restructured. GPUI has deferred its net gain on the proceeds received from the settlements, which ensures recovery of the investment, and will recognize the gain in income over the ten year period of their restructured agreements with NIMO or until such time as an independent system operator (ISO) is established in New York State. The ISO for New York is expected to be implemented as early as 1999, at which time the net deferred gain resulting from the lump sum proceeds will be recognized in income. Midlands Electricity (Midlands) has invested in a power project in Pakistan (Uch Power Project) which was originally scheduled to begin commercial operation in late 1998. The Uch Power Project is a 586 MW facility of which Midlands is a 40% owner. The Pakistani government-owned utility has issued a notice of intent to terminate certain key project agreements. The notice asserts that various forms of corruption were involved in the original granting of the agreements to the Uch investors by the predecessor Pakistani government. GPU Electric, Inc. believes that this notice is similar to notices received by a number of other independent power projects in Pakistan. 39 The Uch investors, including Midlands, strongly deny the allegations and are pursuing all available legal options to enforce their contractual rights under the project agreements. Construction of the Uch Power Project is complete, but commercial operations have been delayed pending resolution of the dispute with the Pakistani government. The Uch investors are continuing to explore remedies to the situation with officials of the Pakistani government and are working with the project lenders to ensure their continued support of the project. The project contractor has given notice of its desire to invoke dispute resolution procedures in relation to a claim for additional costs arising from the failure of the Uch Power Project to provide fuel gas and interconnection facilities. The Uch Power Project denies that it is liable for any additional costs arising from this delay. Through its 50% ownership in Midlands, GPU Electric, Inc.'s current investment in the Uch Power Project is approximately $32 million. In addition, the project lenders could require investors to make additional investments to the project under certain conditions. GPU Electric, Inc.'s share of the additional investment could amount to a maximum of approximately $12 million. There can be no assurance as to the outcome of this matter. Other: - ------ GPU's capital programs, for which substantial commitments have been incurred and which extend over several years, contemplate expenditures of $471 million (JCP&L $169 million; Met-Ed $77 million; Penelec $87 million; Other $138 million) during 1998. The GPU Energy companies have entered into long-term contracts with nonaffiliated mining companies for the purchase of coal for certain generating stations in which they have ownership interests. The contracts, which expire at various dates between 1998 and 2007, require the purchase of either fixed or minimum amounts of the stations' coal requirements. The price of the coal under the contracts is based on adjustments of indexed cost components. The GPU Energy companies' share of the cost of coal purchased under these agreements is expected to aggregate $171 million (JCP&L $26 million; Met-Ed $55 million; Penelec $90 million) for 1998. JCP&L has entered into agreements with other utilities to purchase capacity and energy for various periods through 2004. These agreements provide for up to 614 MW in 1998, declining to 529 MW in 1999 and 345 MW in 2000, through the expiration of the final agreement in 2004. Payments pursuant to these agreements are estimated to be $129 million in 1998, $111 million in 1999, $83 million in 2000, $92 million in 2001, and $101 million in 2002. In accordance with the Nuclear Waste Policy Act of 1982 (NWPA), the GPU Energy companies have entered into contracts with, and have been paying fees to, the DOE for the future disposal of spent nuclear fuel in a repository or interim storage facility. In December 1996, the DOE notified the GPU Energy companies and other standard contract holders that it will be unable to begin acceptance of spent nuclear fuel for disposal by 1998, as mandated by the NWPA. The DOE requested recommendations from contract holders for handling the delay. In January 1997, the GPU Energy companies, along with other electric utilities and state agencies, petitioned the U.S. Court of Appeals to, among other things, permit utilities to cease payments into the Federal 40 Nuclear Waste Fund until the DOE complies with the NWPA. The DOE's inability to accept spent nuclear fuel by 1998 could have a material impact on GPU's results of operations, as additional costs may be incurred to build and maintain interim on-site storage at Oyster Creek. TMI-1 has sufficient on-site storage capacity to accommodate spent nuclear fuel through the end of its licensed life. In June 1997, a consortium of electric utilities, including GPUN, filed a license application with the NRC seeking permission to build an interim above-ground disposal facility for spent nuclear fuel in northwestern Utah. There can be no assurance as to the outcome of these matters. New Jersey and Connecticut have established the Northeast Compact, to construct a low-level radioactive waste disposal facility in New Jersey, which should commence operation by the end of 2003. GPUN's total share of the cost for developing, constructing and site licensing the facility is estimated to be $58 million, which will be paid through 2002. Through September 30, 1998, $6 million has been paid. As a result, at September 30, 1998, a liability of $52 million is reflected on the Consolidated Balance Sheets. JCP&L is recovering these costs from customers, and a regulatory asset has also been recorded. In February 1998, the New Jersey Low-Level Radwaste Facility Siting Board (Siting Board) voted to suspend the siting process in New Jersey. The Siting Board intended to return the unused funds to the generators, but the Governor has overruled this decision. Legislation is pending in the state Senate and the Assembly, however, that would mandate returning the unused funds to the generators, of which GPUN's share is approximately $2.6 million. GPUN cannot determine at this time what effect, if any, this matter will have on its operations. Pennsylvania, Delaware, Maryland and West Virginia have established the Appalachian Compact to construct a facility for the disposal of low-level radwaste in those states, including low-level radwaste from TMI-1. To date, pre-construction costs of $33 million, out of an estimated $88 million, have been paid. Eleven nuclear plants have so far shared equally in the pre-construction costs; GPUN has contributed $3 million on behalf of TMI-1. Pennsylvania has stated that it may suspend the search for a low level radwaste disposal site in the state. GPUN cannot determine at this time what effect, if any, this may have on its operations. JCP&L's two operating nuclear units are subject to the NJBPU's annual nuclear performance standard. Operation of these units at an aggregate annual generating capacity factor below 65% or above 75% would trigger a charge or credit based on replacement energy costs. At current cost levels, the maximum annual effect on net income of the performance standard charge at a 40% capacity factor would be approximately $11 million before tax. While a capacity factor below 40% would generate no specific monetary charge, it would require the issue to be brought before the NJBPU for review. The annual measurement period, which begins in March of each year, coincides with that used for the Levelized Energy Adjustment Clause. At September 30, 1998, GPU, Inc. and consolidated affiliates had 9,264 employees worldwide, of which 8,923 employees were located in the U.S. The majority of the U.S. workforce is employed by the GPU Energy companies, of which approximately 4,800 are represented by unions for collective bargaining purposes. JCP&L, Met-Ed and Penelec's collective bargaining agreements with the International Brotherhood of Electrical Workers expire in 1999, 2000 and 41 2002, respectively. Penelec's collective bargaining agreement with the Utility Workers Union of America expires in 2001. During the normal course of the operation of its businesses, in addition to the matters described above, GPU is from time to time involved in disputes, claims and, in some cases, as a defendant in litigation in which compensatory and punitive damages are sought by the public, customers, contractors, vendors and other suppliers of equipment and services and by employees alleging unlawful employment practices. While management does not expect that the outcome of these matters will have a material effect on GPU's financial position or results of operations, there can be no assurance that this will continue to be the case. 2. ACCOUNTING FOR NON-RECURRING ITEMS Pennsylvania Restructuring Write-offs Historically, the rates an electric utility charges its customers have been based on the utility's costs of operation. As a result, the GPU Energy companies were required to account for the economic effects of cost-based ratemaking regulation under the provisions of Statement of Financial Accounting Standards No. 71 (FAS 71), "Accounting for the Effects of Certain Types of Regulation." FAS 71 requires regulated entities, in certain circumstances, to defer, as regulatory assets, the impact on operations of costs expected to be recovered in future rates. In response to the continuing deregulation of the electric utility industry, the Securities and Exchange Commission (SEC) has questioned the continued applicability of FAS 71 by investor-owned utilities with respect to their electric generation operations. In response to these concerns, the Financial Accounting Standards Board's (FASB) EITF concluded in June 1997 that utilities are no longer subject to FAS 71, for a separable portion of their business, when they know details of their individual transition plans. The EITF also concluded that utilities can continue to carry previously recorded regulated assets, as well as any newly established regulated assets (including those related to generation), on their balance sheets if regulators have guaranteed a regulated cash flow stream to recover the cost of these assets. In June 1998, Met-Ed and Penelec received PaPUC Restructuring Orders, which were subsequently amended in October 1998 by the final Restructuring Orders. The Restructuring Orders, among other things, essentially remove from regulation the costs associated with providing electric generation service to Pennsylvania consumers, effective January 1, 1999. Accordingly, Met-Ed and Penelec have discontinued the application of FAS 71 and adopted the provisions of Statement of Financial Accounting Standards No. 101 (FAS 101), "Regulated Enterprises Accounting for the Discontinuation of Application of FAS 71" with respect to their electric generation operations, in the second quarter of 1998. The transmission and distribution portion of Met-Ed and Penelec's operations will continue to be subject to the provisions of FAS 71. JCP&L expects to discontinue the application of FAS 71 and adopt FAS 101 for its electric generation operations no later than when it receives NJBPU approval of its restructuring plans. As of September 30, 1998, the net effect on earnings of the PaPUC's final Restructuring Orders was as follows: 42 (in millions) Met-Ed Penelec Total ------ ------- ----- Write-off of existing Pennsylvania generation regulatory assets $ 8.0 $ 2.8 $ 10.8 Write-off of existing FERC generation regulatory assets 1.5 17.6 19.1 TMI-1 impairment write-off (FERC) and TMI-1 decommissioning write-off (FERC) 2.0 10.2 12.2 ------- ------- ------- Extraordinary loss (pre-tax) - FAS 101 write-off 11.5 30.6 42.1 Obligation to refund 1998 revenues 27.2 29.2 56.4 Establishment of sustainable energy fund 5.7 6.4 12.1 ------- ------- ------- Total pre-tax write-off 44.4 66.2 110.6 Income tax benefit (18.4) (26.4) (44.8) ------- ------- ------- Total after-tax write-off $ 26.0 $ 39.8 $ 65.8 ======= ======= ======= GPU loss per average common share due to Pennsylvania restructuring $ 0.21 $ 0.31 $ 0.52 ======= ======= ======= FAS 121 Impairment Tests on Generation Facilities: In accordance with FAS 121, GPU performed impairment tests on the September 30, 1998 net book value of the GPU Energy companies' generation facilities. These tests determined that GPU's net investment in TMI-1 was impaired. No impairment existed for the fossil-fuel and hydroelectric generating plants or for the Oyster Creek Nuclear Station as of that date. For the nine months ended September 30, 1998, GPU's investment in TMI-1 was written down by $505 million (pre-tax) (JCP&L $131 million; Met-Ed $251 million; Penelec $123 million) to reflect its fair market value. Re-establishment of TMI-1 Impairment as a Regulatory Asset: Of the amount written down for TMI-1, $496 million (JCP&L $131 million; Met-Ed $250 million; Penelec $115 million) was re-established as a regulatory asset since management believes it is probable of recovery in the restructuring process due to expected gains on the sale of the fossil fuel and hydroelectric generating plants being projected to exceed the TMI-1 writedown amount. 3. ACCOUNTING FOR DERIVATIVE INSTRUMENTS GPU's use of derivative financial and commodity instruments is principally limited to the GPUI Group. GPU does not hold or issue derivative financial or commodity instruments for trading purposes. 43 Interest Rate Swap Agreements: - ------------------------------ The GPUI Group uses interest rate swap agreements to manage the risk of increases in variable interest rates. At September 30, 1998, these agreements covered approximately $1.1 billion of debt and are scheduled to expire on various dates through November 2007. The GPUI Group records amounts paid and received under the agreements as adjustments to the interest expense of the underlying debt since the swaps are related to specific assets, liabilities or anticipated transactions of the GPUI Group. For the nine months ended September 30, 1998, fixed rate interest expense exceeded variable rate interest by approximately $12.8 million. 4. GPUI GROUP EQUITY INVESTMENTS The GPUI Group uses the equity method of accounting for investments in which it has the ability to exercise significant influence over the operating and financial policies of the investee (generally evidenced by a 20% to 50% ownership interest). Investments accounted for under the equity method follow: Ownership Investment Location of Operations Percentage - ---------- ---------------------- ---------- Midlands Electricity plc United Kingdom 50% Mid-Georgia Cogen, L.P. United States 50% Prime Energy, L.P. United States 50% Pasco Cogen, Ltd. United States 50% GPU Solar, Inc. United States 50% Termobarranquilla S.A. Colombia 29% Selkirk Cogeneration Partners, L.P. United States 19% EnviroTech Investment Fund United States 10% Project Orange Associates, L.P. United States 4% OLS Power, L.P. United States 1% Summarized financial information for the GPUI Group's equity method investments (which are not consolidated in the financial statements), including both the GPUI Group's ownership interests and the non-ownership interests, is as follows: Ownership -------------------------------- Balance Sheet Data (in thousands) GPUI Group Other Owners - ------------------ ---------- ------------ September 30, 1998 Current Assets $ 226,908 $ 345,213 Noncurrent Assets 2,646,665 3,261,245 Current Liabilities (883,268) (928,390) Long-Term Debt (1,123,791) (1,610,929) Other Noncurrent Liabilities (252,870) (395,405) ---------- ---------- Equity in Net Assets $ 613,644 $ 671,734 ========== =========== December 31, 1997 Current Assets $ 284,033 $ 391,018 Noncurrent Assets 2,918,125 3,616,461 Current Liabilities (755,499) (814,572) Long-Term Debt (1,497,982) (2,086,257) Other Noncurrent Liabilities (307,504) (396,675) ---------- ---------- Equity in Net Assets $ 641,173 $ 709,975 ========== ========== 44 Ownership -------------------------------- Earnings Data (in thousands) GPUI Group Other Owners - -------------- ---------- ------------ For the nine months ended September 30, 1998 Operating Revenues $ 1,070,234 $ 1,142,546 Depreciation and Amortization (54,723) (60,624) Operating Income 124,357 172,206 Other Income and Deductions 5,701 (19,988) Interest and Preferred Dividends (87,176) (101,907) ---------- ---------- Equity in Net Income $ 42,882 $ 50,311 ========== ========== For the nine months ended September 30, 1997 Operating Revenues $ 939,572 $ 1,017,577 Depreciation and Amortization (35,593) (42,329) Operating Income 142,390 217,311 Other Income and Deductions (134,123) (91,049) Interest and Preferred Dividends (94,260) (114,589) ---------- ---------- Equity in Net Income $ 85,993 $ 11,673 ========== ========== For the nine months ended September 30, 1998 and 1997, the GPUI Group received cash distributions totaling $12.9 million and $37.0 million, respectively. As of September 30, 1998 and December 31, 1997, GPUI Group equity investments on the Consolidated Balance Sheets included goodwill (net of accumulated amortization) of approximately $24 million and $66 million, respectively, which is amortized to expense over periods not exceeding 40 years. Amortization expense for the nine months ended September 30, 1998 and 1997 amounted to $1.2 million and $3.4 million, respectively. In January 1998, the GPUI Group recorded a decrease in goodwill of $41.2 million as a result of GPU Electric, Inc.'s sale of its 50% stake in Solaris Power. In July 1998, GPU Electric, Inc. sold its 10.36% stake in Allgas Energy Limited which it had acquired as part of the sale of Solaris Power in January 1998. 5. SEGMENT INFORMATION In 1997, GPU adopted Statement of Financial Accounting Standards No. 131 (FAS 131), "Disclosures about Segments of an Enterprise and Related Information," which requires the reporting of certain financial information by business segment and geographic area. For the purpose of providing segment information, the GPU Energy companies consist of the three domestic electric utility companies serving customers in Pennsylvania and New Jersey, as well as Genco, GPUN, GPU Telcom and GPUS. The GPUI Group primarily develops, owns and operates generation, transmission and distribution facilities in the United States and in foreign countries. GPU AR is engaged in energy services and retail energy sales. Corporate represents the activities of GPU, Inc., a registered holding company. GPU's reportable segments are strategic business units that are managed separately due to their different operating and regulatory environments. GPU's segment information is as follows: 45 Balance Sheet Segment Data (in thousands) Current Noncurrent Current September 30, 1998 Assets Assets Liabilities - ------------------ ------- ---------- ----------- Domestic: GPU Energy companies $ 876,390 $12,425,467 $1,153,391 GPUI Group* 123,492 393,680 49,732 Less: GPUI Group equity investments included above (46,522) (197,577) (18,579) Add: Original equity investment and income/(loss) less dividends to date - 84,573 - GPU AR 2,771 83 4,044 Corporate 184 6,261 71,675 --------- ---------- --------- Subtotal 956,315 12,712,487 1,260,263 --------- ---------- --------- Foreign: (GPUI Group only) Australia 260,838 1,623,505 278,628 United Kingdom* 169,573 2,243,012 851,853 Other* 75,677 321,733 50,622 Less: GPUI Group equity investments included above (180,386) (2,449,088) (864,689) Add: Original equity investment and income/(loss) less dividends to date - 563,731 - --------- ---------- --------- Subtotal 325,702 2,302,893 316,414 --------- ---------- --------- Consolidated Total $1,282,017 $15,015,380 $1,576,677 ========= ========== ========= Other Cash Long-Term Noncurrent Capital September 30, 1998 Debt Liabilities Expenditures - ------------------ ---------- ---------- ------------ Domestic: GPU Energy companies $2,398,809 $6,191,853 $ 213,132 GPUI Group* 183,770 222,342 25,529 Less: GPUI Group equity investments included above (183,770) (12,328) (4,326) Add: Original equity investment and income/(loss) less dividends to date - - - GPU AR - 118 22 Corporate - 1,398 - --------- --------- --------- Subtotal 2,398,809 6,403,383 234,357 --------- --------- --------- Foreign: (GPUI Group only) Australia 1,409,435 69,857 16,930 United Kingdom* 1,146,932 229,467 70,153 Other* 198,902 61,010 12,081 Less: GPUI Group equity investments included above (940,021) (240,542) (70,939) Add: Original equity investment and income/(loss) less dividends to date - 1,501 - --------- --------- --------- Subtotal 1,815,248 121,293 28,225 --------- --------- --------- Consolidated Total $4,214,057 $6,524,676 $ 262,582 ========= ========= ========= * Includes the effect of consolidating the GPUI Group's ownership interest in investments accounted for under the equity method (pro-rata consolidation), which are not consolidated in the audited consolidated financial statements. 46 Balance Sheet Segment Data (in thousands) (continued) Current Noncurrent Current December 31, 1997 Assets Assets Liabilities - ----------------- ------- ----------- ----------- Domestic: GPU Energy companies $ 831,269 $ 9,015,913 $1,140,492 GPUI Group* 81,027 352,139 90,097 Less: GPUI Group equity investments included above (43,777) (182,384) (21,360) Add: Original equity investment and income/(loss) less dividends to date - 79,458 - GPU AR 4,961 161 3,301 Corporate 165 6,313 155,977 --------- ---------- --------- Subtotal 873,645 9,271,600 1,368,507 --------- ---------- --------- Foreign: (GPUI Group only) Australia* 86,226 2,091,619 558,496 United Kingdom* 188,462 2,152,977 785,152 Other* 114,786 396,078 43,419 Less: GPUI Group equity investments included above (240,256) (2,735,741) (734,139) Add: Original equity investment and income/(loss) less dividends to date 106,317 517,221 - --------- ---------- --------- Subtotal 255,535 2,422,154 652,928 --------- ---------- --------- Consolidated Total $1,129,180 $11,693,754 $2,021,435 ========= ========== ========= Other Cash Long-Term Noncurrent Capital December 31, 1997 Debt Liabilities Expenditures ---------- ----------- ----------- Domestic: GPU Energy companies $2,448,672 $2,721,527 $ 356,416 GPUI Group* 263,378 46,880 111,125 Less: GPUI Group equity investments included above (171,665) (12,321) (120) Add: Original equity investment and income/(loss) less dividends to date - - - GPU AR - - - Corporate - 1,418 - --------- --------- --------- Subtotal 2,540,385 2,757,504 467,421 --------- --------- --------- Foreign: (GPUI Group only) Australia* 1,485,639 115,390 1,811,921 United Kingdom* 1,367,471 245,105 77,706 Other* 258,794 64,803 1,213 Less: GPUI Group equity investments included above (1,326,317) (295,183) (89,624) Add: Original equity investment and income/(loss) less dividends to date - - - --------- --------- --------- Subtotal 1,785,587 130,115 1,801,216 --------- --------- --------- Consolidated Total $4,325,972 $2,887,619 $2,268,637 ========= ========= ========= * Includes the effect of consolidating the GPUI Group's ownership interest in investments accounted for under the equity method (pro-rata consolidation), which are not consolidated in the audited consolidated financial statements. 47 Earnings Segment Data (in thousands) Depreciation For the nine months Operating and Operating ended September 30, 1998 Revenues Amortization Income - ------------------------ --------- ----------- --------- Domestic: GPU Energy companies $3,009,856 $ 352,427 $ 451,855 GPUI Group* 138,758 8,936 21,554 Less: GPUI Group equity investments included above (89,661) (6,869) (22,768) Add: Equity in undistributed earnings of affiliates, net - - - GPU AR 8,337 - (1,477) Corporate - - (3,193) --------- --------- --------- Subtotal 3,067,290 354,494 445,971 --------- --------- --------- Foreign: (GPUI Group only) Australia 135,886 30,455 82,534 United Kingdom* 958,365 43,474 100,824 Other* 46,007 9,039 8,537 Less: GPUI Group equity investments included above (980,573) (47,854) (101,589) Add: Equity in undistributed earnings of affiliates, net - - - --------- --------- --------- Subtotal 159,685 35,114 90,306 --------- --------- --------- Consolidated Total $3,226,975 $ 389,608 $ 536,277 ========= ========= ========= Other Interest and For the nine months Income and Preferred ended September 30, 1998 Deductions Dividends Net Income - ------------------------ ---------- --------- ---------- Domestic: GPU Energy companies $ (12,067) $ 181,747 $ 232,286 GPUI Group* 4,071 15,148 10,477 Less: GPUI Group equity investments included above 2,601 (14,944) (5,223) Add: Equity in undistributed earnings of affiliates, net 5,223 - 5,223 GPU AR 49 - (1,428) Corporate (1,024) 4,910 (9,127) --------- --------- --------- Subtotal (1,147) 186,861 232,208 --------- --------- --------- Foreign: (GPUI Group only) Australia 23,464 81,979 24,019 United Kingdom* 6,127 88,088 18,863 Other* 3,440 8,957 1,563 Less: GPUI Group equity investments included above (8,302) (72,232) (37,659) Add: Equity in undistributed earnings of affiliates, net 37,659 - 37,659 --------- --------- --------- Subtotal 62,388 106,792 44,445 --------- --------- --------- Consolidated Total $ 61,241 $ 293,653 $ 276,653 ========= ========= ========= * Includes the effect of consolidating the GPUI Group's ownership interest in investments accounted for under the equity method (pro-rata consolidation), which are not consolidated in the audited consolidated financial statements. 48 Earnings Segment Data (in thousands)(continued) Depreciation For the nine months Operating and Operating ended September 30, 1997 Revenues Amortization Income - ------------------------ --------- ------------ --------- Domestic: GPU Energy companies $3,062,926 $ 347,755 $ 508,335 GPUI Group* 126,611 8,591 19,691 Less: GPUI Group equity investments included above (102,137) (8,089) (21,417) Add: Equity in undistributed earnings/ (losses) of affiliates, net - - - GPU AR 460 - (2,158) Corporate - - (6,791) --------- --------- --------- Subtotal 3,087,860 348,257 497,660 --------- --------- --------- Foreign: (GPUI Group only) Australia* 112,833 9,089 33,446 United Kingdom* 717,651 18,789 95,671 Other* 30,026 6,624 550 Less: GPUI Group equity investments included above (837,435) (27,501) (120,974) Add: Equity in undistributed earnings/ of affiliates, net - - - --------- --------- --------- Subtotal 23,075 7,001 8,693 --------- --------- --------- Consolidated Total $3,110,935 $ 355,258 $ 506,353 ========= ========= ========= Other Interest and For the nine months Income and Preferred ended September 30, 1997 Deductions Dividends Net Income - ------------------------ ---------- ----------- ---------- Domestic: GPU Energy companies $ 3,823 $ 188,565 $ 323,593 GPUI Group* (8,118) 19,681 (8,108) Less: GPUI Group equity investments included above 2,414 (19,145) 142 Add: Equity in undistributed earnings/ (losses) of affiliates, net (142) - (142) GPU AR 2 - (2,156) Corporate (418) 4,135 (11,344) --------- --------- --------- Subtotal (2,439) 193,236 301,985 --------- --------- --------- Foreign: (GPUI Group only) Australia* (27,051) 21,781 (15,386) United Kingdom* (55,064) 82,971 (42,364) Other* 2,089 3,648 (2,044) Less: GPUI Group equity investments included above 131,710 (75,117) 85,853 Add: Equity in undistributed earnings of affiliates, net (85,853) - (85,853) --------- --------- --------- Subtotal (34,169) 33,283 (59,794) --------- --------- --------- Consolidated Total $ (36,608) $ 226,519 $ 242,191 ========== ========= ========= * Includes the effect of consolidating the GPUI Group's ownership interest in investments accounted for under the equity method (pro-rata consolidation), which are not consolidated in the audited consolidated financial statements. 49 GPU, Inc. and Subsidiary Companies 6. COMPREHENSIVE INCOME For the nine months ended September 30, 1998 and 1997, comprehensive income was as follows: (in thousands) Nine months Ended September 30, ------------------- GPU, Inc. and Subsidiary Companies 1998 1997 - ---------------------------------- ---- ----- Net income $276,653 $242,191 -------- ------- Other comprehensive income/(loss), net of tax: Net unrealized gains on investments 728 4,131 Foreign currency translation (15,175) (5,702) -------- ------- Total other comprehensive income/(loss) (14,447) (1,571) -------- ------- Comprehensive income $262,206 $240,620 ======== ======== Met-Ed Net income $ 32,929 $ 81,113 -------- ------- Other comprehensive income/(loss), net of tax: Net unrealized gains/(losses) on investments (892) 2,754 -------- ------- Comprehensive income $ 32,037 $ 83,867 ======== =======- Penelec Net income $ 21,586 $ 81,104 -------- -------- Other comprehensive income/(loss), net of tax: Net unrealized gains/(losses) on investments (470) 1,377 -------- ------- Comprehensive income $ 21,116 $ 82,481 ======== ======= 50 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, transmission and distribution operations of these electric utilities are conducting business under the name GPU Energy. JCP&L, Met-Ed and Penelec considered together are referred to as the "GPU Energy companies." The generation operations of the GPU Energy companies are conducted by GPU Generation, Inc. (Genco) and GPU Nuclear, Inc. (GPUN). GPU, Inc. also owns all the common stock of GPU International, Inc., GPU Power, Inc. and GPU Electric, Inc., which develop, own and operate generation, transmission and distribution facilities in the United States and in foreign countries. Collectively, these are referred to as the "GPUI Group." Other wholly-owned subsidiaries of GPU, Inc. are GPU Advanced Resources, Inc. (GPU AR), a subsidiary engaging in energy services and retail energy sales; GPU Telcom Services, Inc. (GPU Telcom), a subsidiary engaging in certain telecommunications-related businesses; and GPU Service, Inc. (GPUS), which provides certain legal, accounting, financial and other services to the GPU companies. All of these companies considered together are referred to as "GPU." GPU RESULTS OF OPERATIONS ------------------------- GPU's earnings for the third quarter ended September 30, 1998 were $338.1 million, compared with earnings of $16.9 million for the quarter ended September 30, 1997. The earnings per share on a diluted basis for the third quarter 1998 was $2.65, compared with earnings per share of $0.14 in 1997. Both periods include non-recurring items. Excluding the non-recurring items, GPU's third quarter 1998 and 1997 earnings would have been $128.8 million, or $1.01 per share, and $126.2 million, or $1.04 per share, respectively. Previously, GPU recorded a second quarter 1998 non-recurring charge of $275.1 million after-tax, or $2.16 per share, as a result of Pennsylvania Public Utility Commission (PaPUC) restructuring rate orders received by Met-Ed and Penelec. In the third quarter 1998, as a result of amended PaPUC restructuring rate orders, GPU reversed $266.3 million after-tax, or $2.09 per share, of the non-recurring charge taken in the second quarter, primarily related to above-market nonutility generation costs; and recorded an additional non-recurring charge of $57.0 million after-tax, or $0.45 per share, related to customer rate refunds, the write-off of regulatory assets related to its wholesale energy customers and start up payments to an environmental fund. The year-to-date effect of the PaPUC's rate actions was a charge to income of $65.8 million after-tax, or $0.52 per share. In the third quarter of 1997, a non-recurring charge of $109.3 million, or $0.90 per share, was taken for a windfall profits tax assessed on privatized utilities by the Government of the United Kingdom. For the nine months ended September 30, 1998, GPU's earnings were $276.7 million, or $2.18 per share, compared with earnings of $242.2 million, or $2.00 per share for the nine months ended September 30, 1997. Excluding the effect of the non-recurring items mentioned above, earnings for the nine months ended September 30, 1998 and 1997 would have been $342.5 million, 51 GPU RESULTS OF OPERATIONS (continued) - ------------------------- or $2.70 per share, and $351.5 million, or $2.90 per share, respectively. The earnings decrease on this basis was due to lower income from GPU's domestic utility operations, which are conducted by the GPU Energy companies, and the dilutive effect of the sale of GPU, Inc. common stock in February 1998. The GPU Energy companies' earnings reduction for the nine month period was mainly due to the absence in 1998 of a step increase in unbilled revenue recorded by Met-Ed and Penelec as a result of including their energy cost rates (ECRs) in base rates and the cessation of deferred energy accounting, both effective January 1, 1997; and increased computer costs. Partially offsetting the earnings decrease for the nine months ended September 30, 1998 versus the nine months ended September 30, 1997, was higher GPUI Group income due to gains on the sale of its interest in Solaris Power (Solaris), the sale of Allgas Energy stock, and the sale of half its interest in the Mid-Georgia cogeneration plant (Mid-Georgia). These gains were partially offset by lower Midlands Electricity plc (Midlands) earnings due in part to lower weather-related sales. OPERATING REVENUES: - ------------------- Operating revenues for the third quarter of 1998 increased 4.6% to $1.17 billion, as compared to the third quarter of 1997. For the nine months ended September 30, 1998, revenues increased 3.7% to $3.23 billion as compared to the same period last year. The components of the changes are as follows: (in millions) -------------------------------------- Three Months Nine Months Ended Ended September 30, 1998 September 30, 1998 ------------------ ------------------- GPU Energy companies: Kilowatt-hour (KWH) revenues $ 61.5 $ 42.7 Energy-related revenues 33.4 50.7 Obligation to refund 1998 revenues to customers per PaPUC Order (56.4) (56.4) GPU Telcom revenues 6.8 12.6 Other revenues (36.1) (102.7) ----- ----- Total GPU Energy companies 9.2 (53.1) GPUI Group 39.7 161.2 GPU AR 2.7 7.9 ----- ----- Total increase in revenues $ 51.6 $116.0 ===== ===== GPU Energy Companies Kilowatt-hour revenues - ---------------------- The increase in KWH revenues for the three month period was due primarily to higher residential and commercial customer usage at JCP&L and increased sales to other utilities by Met-Ed and Penelec. The increase in KWH revenues for the nine month period was primarily due 52 GPU RESULTS OF OPERATIONS (continued) - ------------------------- to higher residential and commercial customer usage at JCP&L; and increased sales to other utilities by Met-Ed and Penelec. These increases were partially offset by the absence in 1998 of the step increase in unbilled revenue recorded by Met-Ed and Penelec as a result of including their ECRs in base rates. KWH revenues now include Met-Ed and Penelec's energy and tax revenues, consistent with the inclusion of their ECRs and State Tax Adjustment Surcharges (STAS) in base rates, effective January 1, 1997. Energy-related revenues (JCP&L only) - ------------------------------------ Generally, changes in energy-related revenues do not affect earnings as they reflect corresponding changes in JCP&L's levelized energy adjustment clause (LEAC) billed to customers and expensed. The increase for the three and nine month periods was due primarily to increased sales to other utilities and higher residential and commercial customer sales. Obligation to refund 1998 revenues to customers per PaPUC Order - --------------------------------------------------------------- The decrease in revenues reflect transmission and distribution (T&D) rate reductions resulting from the PaPUC's final Restructuring Orders for Met-Ed and Penelec. The T&D rate reductions reflect Met-Ed and Penelec's obligation to make refunds to customers from 1998 revenues (2.5 percent for Met-Ed customers and 3.0 percent for Penelec customers from December 1996 levels). GPU Telcom revenues - ------------------- GPU Telcom, a subsidiary engaged in certain telecommunication related businesses, was formed in 1997. Its 1998 revenues were derived from contracts for the leasing and construction of telecommunication infrastructure. Other revenues - -------------- Generally, changes in other revenues do not affect earnings as they are offset by corresponding changes in expense. The decrease for the three and nine month periods is primarily due to a decrease in revenue taxes as a result of New Jersey tax legislation that eliminated the gross receipts and franchise tax on utility bills and replaced it with a sales tax, a corporate business tax and a transitional energy facilities assessment, effective January 1, 1998. (See COMPETITIVE ENVIRONMENT.) GPUI Group The increase in GPUI Group revenues for the three and nine month periods was due mainly to the inclusion of revenues from GPU PowerNet (PowerNet), which was acquired by GPU Electric in November 1997. 53 GPU RESULTS OF OPERATIONS (continued) - ------------------------------------- GPU AR GPU AR, which was formed in the second quarter of 1997, derived its revenues from energy sales to customers who chose it as their energy supplier as part of the retail access pilot programs in Pennsylvania (see COMPETITIVE ENVIRONMENT). Some of GPU AR's customers are located in the GPU Energy companies' service territories. OPERATING EXPENSES: - ------------------- Power purchased and interchanged (PP&I) Changes in the energy component of PP&I expense do not significantly affect JCP&L's earnings since these cost variances are passed through the LEAC. However, beginning on January 1, 1997, such cost variances for Met-Ed and Penelec are not subject to deferred accounting and have a current impact on earnings. In October 1998, the PaPUC approved the use of deferred accounting for above-market NUG costs as part of the final Restructuring Orders for Met-Ed and Penelec. The increase in PP&I includes a one-time charge by Met-Ed and Penelec for the NUG portion of unbilled revenue. Fuel and Deferral of energy and capacity costs, net - --------------------------------------------------- For JCP&L, changes in fuel and deferral of energy and capacity costs, net do not affect earnings as they are offset by corresponding changes in energy revenues. Effective January 1, 1997, Met-Ed and Penelec ceased deferred energy accounting as their ECRs were combined with base rates; therefore, cost variances have a current impact on earnings. Higher fuel expenses for Met-Ed and Penelec affected earnings for the three and nine months ended September 30, 1998. Other operation and maintenance (O&M) - ------------------------------------- The increase in other O&M expenses for the three and nine month periods was due primarily to increased computer costs resulting from the reengineering of business processes to position the GPU Energy companies for deregulation; employee reduction costs; and increased GPUI Group O&M expenses resulting from the inclusion of PowerNet. The inclusion of O&M expenses for GPU Telcom, which was formed in 1997, also contributed to the increase for the three and nine month periods. Depreciation and amortization - ----------------------------- The increase in depreciation and amortization expense for the three and nine month periods was due mainly to the inclusion of PowerNet and additions to plant in service. Taxes, other than income taxes - ------------------------------ For JCP&L, changes in taxes other than income taxes do not significantly affect earnings as they are substantially recovered in revenues. However, 54 GPU RESULTS OF OPERATIONS (continued) - ------------------------- effective January 1, 1997, Met-Ed and Penelec's STAS were combined with base rates and are no longer subject to annual adjustment. This did not have a significant impact on earnings for the first nine months of 1998. OTHER INCOME AND DEDUCTIONS: - ---------------------------- Equity in undistributed earnings of affiliates, net The increase in equity in undistributed earnings of affiliates, net for the three and nine month periods was primarily due to higher GPUI Group investment income. The increase was due primarily to the absence in 1998 of a $109.3 million charge taken in 1997 for a windfall profits tax imposed on Midlands by the Government of the United Kingdom. Other income/(expense), net - --------------------------- The increase in other income/(expense), net for the nine month period was due primarily to gains realized by the GPUI Group from the sale of its interest in Solaris, the sale of Allgas Energy stock and the sale of half its interest in Mid-Georgia. This increase was partially offset by a charge for start-up payments for the establishment of an environmental fund for Met-Ed and Penelec; and a charge to terminate a contract with one of Met-Ed's wholesale customers. INTEREST CHARGES AND PREFERRED DIVIDENDS: - ----------------------------------------- Long-term debt - -------------- The increase in interest on long-term debt for the three and nine month periods was due primarily to debt associated with the PowerNet acquisition. A portion of this debt was reduced in 1998 from proceeds received from GPU Electric's sale of its interest in Solaris and the sale of GPU, Inc. common stock. Other interest - -------------- The decrease in other interest for the three and nine month periods was due to lower JCP&L short-term debt levels. EXTRAORDINARY ITEM: - ------------------- Extraordinary item, net of income taxes - --------------------------------------- The extraordinary income for the three month period was due to the amended PaPUC restructuring rate orders received by Met-Ed and Penelec, which substantially reversed the extraordinary charge taken in the second quarter, primarily related to above-market nonutility generation costs. The extraordinary income was partially offset by additional charges taken for the writeoff of regulatory assets related to wholesale energy customers. The extraordinary loss for the nine month period was due to the net impact of the PaPUC Restructuring Orders for Met-Ed and Penelec. 55 JCP&L RESULTS OF OPERATIONS --------------------------- JCP&L's earnings for the third quarter ended September 30, 1998 were $89.3 million, compared to 1997 third quarter earnings of $74.7 million. The increase in earnings was due primarily to higher residential and commercial customer sales. For the nine months ended September 30, 1998, earnings were $177.1 million, compared to $162.2 million for the same period last year. OPERATING REVENUES: - ------------------- Operating revenues for the third quarter of 1998 increased 7.4% to $647.6 million, as compared to the third quarter of 1997. For the nine months ended September 30, 1998, revenues increased 0.5% to $1.6 billion as compared to the same period last year. The components of the changes are as follows: (in millions) ------------------------------------------ Three Months Nine Months Ended Ended September 30, 1998 September 30, 1998 ------------------ ------------------ KWH revenues $ 47.2 $ 60.5 Energy-related revenues 33.2 50.7 Other revenues (35.7) (103.9) ----- ------ Increase in revenues $ 44.7 $ 7.3 ===== ====== Kilowatt-hour revenues - ---------------------- The increase in KWH revenues for the three and nine month periods was due to higher residential and commercial customer usage and an increase in the number of residential and commercial customers. Energy-related revenues - ----------------------- Changes in energy-related revenues do not affect earnings as they reflect corresponding changes in the LEAC billed to customers and expensed. The increase for the three and nine month periods was due primarily to increased sales to other utilities and higher residential and commercial customer sales. Other revenues - -------------- Generally, changes in other revenues do not affect earnings as they are offset by corresponding changes in expense. The decrease for the three and nine month periods is primarily due to lower revenue taxes as a result of New Jersey tax legislation that eliminated the gross receipts and franchise tax on utility bills and replaced it with a sales tax, a corporate business tax, and a transitional energy facilities assessment effective January 1, 1998. (See COMPETITIVE ENVIRONMENT.) 56 JCP&L RESULTS OF OPERATIONS (continued) - --------------------------- OPERATING EXPENSES: - ------------------- Power purchased and interchanged - -------------------------------- Changes in the energy component of PP&I expense do not significantly affect earnings since these cost variances are passed through the LEAC. Fuel and Deferral of energy and capacity costs, net - --------------------------------------------------- Changes in fuel and deferral of energy and capacity costs, net do not affect earnings as they are offset by corresponding changes in energy revenues. Other operation and maintenance - ------------------------------- The increase in other O&M expenses for the three and nine month periods was due primarily to increased computer costs resulting from the reengineering of business processes to position JCP&L for deregulation; and employee reduction costs. Depreciation and amortization - ----------------------------- The decrease in depreciation and amortization expense for the three month period was due primarily to the reversal of charges taken in the first six months of 1998 relating to JCP&L's Final Settlement representing the portion of JCP&L's return on equity which exceeds the maximum amount allowed and must be applied against JCP&L's stranded cost pool. Taxes, other than income taxes - ------------------------------ Generally, changes in taxes other than income taxes do not significantly affect earnings as they are substantially recovered in revenues. OTHER INCOME AND DEDUCTIONS: - ---------------------------- Other income, net - ----------------- The increase in other income, net for the nine month period was due primarily to a second quarter 1997 charge of $5.5 million to settle a lawsuit related to the termination of the Freehold NUG contract. INTEREST CHARGES: - ----------------- Other interest - -------------- The decrease in other interest for the three and nine month periods was due to lower JCP&L short-term debt levels. 57 MET-ED RESULTS OF OPERATIONS ---------------------------- Met-Ed's earnings for the third quarter ended September 30, 1998 were $176.8 million, compared with earnings of $27.2 million for the quarter ended September 30, 1997. Excluding the effect of non-recurring items, Met-Ed's third quarter 1998 earnings would have been $15.5 million. Previously, Met-Ed recorded a second quarter 1998 non-recurring charge of $187.3 million after-tax, as a result of PaPUC restructuring rate orders. In the third quarter 1998, as a result of amended PaPUC restructuring rate orders, Met-Ed reversed $183.2 million after-tax, of the non-recurring charge taken in the second quarter, primarily related to above-market nonutility generation costs; and recorded an additional non-recurring charge of $21.9 million after-tax related to customer rate refunds, the write-off of regulatory assets related to its wholesale energy customers and start-up payments to an environmental fund. For the nine months ended September 30, 1998, Met-Ed's earnings were $32.6 million, compared with earnings of $80.8 million, for the nine months ended September 30, 1997. Excluding the effect of the non-recurring items mentioned above, earnings for the nine months ended September 30, 1998 would have been $58.6 million. The earnings decrease on this basis was due to the absence in 1998 of a step increase in unbilled revenue recorded by Met-Ed as a result of including their energy cost rates (ECRs) in base rates and the cessation of deferred energy accounting, both effective January 1, 1997; and increased computer costs. OPERATING REVENUES: - ------------------- Operating revenues for the third quarter of 1998 decreased 7.7% to $229.0 million, as compared to the third quarter of 1997. For the nine months ended September 30, 1998, revenues decreased 3.1% to $689.8 million as compared to the same period last year. The components of the changes are as follows: (in millions) ------------------------------------------- Three Months Nine Months Ended Ended September 30, 1998 September 30, 1998 ------------------ ------------------ KWH revenues $ 5.7 $ (1.1) Obligation to refund 1998 revenues to customers per PaPUC Order (27.2) (27.2) Other revenues 2.3 6.1 ----- ----- Decrease in revenues $(19.2) $(22.2) ===== ===== Kilowatt-hour revenues - ---------------------- The increase in KWH revenues for the three month period was due mainly to increased sales to other utilities and increased commercial customer usage. The decrease in KWH revenues for the nine month period was due primarily to the absence in 1998 of the step increase in unbilled revenue as a result of Met-Ed including its ECR in base rates, amounting to $13 million; partially offset by increased sales to other utilities and increased commercial customer usage. 58 MET-ED RESULTS OF OPERATIONS (continued) - ---------------------------- Obligation to refund 1998 revenues to customers per PaPUC Order - --------------------------------------------------------------- The decrease in revenues reflect a T&D rate reduction resulting from the PaPUC's final Restructuring Order for Met-Ed. The T&D rate reduction reflects Met-Ed's obligation to make refunds to customers from 1998 revenues (2.5 percent from December 1996 levels). Other revenues - -------------- Generally, changes in other revenues do not affect earnings as they are offset by corresponding changes in expense. OPERATING EXPENSES: - ------------------- Fuel and Power purchased and interchanged - ----------------------------------------- Effective January 1, 1997, Met-Ed ceased deferred energy accounting as its ECR was combined with base rates. Thus, energy cost variances now have a current impact on earnings. In October 1998, the PaPUC approved the use of deferred accounting for above-market NUG costs as part of the final Restructuring Order for Met-Ed. The increase in PP&I includes a one-time charge by Met-Ed for the NUG portion of unbilled revenue. Other operation and maintenance - ------------------------------- The increase in other O&M expenses for the three and nine month periods was due primarily to increased computer costs resulting from the reengineering of business processes to position Met-Ed for deregulation; and employee reduction costs. OTHER INCOME AND DEDUCTIONS: - ---------------------------- Other income/(expense), net - --------------------------- The decrease in other income/(expense), net for the nine month period was due to a charge for start-up payments for the establishment of an environmental fund and a charge to terminate a contract with one of Met-Ed's wholesale customers. EXTRAORDINARY ITEM: - ------------------- Extraordinary item, net of income taxes - --------------------------------------- The extraordinary income for the three month period was due to the amended PaPUC restructuring rate order received by Met-Ed which substantially reversed the extraordinary charge taken in the second quarter, primarily related to above-market nonutility generation costs. The extraordinary income was partially offset by additional charges taken for the writeoff of regulatory assets related to wholesale energy customers. The extraordinary loss for the nine month period was due to the net impact of the PaPUC Restructuring Orders on Met-Ed. 59 PENELEC RESULTS OF OPERATIONS ----------------------------- Penelec's earnings for the third quarter ended September 30, 1998 were $62.9 million, compared with earnings of $19.2 million for the quarter ended September 30, 1997. Excluding the effect of non-recurring items, Penelec's third quarter 1998 earnings would have been $14.9 million. Previously, Penelec recorded a second quarter 1998 non-recurring charge of $87.8 million after-tax, as a result of Pennsylvania Public Utility Commission (PaPUC) restructuring rate orders. In the third quarter 1998, as a result of amended PaPUC restructuring rate orders, Penelec reversed $83.1 million after-tax, of the non-recurring charge taken in the second quarter, primarily related to above-market nonutility generation costs; and recorded an additional non-recurring charge of $35.1 million after-tax related to customer rate refunds, the write-off of regulatory assets related to its wholesale energy customers and start-up payments to an environmental fund. For the nine months ended September 30, 1998, Penelec's earnings were $21.1 million, compared with earnings of $80.6 million, for the nine months ended September 30, 1997. Excluding the effect of the non-recurring items mentioned above, earnings for the nine months ended September 30, 1998 would have been $60.9 million. The earnings decrease on this basis was due to the absence in 1998 of a step increase in unbilled revenue recorded by Penelec as a result of including its energy cost rates (ECRs) in base rates and the cessation of deferred energy accounting, both effective January 1, 1997; and increased computer costs. OPERATING REVENUES: - ------------------- Operating revenues for the third quarter of 1998 increased 0.7% to $259.4 million, as compared to the third quarter of 1997. For the nine months ended September 30, 1998, revenues decreased 2.7% to $773.4 million as compared to the same period last year. The components of the changes are as follows: (in millions) --------------------------------------- Three Months Nine Months Ended Ended September 30, 1998 September 30, 1998 ------------------ ------------------ KWH revenues $ 33.6 $ 13.5 Obligation to refund 1998 revenues to customers per PaPUC Order (29.2) (29.2) Other revenues (2.6) (6.1) ----- ----- Increase/(decrease) in revenues $ 1.8 $(21.8) ===== ===== Kilowatt-hour revenues - ---------------------- The increase in KWH revenues for the three and nine month periods was primarily due to increased sales to other utilities. The nine month revenue comparison was affected by the absence in 1998 of the step increase in unbilled revenue as a result of Penelec including its ECR in base rates, amounting to $15 million. 60 PENELEC RESULTS OF OPERATIONS (continued) - ----------------------------- Obligation to refund 1998 revenues to customers per PaPUC Order - --------------------------------------------------------------- The decrease in revenues reflect a T&D rate reduction resulting from the PaPUC's final Restructuring Order for Penelec. The T&D rate reduction reflects Penelec's obligation to make refunds to customers from 1998 revenues (3.0 percent from December 1996 levels). Other revenues - -------------- Generally, changes in other revenues do not affect earnings as they are offset by corresponding changes in expense. However, lower transmission revenues negatively affected the nine month earnings comparison. OPERATING EXPENSES: - ------------------- Fuel and Power purchased and interchanged - ----------------------------------------- Effective January 1, 1997, Penelec ceased deferred energy accounting as its ECR was combined with base rates. Thus, energy cost variances now have a current impact on earnings. In October 1998, the PaPUC approved the use of deferred accounting for above-market NUG costs as part of the final Restructuring Order for Penelec. The increase in PP&I includes a one-time charge for the NUG portion of unbilled revenue. Other operation and maintenance - ------------------------------- The increase in other O&M expenses for the three and nine month periods was due primarily to increased computer costs resulting from the reengineering of business processes to position Penelec for deregulation; and employee reduction costs. OTHER INCOME AND DEDUCTIONS: - ---------------------------- Other income/(expense), net - --------------------------- The decrease in other income/(expense), net for the three and nine month periods was due to a charge for start-up payments for the establishment of an environmental fund. EXTRAORDINARY ITEM: - ------------------- Extraordinary item, net of income taxes - --------------------------------------- The extraordinary income for the three month period was due to the amended PaPUC restructuring rate order received by Penelec which substantially reversed the extraordinary charge taken in the second quarter, primarily related to above-market nonutility generation costs. The extraordinary income was partially offset by additional charges taken for the writeoff of regulatory assets related to wholesale energy customers. The extraordinary loss for the nine month period was due to the net impact of the PaPUC Restructuring Orders on Penelec. 61 GPUI GROUP ---------- The GPUI Group develops, owns and operates electric generation, transmission and distribution facilities in the U.S. and foreign countries. It has also made investments in certain advanced technologies related to the electric power industry. The GPUI Group has ownership interests in transmission, distribution and supply businesses in England and Australia. It also has ownership interests in nine operating cogeneration plants in the U.S. totaling 1,147 megawatts (MW) (of which the GPUI Group's equity interest represents 498 MW) of capacity, and ten operating generating facilities located in foreign countries totaling 3,820 MW (of which the GPUI Group's equity interest represents 713 MW) of capacity. It also has investments in five generating facilities under construction totaling 1,833 MW (of which the GPUI Group's equity interest represents 339 MW) of capacity. The business of the GPUI Group includes investment, development and operation of these businesses and, when appropriate, purchase and sale of interests in particular businesses. At September 30, 1998, GPU, Inc.'s aggregate investment in the GPUI Group was $526 million; GPU, Inc. has also guaranteed up to an additional $996 million of GPUI Group obligations. 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 $2.2 billion as of September 30, 1998. At September 30, 1998, GPU, Inc. has remaining authorization to finance approximately $869 million of additional investments in FUCOs and EWGs. Management expects that the GPUI Group will provide a substantial portion of GPU's future earnings growth and intends to make additional investments in its business activities. The timing and amount of these investments, however, will depend upon the availability of appropriate opportunities and financing capabilities. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- Year 2000 Issue - --------------- GPU is addressing the Year 2000 issue by undertaking a comprehensive review of its computers, software and equipment with embedded systems such as microcontrollers (together, "Year 2000 Components"), and of its business relationships with third parties, including key customers, lenders, trading partners, vendors, suppliers and service providers. GPU is developing remediation plans, and has begun to take corrective actions. The remediation plans include, among other things, the modification or replacement of Year 2000 Components which are not ready for use beyond the Year 2000. GPU continues to respond to requests for information concerning its Year 2000 readiness. Inquiries have been made by the New Jersey Board of Public Utilities (NJBPU), the PaPUC, the U.S. Nuclear Regulatory Commission, the Department of Energy and by numerous third parties with which GPU has business relationships. 62 Costs - ----- The GPU Energy companies have purchased and are installing an integrated information system (Project Enterprise) designed to help manage business growth and meet the mandates of electric utility deregulation. The system is scheduled to be substantially operational for the GPU Energy companies and GPUS by March 1999 and fully operational for all such companies by June 1999. GPUN and Genco are not installing Project Enterprise prior to the Year 2000, but rather are making modifications to their systems to achieve Year 2000 readiness. These modifications are expected to be completed by March 31, 1999 for critical systems, and by July 31, 1999 for their remaining systems. By implementing Project Enterprise as a part of their Year 2000 solution, the GPU Energy companies will avoid spending $8.1 million (JCP&L, Met-Ed and Penelec $2.7 million each) on modifications to systems that are being replaced. The GPU Energy companies estimate they will spend $106-$115 million for the purchase and implementation of Project Enterprise. In addition to the purchase and implementation of Project Enterprise as a part of their Year 2000 solution, the GPU Energy companies currently estimate they will spend $26.5 million (JCP&L $11.9 million; Met-Ed $7.7 million; Penelec $6.9 million) on the remediation of Year 2000 Components. Approximately 45 percent of the expected costs are for system modifications or replacements; 35 percent for labor (including contract labor); and 20 percent for contingencies. These costs are being funded by the GPU Energy companies through operating cash flows. Of this amount, the GPU Energy companies would have in any event spent $7.4 million (JCP&L $3.6 million; Met-Ed $2.2 million; Penelec $1.6 million) for maintenance and cyclical replacement plans. Through September 30, 1998, a total of approximately $10.6 million (JCP&L $4.5 million; Met-Ed $3.2 million; Penelec $2.9 million) has already been spent on the Year 2000 issue, of which $5.9 million (JCP&L $2.3 million; Met-Ed $1.8 million; Penelec $1.8 million) was spent in 1998. Approximately 4.8 percent of the 1998 and 3.3 percent of the 1999 operating and capital budgets for Information Technology Services (ITS) are allocated to Year 2000 remediation. This level of spending, which includes employee costs and time, is not expected to cause any material delay in ITS performing other planned projects. The GPUI Group currently estimates they will spend approximately $9 million to address the Year 2000 issue, primarily to replace or modify equipment at Midlands Electricity plc. Through September 30, 1998, a total of approximately $1.6 million has already been spent, primarily all of which was spent in 1998. Milestones - ---------- GPU has established Inventory, Assessment, Remediation, Testing and Monitoring as the primary phases for its Year 2000 program. The Inventories of critical systems and components are essentially complete. The milestones for Assessment, Remediation, Testing and Monitoring are as follows: 63 Assessment Remediation Testing Monitoring ---------- ----------- ------- ---------- GPU Energy companies 12/31/1998 03/31/1999 03/31/1999 03/31/2000 and GPUS GENCO 10/31/1998 11/15/1999 11/15/1999 05/31/2000 GPUN 03/31/1999 10/31/1999 10/31/1999 03/31/2000 GPUI Group 12/31/1998 10/31/1999 10/31/1999 03/01/2000 Genco expects to complete modifications and testing of Year 2000 Components involved in 83 percent of its generation capacity by May 31, 1999. Modifications and testing of the remaining components, primarily for three generating units with outages scheduled in the Fall of 1999, will not be completed until mid-November 1999. GPUN expects to complete modifications and testing for most of its systems and components by July 1, 1999. Modifications and testing of fewer than a dozen components at TMI-1, which is scheduled for a refueling outage in September 1999, are not expected to be completed until late October 1999. Third Party Qualification - ------------------------- Due to the interdependence of computer systems and the reliance on other organizations for supplies, materials or services, GPU is addressing the Year 2000 issue as it relates to the readiness of third parties. As part of its Year 2000 strategy, GPU is contacting key customers, lenders, trading partners, vendors, suppliers and service providers to assess whether they are adequately addressing the Year 2000 issue. With respect to computer software and equipment with embedded systems, GPU has analyzed where it is dependent upon third party data and has identified four principal critical areas: (1) the Pennsylvania-New Jersey-Maryland (PJM) Interconnection; (2) electric generation suppliers, such as cogeneration operators and nonutility generators (NUGs); (3) Electronic Data Interchange (EDI) with trading partners; and (4) Electronic Funds Transfer (EFT) with financial institutions. The following summarizes the actions that have taken place with critical third parties: - PJM - A test plan is in place and awaiting a November 1998 upgrade of PJM systems to enable data link testing. While some testing of PJM systems has already begun, the major testing will not be performed until February 1999. - Electric generation suppliers - All electric generation suppliers have been contacted and information as to their readiness status has been received from a small percentage. Those that have responded have readiness dates established generally for July 1999. - EDI/EFT - Readiness questionnaires have been sent to approximately 160 organizations with which GPU exchanges data electronically and conducts electronic funds transfers. GPU has currently received responses from only a few of these organizations. 64 Scenarios and Contingencies - --------------------------- If GPU, or critical third parties upon whom GPU relies, are unable to successfully address their Year 2000 problems on a timely basis, certain computers, equipment, systems and applications may not function properly, which could have a material adverse effect on GPU's operations and financial condition. While GPU cannot predict what effect, if any, the Year 2000 problem will have on its operations, one possible scenario may include, among other things, interruptions in delivering electric service, a temporary inability to process transactions, provide bills or operate electric generating stations. GPU currently has no cost estimates related to its Year 2000 risks. While there can be no assurance as to the outcome of this matter, GPU believes that its Year 2000 preparations will be successful relative to its mission-critical Year 2000 Components. In addition, GPU is developing contingency plans in accordance with the contingency planning schedule proposed by the North American Electric Reliability Council. These plans, which are currently expected to be finalized in mid- to late-1999, will include supplementing present general emergency procedures with specific measures for Year 2000 problems and placing troubleshooting teams at sites where critical components are located. Capital Expenditures - -------------------- GPU Energy Companies The GPU Energy companies' capital spending for the nine months ended September 30, 1998 was $213 million (JCP&L $112 million; Met-Ed $33 million; Penelec $65 million; Other $3 million), and was used primarily for new customer connections and to maintain and improve existing transmission and distribution facilities. For 1998, capital expenditures are forecasted to be $336 million (JCP&L $169 million; Met-Ed $77 million; Penelec $87 million; Other $3), mainly related to the GPU Energy companies and will be used primarily for ongoing system development. Expenditures for maturing obligations will total $43 million (JCP&L $13 million; Penelec $30 million) in 1998. A substantial portion of the GPU Energy companies' 1998 capital outlays will be satisfied through internally generated funds. GPUI Group The GPUI Group's capital spending was $49 million for the nine months ended September 30, 1998. For 1998, capital expenditures are forecasted to be $133 million. Expenditures for maturing obligations are estimated to total $589 million in 1998. A substantial portion of the GPUI Group's 1998 capital outlays will be required to be satisfied through external financings. Financing - --------- GPU, Inc. GPU, Inc. has received SEC approval to issue and sell up to $300 million of unsecured debentures through 2001. Further significant investments by the GPUI Group, or otherwise, may require GPU, Inc. to issue additional debt 65 and/or common stock (see GPUI GROUP for a discussion of GPU, Inc.'s remaining investment authorization). GPU is in the process of arranging a new unsecured commercial paper credit facility to finance up to $1 billion of investments in FUCOs and EWGs. GPU expects that the proceeds from the sale of commercial paper (guaranteed by GPU, Inc.) will be used to repay a portion of outstanding acquisition debt and to finance future investments. GPUI Group In August 1998, Austran Holdings, Inc. (Austran), a wholly owned subsidiary of GPU Electric, Inc., entered into a A$500 million (approximately U.S. $297 million) revolving commercial paper program. GPU PowerNet has guaranteed Austran's obligations under this program. As of September 30, 1998, Austran borrowed approximately A$342 million (approximately U.S. $203 million) under the commercial paper program and intends to borrow an additional A$100 million (approximately U.S. $59 million) to refinance the current portion of the senior debt credit facility used to finance the PowerNet acquisition. These borrowings have been classified as noncurrent since it is management's intent to reissue the commercial paper on a long-term basis. GPU Energy Companies JCP&L and Penelec have regulatory authority to issue and sell first mortgage bonds (FMBs), including secured medium-term notes, and preferred stock through June 1999. Met-Ed has similar authority through December 1999. Under existing authorizations, JCP&L, Met-Ed and Penelec may issue these senior securities in aggregate amounts of $145 million, $190 million and $70 million, respectively, of which up to $100 million for JCP&L and Met-Ed and $70 million for Penelec may consist of preferred stock. Met-Ed and Penelec are seeking regulatory approvals to issue and sell senior notes and preferred securities in aggregate amounts of $250 million and $725 million, respectively, of which up to $125 million for each company may consist of preferred securities. JCP&L intends to seek regulatory approval to issue and sell senior notes and preferred securities in an aggregate amount of $300 million, of which up to $200 million may consist of preferred securities. The GPU Energy companies also have regulatory authority to incur short-term debt, a portion of which may be through the issuance of commercial paper. The GPU Energy companies' bond indentures and articles of incorporation include provisions that limit the amount of long-term debt, preferred stock and short-term debt the companies may issue. The GPU Energy companies' interest and preferred dividend coverage ratios are currently in excess of indenture and charter restrictions. The amount of FMBs that the GPU Energy companies could issue based on the bondable value of property additions is in excess of amounts currently authorized. Current plans call for the GPU Energy companies to issue senior securities during the next three years to fund the redemption of maturing senior securities, refinance outstanding senior securities if economic, and finance construction activities. 66 COMPETITIVE ENVIRONMENT ----------------------- Managing the Transition - ----------------------- As competition in the electric utility industry increases, the price of electricity and quality of customer service will be critical. GPU has been active both on the federal and state levels in helping to shape electric industry restructuring while seeking to protect the interests of its shareholders and customers, and is attempting to assess the impact that these competitive pressures and other changes will have on its financial condition and results of operations. In October 1997, GPU announced its intention to begin a process to sell, through a competitive bid process, up to all of the fossil-fuel and hydroelectric generating facilities owned by the GPU Energy companies. These facilities, comprised of 26 operating stations, support organizations and development sites, total approximately 5,300 MW (JCP&L 1,900 MW; Met-Ed 1,300 MW; Penelec 2,100 MW) of capacity and have a net book value of approximately $1.1 billion (JCP&L $282 million; Met-Ed $290 million; Penelec $527 million) at September 30, 1998. The net proceeds from the sale would be used to reduce the capitalization of the respective GPU Energy companies and may also be applied to reduce short-term debt, finance further acquisitions, repurchase GPU, Inc. common stock, and to reduce acquisition debt of the GPUI Group. In August 1998, Penelec and New York State Electric & Gas Corporation (NYSEG) entered into definitive agreements with Edison Mission Energy to sell the Homer City Station for a total purchase price of approximately $1.8 billion. Penelec and NYSEG each owns a 50% interest in the station, and will share equally in the net sale proceeds. The sale, which is subject to various federal and state regulatory approvals, is expected to be completed in the first quarter of 1999. On November 9, 1998, the GPU Energy companies entered into definitive purchase agreements with Sithe Energies and FirstEnergy Corporation to sell, with the exception of JCP&L's 50% ownership interest in the Yards Creek Pumped Storage plant, all their remaining fossil-fuel and hydroelectric generating facilities for a total purchase price of approximately $1.7 billion (JCP&L $442 million; Met-Ed $677 million; and Penelec $603 million). The sales are expected to be completed in mid-1999, subject to the timely receipt of the necessary regulatory and other approvals. In addition to the continued operation of the Oyster Creek Nuclear Generating Station (Oyster Creek), JCP&L has been exploring the sale or early retirement of the plant to mitigate costs associated with its continued operation. In July 1998, GPU announced that it was unable to identify a buyer for the facility. GPU does not anticipate making a final decision on the plant before the NJBPU rules on JCP&L's restructuring filing. In October 1998, GPU entered into definitive purchase agreements to sell TMI-1 to AmerGen Energy Company, LLC (AmerGen), a joint venture between PECO Energy and British Energy. Terms of the purchase agreements are summarized as follows: 67 - - The total cash purchase price is $100.6 million, which represents $23 million to be paid at financial closing for the plant, and $77.6 million for the nuclear fuel in the reactor to be paid in five equal annual installments beginning one year after the closing. The purchase price is subject to certain adjustments for capital expenditures and other items. - - AmerGen will make certain contingent payments of up to $80 million for the period January 1, 2002 through December 31, 2010 depending on the actual energy market clearing prices through 2010. - - GPU will purchase the energy and capacity from TMI-1 from the closing through December 31, 2001, at predetermined rates. - - At financial closing, GPU will make additional deposits into the TMI-1 decommissioning trusts to bring the trust totals up to $320 million. At financial closing, AmerGen will assume all liability and obligation for decommissioning TMI-1. - - GPU will continue to own and hold the license for Three Mile Island Unit 2 (TMI-2), which would not be included in the sale agreement. No liability for TMI-2 or its decommissioning will be assumed by AmerGen. - - AmerGen will employ all employees located at TMI-1 at financial closing, and will also have the opportunity to offer positions to GPUN's headquarters staff. GPU will be responsible for all severance payments associated with these employees for a one year period following financial closing. AmerGen will accept the current collective bargaining agreement covering TMI-1 union employees. The sale is subject to various conditions, including the receipt of satisfactory federal and state regulatory approvals prior to financial closing. In addition, certain rulings from the Internal Revenue Service will be necessary with respect to the maintenance or transfer of the decommissioning trusts at the closing. There can be no assurance as to the outcome of these matters. Recent Regulatory Actions - ------------------------- Pennsylvania - ------------ In 1996, Pennsylvania adopted comprehensive legislation which provides for the restructuring of the electric utility industry. The legislation, among other things, permits one-third of Pennsylvania retail consumers to choose their electric supplier beginning January 1, 1999, two-thirds to choose by January 1, 2000 and all retail consumers to do so by January 1, 2001. The legislation requires the unbundling of rates for transmission, distribution and generation services. Utilities would have the opportunity to recover their prudently incurred stranded costs that result from customers choosing another supplier through a PaPUC approved competitive transition charge, subject to certain conditions, including that they attempt to mitigate these costs. For a discussion of stranded costs, see Note 1 of the Notes to Consolidated Financial Statements - Competition and the Changing Regulatory Environment. 68 The legislation provides utilities the opportunity to reduce their stranded costs through the issuance of transition bonds with maturities of up to 10 years. The sale proceeds could be used to buy out or buy down uneconomic NUG contracts, to reduce capitalization, or both. Principal and interest payments on the bonds would be paid by all distribution service customers through a nonbypassable intangible transition charge. Reduced financing costs associated with the sale of transition bonds would be used to provide rate reductions for all customers. Effective January 1, 1997, transmission and distribution (T&D) rates charged to Pennsylvania retail customers are generally capped for 4 1/2 years, and generation rates are generally capped for up to nine years. Transmission and distribution of electricity will continue as a regulated monopoly. An independent system operator (ISO) will be responsible for coordinating the generation and transmission of electricity in an efficient and nondiscriminatory manner. In June 1997, Met-Ed and Penelec filed with the PaPUC their proposed restructuring plans to implement competition and customer choice in Pennsylvania. In June 1998, the PaPUC entered Restructuring Orders on the plans. On July 20, 1998, however, Met-Ed and Penelec appealed the Restructuring Orders to the Commonwealth Court and also filed complaints in the U.S. District Court seeking both declaratory and injunctive relief challenging, among other things, the PaPUC's refusal in the Restructuring Orders to ensure full recovery of the costs of NUG contracts, as required by state and federal law. In addition, on July 20, 1998 Met-Ed and Penelec filed Alternative Restructuring Plans (Alternative Plans) with the PaPUC based on the provision in the Customer Choice Act that enables a utility to file an alternate plan if the PaPUC rejects the utility's initial plan. On August 5, 1998, the PaPUC rejected the Alternative Plans as invalid and on August 17, 1998, Met-Ed and Penelec appealed this action. Following extended negotiations, on September 23, 1998, Met-Ed, Penelec, the PaPUC and numerous intervenors in the restructuring proceedings entered into Settlement Agreements providing for new restructuring plans. On October 16, 1998, the PaPUC adopted final Restructuring Orders approving the Settlement Agreements. For additional information, see Note 2, Accounting for Non-recurring Items. The major elements of the final Restructuring Order are as follows: - - A transmission and distribution tariff rate which provides adequate funding for maintaining the reliability of Met-Ed and Penelec's electric distribution systems; - - A rate reduction from January 1, 1999 through December 31, 1999, for all customers, whether they choose an alternate supplier or not, reflecting Met-Ed and Penelec's obligation to make refunds to customers from 1998 revenues (2.5 percent for Met-Ed customers and 3.0 percent for Penelec customers from December 1996 levels); 69 - - The ability of all customers to participate in electric choice on January 1, 1999 - two years sooner than called for in Pennsylvania's Electricity Competition Act; - - Customers will receive a "shopping credit" that will result in savings if they buy electricity from an alternate supplier that charges less than the shopping credit. The average shopping credit in 1999 will be 4.350 cents per kilowatt-hour for Met-Ed and 4.404 cents per kilowatt-hour for Penelec. Actual prices will vary by customer rate class; - - Assurance of full recovery of the above-market costs of government-mandated contracts to buy electricity from NUGs (Beginning in 2005, the amount collected will be adjusted every five years over the life of each contract); - - A rate cap for the cost of delivering electricity (transmission and distribution) until 2004, three-and-one-half years longer than the period called for in Pennsylvania's Electricity Competition Act (with the exception of a pending federal order requiring a transmission rate increase in Pennsylvania); - - A rate cap for electricity purchased from GPU Energy, as provider of last resort, until 2010; - - PaPUC approval for Met-Ed and Penelec to sell their generating stations, including TMI-1; - - Recovery of $658.14 million in stranded costs for Met-Ed over 12 years and $332.16 million for Penelec over 11 years (These amounts reflect the effects of using the estimated net proceeds from selling Met-Ed and Penelec's generating plants to reduce stranded costs and will be adjusted based on actual net sale proceeds); - - $2.7 million and $3.4 million assistance in 1999 for low-income customers of Met-Ed and Penelec, respectively; increasing to $6.4 million and $6.9 million in 2002. - - A sustainable energy fund to promote the development and use of renewable energy and clean energy technologies with one-time payments in 1998 of $5.7 million from Met-Ed and of $6.4 million from Penelec; - - The ability of some customers to choose another licensed supplier to provide metering services beginning January 1, 1999, and billing services beginning January 1, 2000; - - A phase-in of competitive bidding beginning no later than June 1, 2000, for other suppliers to be the "provider of last resort" for customers who do not shop; and - - The dismissal of all pending litigation in accordance with the Settlement Agreements. 70 New Jersey - ---------- In April 1997, the NJBPU issued final Findings and Recommendations for Restructuring the Electric Power Industry in New Jersey. The NJBPU recommended, among other things, that certain electric retail customers be permitted to choose their supplier beginning October 1998, expanding to include all retail customers by July 1, 2000. It is currently expected that retail competition in New Jersey will not commence before the second quarter of 1999. The NJBPU also recommended a near-term electric rate reduction of 5% to 10% with the phase-in of retail competition, as well as additional rate reductions accomplished as a result of new energy tax legislation, as discussed below. The NJBPU has proposed that utilities have an opportunity to recover their stranded costs associated with generating capacity commitments provided that they attempt to mitigate these costs. Also, NUG contracts which cannot be mitigated would be eligible for stranded cost recovery. The determination of stranded cost recovery by the NJBPU would be undertaken on a case-by-case basis, with no guaranty for full recovery of these costs. A separate market transition charge (MTC) would be established for each utility to allow utilities to recover stranded costs over 4 to 8 years. The MTC would be capped to ensure that customers experience the NJBPU's recommended overall rate reduction of 5-10%. In addition, the NJBPU is proposing that utilities unbundle their rates and allow customers to choose their electric generation supplier. Transmission and distribution of electricity would continue as a regulated monopoly and utilities would be responsible for connecting customers to the system and for providing distribution service. Transmission service would be provided by an ISO, which would be responsible for maintaining the reliability of the regional power grid and would be regulated by the Federal Energy Regulatory Commission (FERC). In July 1997, New Jersey enacted energy tax legislation which eliminated the 13% gross receipts and franchise tax on utility bills effective January 1, 1998. Utilities are collecting from customers a 6% sales tax and paying a corporate business tax which amounts to 1-2% of revenues. Utilities are also paying a transitional energy facilities assessment which will phase out over five years and result in a 5-6% rate reduction to customers. In July 1997, JCP&L filed with the NJBPU its proposed restructuring plan for a competitive electric marketplace in New Jersey. Included in the plan were stranded cost, unbundled rate and restructuring filings. In December 1997, JCP&L submitted supplemental information regarding the proposed sale of its fossil-fuel and hydroelectric generating facilities (see Managing the Transition). Highlights of the plan include: - - Some electric retail customers would be able to choose their supplier beginning on October 1, 1998, as initially recommended by the NJBPU, expanding to include all retail customers by July 1, 2000. - - As required by the NJBPU's final findings and recommendations, JCP&L would unbundle its rates and these rates would apply to all distribution customers, with the exception of a Production Charge, which would be 71 charged only to customers who do not choose an alternative energy supplier. The proposed unbundled rate structure would include: -- a flat monthly Customer Charge for the costs associated with metering, billing and customer account administration. -- a Delivery Charge consisting of capital and O&M costs associated with the transmission and distribution system; the recovery of regulatory assets, including those associated with generation; the cost of social programs; and certain costs related to the proposed ratemaking treatment of Oyster Creek. -- a Market Energy and Capacity (MEC) Charge would be established on a monthly basis for a six-month period for electricity provided to customers for whom JCP&L continues to act as their electric generation supplier. JCP&L would be the supplier of last resort for customers who cannot or do not wish to purchase energy from an alternative supplier. The MEC would be based upon competitively "bidding out" the discrepancy between projected needs and projected resources. JCP&L would true-up the MEC charges for sales differences against its actual cost to provide that power, plus interest. The true-up would be recovered from, or credited to, the customers who were customers during that period, based upon their usage during such period. The MEC would be established every six months. -- a Societal Benefits Charge to recover demand-side management costs, manufactured gas plant remediation costs, and nuclear decommissioning costs. -- a MTC to recover non-NUG stranded generation costs (other than Oyster Creek). This charge would include both owned generation and utility purchase power commitments. It is expected that the MTC would be in effect for less than a three-year period. -- a NUG Transition Charge (NTC) to recover ongoing above-market NUG costs over the life of the contracts and provide a mechanism to flow through to customers the benefits of future NUG mitigation efforts. The NTC would be subject to an annual true-up for actual cost escalations or reductions, changes in availability or dispatch levels and other cost variations over the life of each NUG project. The NTC would also be subject to adjustment in the future to reflect additional NUG buyout or restructuring costs and any related savings. - - The unbundling plan calls for an estimated 10% rate reduction, of which 2.1% became effective as part of JCP&L's Stipulation of Final Settlement (Final Settlement) approved by the NJBPU in 1997. The remaining reductions would be phased in over a two-year period beginning after the commencement of retail choice, and would be achieved through, among other things, the proposed early retirement of Oyster Creek for ratemaking purposes in September 2000 and, if legislation is enacted, the securitization of certain above-market costs. In addition to this rate reduction, JCP&L customers would receive an additional rate reduction of approximately 6% to 72 be phased in over the next five years as a result of energy tax legislation signed into law in July 1997. - - In addition to the continued operation of the Oyster Creek facility, JCP&L is exploring the early retirement of the plant to mitigate costs associated with its continued operation. A final decision on the plant's future will not be made until the NJBPU rules on JCP&L's restructuring filing. Nevertheless, JCP&L has proposed that the NJBPU approve an early retirement of Oyster Creek in September 2000, for ratemaking purposes. The ratemaking treatment being requested for Oyster Creek is as follows: -- The market value of Oyster Creek's generation output would be recovered in the Production Charge. -- The above-market operating costs would be recovered as a component of the Delivery Charge through September 2000. If the plant is operated beyond that date, these costs would not be included in customer rates. -- Existing Oyster Creek regulatory assets would, like other regulatory assets, be recovered as part of the Delivery Charge. -- Oyster Creek decommissioning costs would, like TMI-1 decommissioning costs, be recovered as a component of the Societal Benefits Charge. -- JCP&L's net investment in Oyster Creek would be recovered through the Delivery Charge as a levelized annuity, effective with the commencement of retail choice through its original expected operating life, 2009. - - Stranded costs at the time originally proposed by the NJBPU for initial customer choice (September 30, 1998), on a present value basis, are estimated at $1.6 billion, of which $1.5 billion is for above-market NUG contracts. The $1.6 billion excludes above-market generation costs related to Oyster Creek. Numerous parties have intervened in this proceeding and are actively contesting various aspects of JCP&L's filings, including, among other things, recovery by JCP&L of plant capital additions since its last base rate case in 1992, projections of future electricity prices on which stranded cost recovery calculations are based, the appropriate level of return and the appropriateness of earning a return on stranded investment. Consultants retained by the NJBPU Staff, the Division of Ratepayer Advocate and other parties have proposed that JCP&L's stranded cost recoveries should be substantially lower than the levels JCP&L is seeking. In a February 1998 order, the NJBPU substantially affirmed an ALJ ruling which required that rates be unbundled based on the 1992 cost of service levels which were the basis for JCP&L's last base rate case, but clarified that (1) JCP&L could update its 1992 cost of service study to reflect adjustments consistent with the NJBPU approved Final Settlement which, among other things, recognized certain increased expense levels and reductions to 73 base rates and (2) all of the other updated post-1992 cost information that JCP&L had submitted in the proceeding should remain in the record, which the NJBPU will utilize after issuance of the ALJ's initial decision to establish a reasonable level of rates going forward. Furthermore, the NJBPU emphasized in its order that the final unbundled rates established as a result of this proceeding will be lower than the current bundled rates. This directive has been recognized in JCP&L's July 1997 restructuring plan which proposed annual revenue reductions totaling approximately $185 million. The NJBPU will render final and comprehensive decisions on the precise level of aggregate rate reductions required in order to accomplish its primary goals of introducing retail competition and lowering electricity costs for consumers. If the NJBPU were to accept the positions of various parties or their consultants, or were ultimately to deny JCP&L's request to recover post-1992 capital additions and increased expenses, it would have a material adverse impact on JCP&L's stranded cost recovery, restructuring proceeding and future earnings. Hearings with respect to the stranded cost and unbundled rate filings have been completed. On September 4, 1998, the ALJ issued a recommended decision containing the following major elements: - - The ALJ did not consider current cost levels as the basis for unbundling rates, but instead used 1992 costs. With the exception of JCP&L's investment in a new combustion turbine plant, the ALJ denied recovery of post-1992 rate case capital additions. However, the ALJ did recommend that the NJBPU reconsider these matters. - - The ALJ recommended that the Oyster Creek investment be recovered over a period of between four and eleven years, but once the plant is retired for ratemaking purposes, no return should be provided on the unamortized investment. - - The ALJ recommended that the 2.1% rate reduction implemented in April 1997 as part of JCP&L's Global Settlement should not be part of the 5-10% rate reduction mandated by the NJBPU's Final Report. - - The ALJ endorsed a market line higher than that proposed by JCP&L. - - The ALJ approved recovery of actual NUG costs through a NUG Transition Charge (NTC), over the lives of the contracts. - - The ALJ accepted JCP&L's proposal for recovery of nuclear decommissioning costs through a Societal Benefits Charge, but disallowed the inclusion of fossil decommissioning costs in the calculation of stranded costs. - - The ALJ accepted GPU Energy's generation asset divestiture plan and the position that the net proceeds be applied to reduce other stranded costs. Evidentiary hearings before the NJBPU with respect to the separate restructuring filing were held jointly with the other New Jersey utilities, and briefs have been filed. GPU Energy expects a NJBPU decision coincident 74 with decisions in the stranded cost and unbundled rates proceedings. There can be no assurance as to the outcome of these proceedings. In September 1998, legislation to deregulate New Jersey's electricity market was introduced in the Assembly and Senate. The proposed legislation provides for, among other things, customer choice beginning no later than June 1, 1999 and expanding to include all customers by October 1, 1999; a minimum five to ten percent rate reduction; the unbundling of customer bills; the recovery of stranded costs; and the ability to securitize stranded costs. The NJBPU is not expected to issue final decisions on JCP&L's stranded cost, unbundled rate and restructuring filings until after legislation is enacted, which is currently anticipated by the end of 1998. JCP&L has received NJBPU approval for a one-year pilot program offering customers in Monroe Township, New Jersey, a choice of their electric energy supplier. The pilot program began in September 1997, and has been extended until December 31, 1998. Monroe Township had been exploring the possibility of establishing its own municipal electric system. Other - ----- In November 1997, the FERC issued an order to the Pennsylvania-New Jersey-Maryland (PJM) Power Pool which, among other things, directed the GPU Energy companies to implement a single-system transmission rate, effective January 1, 1998. The implementation of a single-system rate is not expected to affect total transmission revenues. It would, however, increase the pricing for transmission service in Met-Ed and Penelec's service territories and reduce 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 final 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 since the NJBPU has recommended a 5-10% rate reduction effective with the implementation of customer choice. There can be no assurance as to the outcome of this matter. Several bills have been introduced in Congress providing for a comprehensive restructuring of the electric utility industry. These bills propose, 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). The Clinton administration announced a Comprehensive Electricity Competition Plan which proposes, among other things, customer choice by January 1, 2003, stranded cost recovery, reliability standards, environmental provisions, and the repeal of both PURPA and PUHCA. The plan does, however, allow states to opt out of the mandate if they believe consumers would be better served by an alternative policy. The administration's plan was submitted to Congress in June 1998. 75 Nonutility Generation Agreements - -------------------------------- Pursuant to the requirements of PURPA and state regulatory directives, the GPU Energy companies have entered into power purchase agreements with NUGs for the purchase of energy and capacity for remaining periods of up to 23 years. Although a few of these facilities are dispatchable, most are must-run and generally obligate the GPU Energy companies to purchase, at the contract price, the output up to the contract limits. As of September 30, 1998, facilities covered by these agreements having 1,681 MW (JCP&L 912 MW; Met-Ed 364 MW; Penelec 405 MW) of capacity were in service. Although the Pennsylvania legislation and the Energy Master Plan in New Jersey both include provisions for the recovery of costs under NUG agreements and certain NUG buyout costs, there can be no assurance that the GPU Energy companies will continue to be able to recover similar costs which may be incurred in the future. (See Note 1 of the Notes to Consolidated Financial Statements Competition and the Changing Regulatory Environment.) The GPU Energy companies intend to avoid, to the maximum extent practicable, entering into any new NUG agreements that are not needed or not consistent with current market pricing and continue to support legislative efforts to repeal PURPA. They are also attempting to renegotiate, and in some cases buy out, existing high cost long-term NUG agreements where it is economic to do so (see THE GPU ENERGY COMPANIES' SUPPLY PLAN). THE GPU ENERGY COMPANIES' SUPPLY PLAN ------------------------------------- Supplier of Last Resort - ----------------------- Under traditional retail regulation, supply planning in the electric utility industry is directly related to projected sales growth in a utility's franchise service territory. As the GPU Energy companies prepare to operate in a competitive environment, their supply planning strategy will focus on providing for the needs of existing retail customers who continue to receive energy supplied by the GPU Energy companies and for whom the GPU Energy companies continue to have an obligation to serve. Based upon the PaPUC final Restructuring Orders for Met-Ed and Penelec, electric utility customers in Pennsylvania will be able to shop for their generation supplier beginning January 1, 1999. Met-Ed and Penelec will furnish, through a competitive bid process, provider of last resort service (PLR) for 20% of their retail customers on June 1, 2000, 40% on June 1, 2001, 60% on June 1, 2002, and 80% on June 1, 2003, referred to as Competitive Default Service (CDS). If no qualified bids for CDS are received at or below their generation rate caps, Met-Ed and Penelec will provide PLR service at the rate cap levels unless modified by the PaPUC. Any retail customers assigned to CDS may elect a competitive generation supplier or 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. JCP&L's obligation as supplier of last resort will be determined after restructuring legislation in New Jersey is enacted. There can be no assurance as to the outcome of these proceedings. 76 Following the completion of the sale of the GPU Energy companies' generation facilities, and the evolving competitive climate in which the GPU Energy companies' existing customers will be able to choose their electric generation supplier, the GPU Energy companies' future supply plan will likely focus on short- to intermediate-term commitments and reliance on spot market purchases. The GPU Energy companies' present strategy includes minimizing the financial exposure associated with new long-term purchase commitments. Managing Nonutility Generation - ------------------------------ The October 1998 PaPUC final Restructuring Orders provide for, and the proposed legislation and restructuring plans in New Jersey also contemplate, full recovery of the above-market costs of NUG agreements. The GPU Energy companies will continue efforts to reduce the above-market costs of these agreements and will, where beneficial, attempt to renegotiate the prices of the agreements, offer contract buyouts and attempt to convert must-run agreements to dispatchable agreements. There can be no assurance as to the extent to which these efforts will be successful in whole or in part. In 1997, the NJBPU approved a Stipulation of Final Settlement which, among other things, provides for the recovery of costs associated with the buyout of the Freehold Cogeneration project. The Final Settlement provides for recovery through the LEAC of: (1) buyout costs up to $130 million, and 50% of any costs from $130 million to $140 million, over a seven-year period for the termination of the Freehold power purchase agreement. The Freehold cost recovery was granted on an interim basis subject to refund, pending further review by the NJBPU, before which the matter is pending. In 1997, Met-Ed and Penelec issued requests for proposals (RFPs) to 24 NUG projects which currently supply a total of approximately 760 MW under power purchase agreements. The RFPs requested the NUGs to propose buyouts, buydowns and/or restructurings of current power purchase contracts in return for cash payments. In January 1998, Met-Ed and Penelec entered into definitive buyout agreements with two bidders. These agreements were contingent upon Met-Ed and Penelec obtaining a PaPUC order allowing for the full recovery of the buyout payments through retail rates. In October 1998, the PaPUC issued final Restructuring Orders that, among other things, established terms and conditions that would enable the buyout agreements to proceed. 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 response to the continuing deregulation of the electric utility industry, the SEC has questioned the continued applicability of FAS 71 by investor-owned utilities with respect to their electric generation operations. In response to these concerns, the Financial Accounting Standards Board's (FASB) Emerging Issues Task Force (EITF) concluded in June 1997 that utilities are no longer subject to FAS 71, for a separable portion of their business, when they know details of their individual transition plans. The EITF also concluded that utilities 77 can continue to carry previously recorded regulated assets, as well as any newly established regulated assets (including those related to generation), on their balance sheets if regulators have guaranteed a regulated cash flow stream to recover the cost of these assets. In June and October 1998, Met-Ed and Penelec received PaPUC Restructuring Orders, which among other things, essentially remove from regulation the costs associated with providing electric generation service to Pennsylvania consumers, effective January 1, 1999. Accordingly, Met-Ed and Penelec have discontinued the application of FAS 71 and adopted the provisions of Statement of Financial Accounting Standards No. 101 (FAS 101), "Regulated Enterprises - Accounting for the Discontinuation of Application of FASB Statement No. 71" with respect to their electric generation operations in the second quarter of 1998. The transmission and distribution portion of Met-Ed and Penelec's operations will continue to be subject to the provisions of FAS 71. JCP&L will discontinue the application of FAS 71 and adopt FAS 101 for its electric generation operations no later than when it receives NJBPU approval of its restructuring plans. 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," GPU performed impairment tests on the net book value of the GPU Energy companies' generation facilities. These tests determined that GPU's net investment in TMI-1 was impaired. No impairment existed for the fossil fuel and hydroelectric generating plants or for Oyster Creek as of September 30, 1998. For the nine months ended September 30, 1998, GPU's investment in TMI-1 was written down by $505 million (pre-tax) (JCP&L $131 million; Met-Ed $251 million; Penelec $123 million) to reflect its fair market value. The amounts written off were re-established as a regulatory asset since management believes it is probable of recovery in the restructuring process due to expected gains on the sale of the fossil-fuel and hydroelectric generating plants being projected to exceed the TMI-1 writedown amount. In June 1998, Statement of Financial Accounting Standards No. 133 (FAS 133), "Accounting for Derivative Instruments and Hedging Activities" was issued. FAS 133 requires that companies recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. To comply with this statement, GPU will be required to include its derivative transactions on its balance sheet at fair value, and recognize the subsequent changes in fair value as either gains or losses in earnings or reported as a component of other comprehensive income, depending upon the intended use and designation of the derivative as a hedge. The statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. GPU expects to adopt this statement in the first quarter of 2000. GPU is in the process of evaluating the impact of FAS 133. 78 PART II ITEM 1 - LEGAL PROCEEDINGS ----------------- Information concerning the current status of certain legal proceedings instituted against the 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 (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 - GPU, Inc. and Subsidiary Companies B - JCP&L C - Met-Ed D - 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 October 2, 1998, under Item 5 (Other Events). Dated October 22, 1998, under Item 5 (Other Events). Jersey Central Power & Light Company: ------------------------------------- Dated October 22, 1998, under Item 5 (Other Events). Metropolitan Edison Company: ---------------------------- Dated October 2, 1998, under Item 5 (Other Events). Dated October 22, 1998, under Item 5 (Other Events). Pennsylvania Electric Company: ------------------------------- Dated October 2, 1998, under Item 5 (Other Events). Dated October 22, 1998, under Item 5 (Other Events). 79 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. November 9, 1998 By: /s/ J. G. Graham ------------------------------------ J. G. Graham, Senior Vice President (Chief Financial Officer) November 9, 1998 By: /s/ F. A. Donofrio ------------------------------------ F. A. Donofrio, Vice President and Comptroller (Chief Accounting Officer) JERSEY CENTRAL POWER & LIGHT COMPANY METROPOLITAN EDISON COMPANY PENNSYLVANIA ELECTRIC COMPANY November 9, 1998 By: /s/ D. Baldassari ------------------------------------ D. Baldassari, President (Principal Operating Officer) November 9, 1998 By: /s/ D. W. Myers ------------------------------------ D. W. Myers, Vice President and Comptroller (Principal Accounting Officer) 80 EX-99 2 EXHIBIT INDEX EXHIBIT INDEX ------------- (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 - GPU, Inc. and Subsidiary Companies B - JCP&L C - Met-Ed D - Penelec (27) Financial Data Schedules A - GPU, Inc. and Subsidiary Companies B - JCP&L C - Met-Ed D - Penelec EX-12 3 EXHIBIT 12A Exhibit 12A Page 1 of 2 GPU, INC. AND SUBSIDIARY COMPANIES 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 (In Thousands) - -------------------------------------------------------------------------------- UNAUDITED Nine Months Ended ----------------------------- September 30, September 30, 1998 1997 ---- ---- OPERATING REVENUES $3,226,975 $3,110,935 --------- --------- OPERATING EXPENSES 2,525,769 2,420,586 Interest portion of rentals (A) 21,424 18,225 Fixed charges of service company subsidiaries (B) 1,891 2,160 --------- --------- Net expense 2,502,454 2,400,201 --------- --------- OTHER INCOME AND DEDUCTIONS: Allowance for funds used during construction 4,285 4,482 Equity in undistributed earnings/(losses) of affiliates, net 42,882 (85,995) Other income, net 44,377 1,472 Minority interest net income (1,457) (1,035) --------- -------- Total other income and deductions 90,087 (81,076) --------- -------- EARNINGS AVAILABLE FOR FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (excluding taxes based on income) $ 814,608 $ 629,658 ========= ========= FIXED CHARGES: Interest on funded indebtedness $ 241,264 $ 172,603 Other interest (C) 49,312 50,132 Preferred stock dividends of subsidiaries on a pretax basis (E) 13,762 18,204 Interest portion of rentals (A) 21,424 18,225 --------- --------- Total fixed charges $ 325,762 $ 259,164 ========= ========= RATIO OF EARNINGS TO FIXED CHARGES 2.50 2.43 ==== ==== RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (D) 2.50 2.43 ==== ==== Exhibit 12A Page 2 of 2 GPU, INC. AND SUBSIDIARY COMPANIES 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 (In Thousands) - -------------------------------------------------------------------------------- UNAUDITED - ------------------------ NOTES: (A) GPU has included the equivalent of the interest portion of all rentals charged to income as fixed charges for this statement and has excluded such components from Operating Expenses. (B) Represents fixed charges of GPU Service, Inc. and GPU Nuclear, Inc. which are accounted for as operating expenses in the consolidated income statement. GPU has removed the fixed charges from operating expenses and included such amounts in fixed charges as interest on funded indebtedness and other interest for this statement. (C) Includes amount for subsidiary-obligated mandatorily redeemable preferred securities of $21,666 for the nine month periods ended September 30, 1998 and 1997, respectively. (D) GPU, Inc., the parent holding company, does not have any preferred stock outstanding, therefore, the ratio of earnings to combined fixed charges and preferred stock dividends is the same as the ratio of earnings to fixed charges. (E) Calculation of preferred stock dividends of subsidiaries on a pretax basis is as follows: Nine Months Ended ------------------------------ September 30, September 30, 1998 1997 ---- ---- Income before provision for income taxes and preferred stock dividends of subsidiaries $502,608 $482,658 Income before extraordinary item in 1998 and preferred stock dividends of subsidiaries 310,924 251,682 Pretax earnings ratio 161.6% 191.8% Preferred stock dividends of subsidiaries 8,516 9,491 Preferred stock dividends of subsidiaries on a pretax basis 13,762 18,204 EX-12 4 EXHIBIT 12B Exhibit 12B Page 1 of 2 JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY 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 (In Thousands) UNAUDITED Nine Months Ended ----------------------------- September 30, September 30, 1998 1997 ---- ---- OPERATING REVENUES $1,598,853 $1,591,569 --------- --------- OPERATING EXPENSES 1,218,704 1,250,453 Interest portion of rentals (A) 7,573 8,039 --------- --------- Net expense 1,211,131 1,242,414 --------- --------- OTHER INCOME: Allowance for funds used during construction 1,988 1,823 Other income, net 7,232 2,122 --------- --------- Total other income 9,220 3,945 --------- --------- EARNINGS AVAILABLE FOR FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (excluding taxes based on income) $ 396,942 $ 353,100 ========= ========= FIXED CHARGES: Interest on funded indebtedness $ 65,455 $ 67,779 Other interest (B) 16,670 19,705 Interest portion of rentals (A) 7,573 8,039 --------- --------- Total fixed charges $ 89,698 $ 95,523 ========= ========= RATIO OF EARNINGS TO FIXED CHARGES 4.43 3.70 ==== ==== Preferred stock dividend requirement $ 7,633 $ 8,638 Ratio of income before provision for income taxes to net income (C) 166.3% 150.7% --------- --------- Preferred stock dividend requirement on a pretax basis 12,694 13,017 Fixed charges, as above 89,698 95,523 --------- --------- Total fixed charges and preferred stock dividends $ 102,392 $ 108,540 ========= ========= RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS 3.88 3.25 ==== ==== Exhibit 12B Page 2 of 2 JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY 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 (In Thousands) UNAUDITED - --------------------- NOTES: (A) JCP&L has included the equivalent of the interest portion of all rentals charged to income as fixed charges for this statement and has excluded such components from Operating Expenses. (B) Includes amount for company-obligated mandatorily redeemable preferred securities of $8,025 for the nine month periods ended September 30, 1998 and 1997, respectively. (C) Represents income before provision for income taxes of $307,244 and $257,577 for the nine month periods ended September 30, 1998 and 1997, respectively, divided by net income of $184,708 and $170,867, respectively for the same periods. EX-12 5 EXHIBIT 12C Exhibit 12C Page 1 of 2 METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES 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 (In Thousands) - -------------------------------------------------------------------------------- UNAUDITED Nine Months Ended ---------------------------- September 30, September 30, 1998 1997 ----------- ------------ OPERATING REVENUES $689,829 $711,975 ------- ------- OPERATING EXPENSES 564,647 531,742 Interest portion of rentals (A) 7,560 4,195 ------- ------- Net expense 557,087 527,547 ------- ------- OTHER INCOME AND DEDUCTIONS: Allowance for funds used during construction 676 1,032 Other income/(expense), net (14,798) 2,408 ------- ------- Total other income and deductions (14,122) 3,440 ------- -------- EARNINGS AVAILABLE FOR FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (excluding taxes based on income) $118,620 $187,868 ======= ======= FIXED CHARGES: Interest on funded indebtedness $ 31,870 $ 33,275 Other interest (B) 13,320 12,095 Interest portion of rentals (A) 7,560 4,195 ------- ------- Total fixed charges $ 52,750 $ 49,565 ======= ======= RATIO OF EARNINGS TO FIXED CHARGES 2.25 3.79 ==== ==== Preferred stock dividend requirement $ 362 $ 362 Ratio of income before provision for income taxes to net income (C) 165.8% 170.5% ------- ------- Preferred stock dividend requirement on a pretax basis 600 617 Fixed charges, as above 52,750 49,565 ------- ------- Total fixed charges and preferred stock dividends $ 53,350 $ 50,182 ======= ======= RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS 2.22 3.74 ==== ==== Exhibit 12C Page 2 of 2 METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES 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 (In Thousands) - -------------------------------------------------------------------------------- UNAUDITED NOTES: (A) Met-Ed has included the equivalent of the interest portion of all rentals charged to income as fixed charges for this statement and has excluded such components from Operating Expenses. (B) Includes amount for company-obligated mandatorily redeemable preferred securities of $6,750 for the nine month periods ended September 30, 1998 and 1997, respectively. (C) Represents income before provision for income taxes of $65,870 and $138,303 for the nine month periods ended September 30, 1998 and 1997, respectively, divided by income before extraordinary item of $39,734 and net income of $81,113, respectively for the same periods. EX-12 6 EXHIBIT 12D Exhibit 12D Page 1 of 2 PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES 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 (In Thousands) - -------------------------------------------------------------------------------- UNAUDITED Nine Months Ended ----------------------------- September 30, September 30, 1998 1997 ------------ ------------- OPERATING REVENUES $773,364 $795,184 ------- ------- OPERATING EXPENSES 653,179 609,258 Interest portion of rentals (A) 3,729 3,120 ------- ------- Net expense 649,450 606,138 ------- ------- OTHER INCOME AND DEDUCTIONS: Allowance for funds used during construction 1,621 1,627 Other income/(expense), net (4,312) 1,198 ------- -------- Total other income and deductions (2,691) 2,825 ------- ------- EARNINGS AVAILABLE FOR FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (excluding taxes based on income) $121,223 $191,871 ======= ======= FIXED CHARGES: Interest on funded indebtedness $ 35,922 $ 36,672 Other interest (B) 13,542 13,095 Interest portion of rentals (A) 3,729 3,120 ------- ------- Total fixed charges $ 53,193 $ 52,887 ======= ======= RATIO OF EARNINGS TO FIXED CHARGES 2.28 3.63 ==== ==== Preferred stock dividend requirement $ 521 $ 491 Ratio of income before provision for income taxes to net income (C) 167.8% 171.4% ------- ------- Preferred stock dividend requirement on a pretax basis 874 842 Fixed charges, as above 53,193 52,887 ------- ------- Total fixed charges and preferred stock dividends $ 54,067 $ 53,729 ======= ======= RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS 2.24 3.57 ==== ==== Exhibit 12D Page 2 of 2 PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES 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 (In Thousands) - -------------------------------------------------------------------------------- UNAUDITED - ------------------- NOTES: (A) Penelec has included the equivalent of the interest portion of all rentals charged to income as fixed charges for this statement and has excluded such components from Operating Expenses. (B) Includes amount for company-obligated mandatorily redeemable preferred securities of $6,891 for the nine month periods ended September 30, 1998 and 1997, respectively. (C) Represents income before provision for income taxes of $68,030 and $138,984 for the nine month periods ended September 30, 1998 and 1997, respectively, divided by income before extraordinary item of $40,536 and net income of $81,104, respectively for the same periods. EX-27 7 GPU FDS 27A
UT 0000040779 GPU, INC. 1,000 US DOLLARS 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1 PER-BOOK 6,815,527 2,139,204 1,282,017 6,060,649 0 16,297,397 331,958 1,010,373 2,235,027 3,499,009 416,500 66,478 4,214,057 298,393 0 0 262,110 2,500 2,035 129,440 7,406,875 16,297,397 3,226,975 164,929 2,525,769 2,690,698 536,277 61,241 597,518 293,653 276,653 0 276,653 192,149 178,400 572,800 2.18 2.18 INCLUDES ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS) OF ($43,743). INCLUDES REACQUIRED COMMON STOCK OF $78,349. INCLUDES AMOUNT FOR SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF $330,000. INCLUDES AMOUNT FOR SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF $21,666 AND PREFERRED STOCK DIVIDENDS OF SUBSIDIARIES OF $8,516. INCLUDES MINORITY INTEREST NET (INCOME)/LOSS OF ($1,457) AND AN AFTER-TAX CHARGE FOR AN EXTRAORDINARY ITEM OF $25,755 ($.20 PER SHARE).
EX-27 8 JCP&L FDS 27B
UT 0000053456 JERSEY CENTRAL POWER & LIGHT COMPANY 1,000 US DOLLARS 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1 PER-BOOK 2,719,940 500,320 471,744 996,787 0 4,688,791 153,713 510,769 942,714 1,607,196 211,500 37,741 1,173,472 47,500 0 24,993 12 2,500 0 87,929 1,495,948 4,688,791 1,598,853 119,099 1,218,704 1,337,803 261,050 4,447 265,497 80,789 184,708 7,633 177,075 110,000 87,545 343,210 0 0 INCLUDES AMOUNT FOR COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF $125,000. INCLUDES AMOUNT FOR COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF $8,025. REPRESENTS COMMON STOCK DIVIDENDS PAID TO PARENT CORPORATION.
EX-27 9 MET-ED FDS 27C
UT 0000065350 METROPOLITAN EDISON COMPANY 1,000 US DOLLARS 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1 PER-BOOK 1,300,492 197,981 205,833 2,301,300 0 4,005,606 66,273 370,200 252,796 689,269 100,000 12,056 576,903 76,200 0 0 24 0 30 27,030 2,524,094 4,005,606 689,829 32,115 564,647 596,762 93,067 (8,734) 84,333 44,599 32,929 362 32,567 60,000 42,480 105,401 0 0 INCLUDES ACCUMULATED OTHER COMPREHENSIVE INCOME OF $11,595. REPRESENTS COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES. INCLUDES AMOUNT FOR COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF $6,750. INCLUDES AN AFTER-TAX CHARGE FOR AN EXTRAORDINARY ITEM OF $6,805. REPRESENTS COMMON STOCK DIVIDENDS PAID TO PARENT CORPORATION.
EX-27 10 PENELEC FDS 27D
UT 0000077227 PENNSYLVANIA ELECTRIC COMPANY 1,000 US DOLLARS 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1 PER-BOOK 1,673,268 80,824 238,147 2,510,766 0 4,503,005 105,812 285,486 385,635 776,933 105,000 16,681 626,434 79,600 0 0 50,012 0 2,005 14,269 2,832,071 4,503,005 773,364 24,007 653,179 677,186 96,178 (7,799) 88,379 47,843 21,586 521 21,065 35,000 48,375 142,514 0 0 INCLUDES ACCUMULATED OTHER COMPREHENSIVE INCOME OF $5,862. REPRESENTS COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES. INCLUDES AMOUNT FOR COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF $6,891. INCLUDES AN AFTER-TAX CHARGE FOR AN EXTRAORDINARY ITEM OF $18,950. REPRESENTS COMMON STOCK DIVIDENDS PAID TO PARENT CORPORATION.
-----END PRIVACY-ENHANCED MESSAGE-----