10-Q 1 gpu_10q2qtr-0801.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 -------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 For the transition period from to ----------------- -------------- Commission Registrant, State of Incorporation, I.R.S. Employer File Number Address and Telephone Number Identification No. ----------- ----------------------------------- ------------------ 1-6047 GPU, Inc. 13-5516989 (a Pennsylvania corporation) 300 Madison Avenue Morristown, New Jersey 07962-1911 Telephone (973) 401-8200 1-3141 Jersey Central Power & Light Company 21-0485010 (a New Jersey corporation) 2800 Pottsville Pike Reading, Pennsylvania 19640-0001 Telephone (610) 929-3601 1-446 Metropolitan Edison Company 23-0870160 (a Pennsylvania corporation) 2800 Pottsville Pike Reading, Pennsylvania 19640-0001 Telephone (610) 929-3601 1-3522 Pennsylvania Electric Company 25-0718085 (a Pennsylvania corporation) 2800 Pottsville Pike Reading, Pennsylvania 19640-0001 Telephone (610) 929-3601 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- The number of shares outstanding of each of the registrant's classes of voting stock, as of July 31, 2001, was as follows: Shares Registrant Title Outstanding ----------------------------------- ----------------------------- ----------- GPU, Inc. Common Stock, $2.50 par value 119,539,559 Jersey Central Power & Light Company Common Stock, $10 par value 15,371,270 Metropolitan Edison Company Common Stock, no par value 859,500 Pennsylvania Electric Company Common Stock, $20 par value 5,290,596 GPU, Inc. and Subsidiary Companies Quarterly Report on Form 10-Q June 30, 2001 Table of Contents ----------------- Page PART I - Financial Information ---- Combined Management's Discussion and Analysis of Financial Condition and Results of Operations 1 Consolidated Financial Statements: GPU, Inc. --------- Balance Sheets 26 Statements of Income 28 Statements of Cash Flows 29 Jersey Central Power & Light Company ------------------------------------ Balance Sheets 30 Statements of Income 32 Statements of Cash Flows 33 Metropolitan Edison Company --------------------------- Balance Sheets 34 Statements of Income 36 Statements of Cash Flows 37 Pennsylvania Electric Company ----------------------------- Balance Sheets 38 Statements of Income 40 Statements of Cash Flows 41 Combined Notes to Consolidated Financial Statements 42 PART II - Other Information 67 Signatures 68 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 2000 Annual Report on Form 10-K, filed by the individual registrants with the Securities and Exchange Commission and should be read in conjunction therewith. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, GPU, Inc., Jersey Central Power & Light Company, Metropolitan Edison Company and Pennsylvania Electric Company (the GPU registrants) are hereby filing cautionary statements identifying important factors that could cause their actual results to differ materially from those projected in forward-looking statements (as that term is defined in the Private Securities Litigation Reform Act of 1995) made by or on behalf of the GPU registrants which are made in this Form 10-Q. Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions or future events or performance (often, but not always, through the use of words or phrases such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "projects," "will likely," "result," "will continue" or similar expressions) are not statements of historical facts and may be forward-looking. Forward-looking statements involve estimates, assumptions and uncertainties and are qualified in their entirety by reference to, and are accompanied by, the following important factors, which are difficult to predict, contain uncertainties, are beyond the control of the GPU registrants and may cause actual results to differ materially from those contained in those forward-looking statements: - the consummation of the proposed merger of GPU, Inc. with FirstEnergy Corp.; - the effects of regulatory decisions, including any conditions imposed relating to the proposed merger with FirstEnergy Corp.; - 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; - energy prices and availability; and - uncertainties involved with foreign operations including political risks and foreign currency fluctuations. Any forward-looking statement speaks only as of the date on which that statement is made, and the GPU registrants undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which that statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all of those factors, nor can it assess the impact of each of those factors on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. 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). These electric utilities are conducting business under the name GPU Energy and considered together are referred to as the "GPU Energy companies." GPU Capital, Inc. and GPU Electric, Inc. and their subsidiaries own, operate and fund the acquisition of electric distribution and gas transmission systems in foreign countries, and are referred to as "GPU Electric." GPU Electric's foreign utility companies include Midlands Electricity plc (conducting business as GPU Power UK); GPU Empresa Distribuidora Electrica Regional S.A. (Emdersa); and GPU GasNet. GPU Power, Inc. and its subsidiaries (GPU Power) develop, own and operate generation facilities in foreign countries. Other subsidiaries of GPU, Inc. include GPU Advanced Resources, Inc. (GPU AR), which sells electric energy at retail; GPU Telcom Services, Inc. (GPU Telcom), which is engaged in telecommunications-related businesses; MYR Group Inc. (MYR), which is a utility infrastructure construction services company; GPU Service, Inc. (GPUS), which provides legal, accounting, financial and other services to the GPU companies; GPU Diversified Holdings LLC, which makes investments in energy-related businesses; and GPU Nuclear, Inc. (GPUN). All of these companies considered together are referred to as "GPU." GPU's RESULTS OF OPERATIONS --------------------------- EARNINGS PER SHARE CONTRIBUTION: -------------------------------- (on a diluted basis) Three Months Ended Six Months Ended June 30, June 30, ------------------------- ------------------------ 2001 2000 Change 2001 2000 Change ------ ------ ------ ------ ------ ------ Operations: GPU Energy companies $ 0.56 $ 0.46 $ 0.10 $ 1.27 $ 1.25 $ 0.02 GPU Electric 0.06 0.27 (0.21) 0.16 0.56 (0.40) GPU Power/GPUI (1) 0.02 - 0.02 0.04 0.03 0.01 GPU AR - - - 0.01 0.01 - GPU Telcom - (0.01) 0.01 - (0.01) 0.01 MYR 0.03 0.01 0.02 0.04 0.01 0.03 GPU, Inc. (Corporate) (0.05) (0.04) (0.01) (0.15) (0.08) (0.07) ----- ----- ----- ----- ----- ----- Total operations 0.62 0.69 (0.07) 1.37 1.77 (0.40) Non-recurring items: GPU Energy companies - - - (0.17) - (0.17) GPU Electric 0.10 (2.43) 2.53 0.10 (2.43) 2.53 ----- ----- ----- ----- ----- ----- Total $ 0.72 $(1.74) $ 2.46 $ 1.30 $(0.66) $ 1.96 ===== ===== ===== ===== ===== ===== (1) The 2000 results include GPU International, Inc. (GPUI), which was sold in December 2000. GPU's earnings before non-recurring items for the second quarter 2001 were $75.1 million, or $0.62 per share, compared with earnings before non-recurring items of $84.2 million, or $0.69 per share, for the same period in 2000. The lower 2001 second quarter earnings, on this basis, was primarily 1 GPU, Inc. and Subsidiary Companies due to a reduction of GPU Electric earnings resulting from: lower income earned by GPU Power UK's independent power projects; the absence from 2001 earnings of GPU PowerNet income due to its sale in June 2000; the absence from 2001 earnings of a second quarter 2000 gain related to gas supply contracts in the UK; and the absence from 2001 earnings of a 2000 tax benefit affecting GPU GasNet. Also contributing to the lower earnings was the Pennsylvania energy supply loss reflecting the fact that Met-Ed and Penelec had to purchase electricity under their provider of last resort (PLR) obligations at prices above the retail rate caps at which they could resell it, as well as the effect of increasing numbers of shopping customers returning from alternate generation suppliers in Pennsylvania. On June 14, 2001, the Pennsylvania Public Utility Commission (PaPUC) issued an order that allows Met-Ed and Penelec to defer, for future rate recovery from customers, energy costs in excess of their fixed generation tariff rates starting June 1, 2001. For additional information on the PaPUC's order, see the Provider of Last Resort section of GPU Energy Supply Plan. Partially offsetting the impact of these decreases was a gain recorded on the sale of marketable securities by GPU, Inc. in the second quarter 2001. After taking into account the 2001 and 2000 non-recurring items, GPU recorded earnings of $86.7 million, or $0.72 per share, in the second quarter 2001, compared with a net loss of $210.8 million, or $1.74 per share, for the same quarter in 2000. The second quarter 2001 earnings include a non-recurring gain of $11.6 million after-tax, or $0.10 per share, on the sale of GPU Power UK's interest in the Humber generating station. The comparable 2000 earnings include a non-recurring loss of $295 million after-tax, or $2.43 per share, on the sale of GPU PowerNet (during the fourth quarter 2000, GPU revised its estimate of tax benefits associated with the GPU PowerNet sale, which ultimately reduced the after-tax loss to $276.6 million, or $2.28 per share). For the six months ended June 30, 2001, earnings before non-recurring items were $164.1 million, or $1.37 per share, against $215.2 million, or $1.77 per share, for the first half of 2000. The same factors affecting the comparable quarterly results also affected the year to date comparison. Also contributing to the decrease for the first half of 2001 was lower earnings at GPU Power UK due to the reset of electricity delivery rates that took effect in April 2000, partially offset by higher revenues at GPU Energy due to the weather in the first quarter 2001. After taking into account the 2001 and 2000 non-recurring items, GPU recorded earnings of $155.6 million, or $1.30 per share, for the first six months of 2001, compared with a net loss of $79.8 million, or $0.66 per share, for the same period in 2000. In addition to the second quarter non-recurring items described above, the first-half 2001 earnings include a non-recurring charge of $10.7 million after-tax, or $0.09 per share, for costs related to Voluntary Enhanced Retirement Programs (VERP) offered to certain bargaining unit employees in Pennsylvania; and a non-recurring charge of $9.4 million after-tax, or $0.08 per share, for costs related to the termination of a wholesale energy contract with Allegheny Electric Cooperative (AEC). Not including the GPU PowerNet loss, there were no other first-half 2000 non-recurring items. 2 GPU, Inc. and Subsidiary Companies OPERATING REVENUES: ------------------- Operating revenues for the second quarter 2001 increased $67.5 million to $1.3 billion, as compared to the second quarter 2000. For the six months ended June 30, 2001, operating revenues increased $191.5 million to $2.6 billion, as compared to the same period last year. The components of the changes are as follows: 2001 vs. 2000 (in millions) ---------------------------------------- Three Months Ended Six Months Ended June 30, June 30, ----------------- ---------------- GPU Energy companies: Kilowatt-hour (KWH) revenues $ 56.2 $116.8 Energy and restructuring-related Revenues (NJ) 40.2 38.7 Competitive transition charge (CTC) revenues (PA) 1.1 2.0 Other revenues (8.0) (7.2) ----- ----- Total GPU Energy companies 89.5 150.3 GPU Electric (62.5) (123.6) GPU Power/GPUI (23.6) (47.1) GPU AR (9.6) (20.7) GPU Telcom 2.9 9.0 MYR 70.8 223.6 ----- ----- Total increase $ 67.5 $191.5 ===== ===== GPU Energy companies Kilowatt-hour revenues ---------------------- The increase for both the periods ended June 30, 2001 was primarily due to the return of numerous shopping customers in Pennsylvania from alternate generation suppliers during the first half of 2001, and higher weather-related sales due to colder winter temperatures this year compared to the previous winter. Energy and restructuring-related revenues (JCP&L only) ------------------------------------------------------ Changes in energy and restructuring-related revenues do not affect earnings as they are offset by corresponding changes in expense. The increase for both the periods ended June 30, 2001 was partly due to increased sales to other utilities. Competitive transition charge (CTC) revenues (Met-Ed and Penelec only) ---------------------------------------------------------------------- CTC revenues represent Pennsylvania stranded cost recoveries permitted by the PaPUC in accordance with Met-Ed and Penelec's final Restructuring Orders effective January 1, 1999. Changes in CTC revenues generally do not affect earnings as they are offset by corresponding changes in expense. Other revenues -------------- The decrease for both the periods ended June 30, 2001 was primarily due to lower transmission revenues as a result of fewer customers shopping for their energy supply. 3 GPU, Inc. and Subsidiary Companies GPU Electric The decrease for both the periods ended June 30, 2001 was primarily due to the reset of electricity delivery rates at GPU Power UK that took effect in April 2000, and the absence of GPU PowerNet revenues in 2001 due to its sale in June 2000. GPU Power/GPUI The decrease for both the periods ended June 30, 2001 was primarily due to the absence of GPUI revenues in 2001 due to its sale in December 2000. GPU AR The decrease for both the periods ended June 30, 2001 was due to GPU AR having fewer shopping customers under contract to supply electricity as a result of significantly higher wholesale electricity prices, as compared to the same periods last year. The higher wholesale electricity prices have essentially caused the return of the majority of shopping customers in Pennsylvania to their respective utility companies' fixed generation tariff rates. GPU Telcom The increase for both the periods ended June 30, 2001 was primarily due to more fiber optics miles constructed for private build customers in 2001, as compared to the same periods last year. MYR The increase for both the periods ended June 30, 2001 was due to the inclusion of revenues from MYR following its acquisition by GPU, Inc. in the second quarter 2000. OPERATING INCOME: ----------------- Operating income for the second quarter 2001 increased $362.4 million to $220.4 million, as compared to the second quarter 2000. For the six months ended June 30, 2001, operating income increased $238.6 million to $436.9 million, as compared to the same period last year. The components of the changes are as follows: 2001 vs. 2000 (in millions) ---------------------------------------- Three Months Ended Six Months Ended June 30, June 30, ----------------- ---------------- GPU Energy companies $ 20.0 $ (44.8) GPU Electric 341.0 279.3 GPU Power/GPUI 0.4 1.3 GPU AR 1.6 (0.6) GPU Telcom 1.1 3.1 MYR 3.6 6.0 GPU, Inc. (5.3) (5.7) ------ ------ Total increase $ 362.4 $ 238.6 ====== ====== 4 GPU, Inc. and Subsidiary Companies GPU Energy companies The increase for the three month period ended June 30, 2001 was primarily due to lower operation and maintenance (O&M) expenses (approximately $60 million) resulting principally from the sale of the Oyster Creek Generating Station (Oyster Creek) in August 2000; and higher transmission and distribution (T&D) revenues. Partially offsetting these was: higher energy costs (approximately $78 million) reflecting the fact that Met-Ed and Penelec had to purchase electricity at prices above the retail rate caps at which they could resell it, which impact was made worse because of the increasing number of shopping customers returning from alternate generation suppliers in the first half of 2001; and higher amortization expenses (approximately $14 million) due to increased costs associated with decommissioning the Saxton Nuclear Experimental facility, and increased Oyster Creek amortization due to a New Jersey Board of Public Utilities (NJBPU) order related to the plants sale. Starting June 1, 2001, however, as a result of the PaPUC's June 2001 order, Met-Ed and Penelec began to defer, for future rate recovery from customers, their energy costs in excess of their fixed generation tariff rates (approximately $44 million through June 30). The decrease for the six month period ended June 30, 2000 reflects a non-recurring charge of $18.3 million pre-tax, for the costs of a VERP offered to certain bargaining unit employees in Pennsylvania; and a non-recurring charge of $16 million pre-tax, for costs related to the termination of a wholesale energy contract with AEC. In addition, the same factors affecting the comparable quarterly results also affected the year to date comparison. These factors include higher energy costs (approximately $159 million) and higher amortization expense (approximately $24 million), partially offset by lower O&M expenses (approximately $100 million, excluding the VERP) and higher sales due to this year's winter weather. GPU Electric The increase for both the periods ended June 30, 2001 was primarily due to the absence of a pre-tax loss of $372 million recorded in the second quarter 2000, on the sale of GPU PowerNet. Partially offsetting this was: lower revenues as a result of the reset of electricity delivery rates at GPU Power UK in April 2000; the absence in 2001 of a second quarter 2000 gain of $15.9 million related to gas supply contracts in the UK; and the absence in 2001 of GPU PowerNet operating income due to its sale in June 2000. MYR The increase for both the periods ended June 30, 2001 was due to the inclusion of MYR following its acquisition by GPU, Inc. in the second quarter 2000. GPU, Inc. The lower other income for both the periods ended June 30, 2001 was primarily due to the recording of an increase in GPU's estimated liability with respect to the Dover Gas Site (approximately $2.4 million), and an increase in GPU/FirstEnergy merger-related costs (approximately $1 million). 5 GPU, Inc. and Subsidiary Companies OTHER INCOME AND DEDUCTIONS: ---------------------------- Other income and deductions for the second quarter 2001 increased $20.1 million to $53.5 million, as compared to the second quarter 2000. For the six months ended June 30, 2001, other income and deductions increased $20.3 million to $76.8 million, as compared to the same period last year. The components of the changes are as follows: 2001 vs. 2000 (in millions) ---------------------------------------- Three Months Ended Six Months Ended June 30, June 30, ----------------- ---------------- GPU Energy companies $ 11.0 $ 18.3 GPU Electric (1.5) (6.7) GPU Power/GPUI 1.6 (0.9) GPU AR - - GPU Telcom (1.5) (2.9) MYR 0.5 0.4 GPU, Inc. 10.0 12.1 ----- ----- Total increase $ 20.1 $ 20.3 ===== ===== GPU Energy companies The increase for both the periods ended June 30, 2001 was primarily due to higher CTC interest income of approximately $10 million; and the absence in 2001 of the effect of discounting a long-term receivable due from AmerGen Energy Company LLC (AmerGen) related to Oyster Creek outage costs, which had the effect of reducing 2000 earnings by $8.8 million pre-tax. Partially offsetting these was lower interest income of approximately $4 million. GPU Electric The decrease for both the periods ended June 30, 2001 was primarily due to lower income from GPU Power UK's independent power projects (approximately $22 million). Largely offsetting these was a non-recurring gain of $17.8 million pre-tax, on the sale of GPU Power UK's interest in the Humber generating station. GPU, Inc. The increase for the three and six months ended June 30, 2001 was due primarily to a gain of $10.7 million pre-tax, on the sale of certain marketable securities. INTEREST CHARGES AND PREFERRED DIVIDENDS: ----------------------------------------- Interest charges and preferred dividends for the second quarter 2001 decreased $18.3 million to $123.5 million, as compared to the second quarter 2000. For the six months ended June 30, 2001, interest charges and preferred dividends decreased $40.3 million to $244.5 million, as compared to the same period last year. The components of the changes are as follows: 6 GPU, Inc. and Subsidiary Companies 2001 vs. 2000 (in millions) ---------------------------------------- Three Months Ended Six Months Ended June 30, June 30, ----------------- ---------------- GPU Energy companies $ 5.3 $ 6.2 GPU Electric (28.7) (57.4) GPU Power/GPUI (0.2) (0.5) GPU AR - - GPU Telcom - - MYR (2.2) (1.9) GPU, Inc. 7.5 13.3 ----- ----- Total decrease $(18.3) $(40.3) ===== ===== GPU Energy companies The increase for both the periods ended June 30, 2001 was primarily due to interest on the issuance of $150 million of senior notes in May 2001 by JCP&L, and higher average short-term debt levels. GPU Electric The decrease for both the periods ended June 30, 2001 was primarily due to lower debt levels resulting primarily from the sale of GPU PowerNet in June 2000. Also contributing to the decrease was lower interest rates at GPU Capital, Inc. GPU, Inc. The increase for both the periods ended June 30, 2001 was primarily due to interest on the issuance of $300 million of debentures in December 2000. JCP&L's RESULTS OF OPERATIONS ----------------------------- JCP&L's earnings for the second quarter 2001 were $44.7 million, compared to second quarter 2000 earnings of $42.8 million. The increase was primarily due to lower O&M expenses and the absence in 2001 of the effect of discounting a long-term receivable due from AmerGen related to Oyster Creek outage costs. Partially offsetting these was higher amortization expenses, and increased financing costs. For the six months ended June 30, 2001, JCP&L's earnings were $94.7 million, compared to $85.9 million for the same period in 2000. The same factors affecting the comparable quarterly results also affected the year to date comparison. Also contributing to the increase for the first half of 2001 was higher weather-related sales due to colder winter temperatures this year compared to the previous winter. OPERATING REVENUES: ------------------- Operating revenues for the second quarter 2001 increased $30.9 million to $521.1 million, as compared to the second quarter 2000. For the six months ended June 30, 2001, operating revenues increased $39.8 million to $982.7 million, compared to the same period last year. The components of the changes are as follows: 7 GPU, Inc. and Subsidiary Companies 2001 vs. 2000 (in millions) ---------------------------------------- Three Months Ended Six Months Ended June 30, June 30, ----------------- ---------------- KWH revenues $(1.9) $ 6.2 Energy and restructuring-related revenues 40.2 38.7 Other revenues (7.4) (5.1) ---- ---- Increase in revenues $30.9 $39.8 ==== ==== KWH revenues ------------ The increase for the six months ended June 30, 2001 was primarily due to higher demand for electricity resulting from colder weather during the winter of 2001 compared to the previous winter. Energy and restructuring-related revenues ------------------------------------------ Changes in energy and restructuring-related revenues do not affect earnings as they are offset by corresponding changes in expense. The increase for both the periods ended June 30, 2001 was partly due to increased sales to other utilities. Other revenues -------------- The decrease for both the periods ended June 30, 2001 was primarily due to a decrease in building rental revenues of approximately $4 million, and decreased transmission revenues as a result of fewer customers shopping for their energy supply. OPERATING INCOME: ----------------- Operating income for the second quarter 2001 decreased $1.1 million to $98.4 million, as compared to the second quarter 2000. The decrease was primarily due to higher amortization expenses of approximately $6 million as a result of increased costs associated with decommissioning the Saxton Nuclear Experimental facility and increased Oyster Creek amortization due to a NJBPU order related to the plants sale. Also contributing to the decrease was higher energy costs due to increased demand for electricity and the company's need to purchase more electricity due to the sale of Oyster Creek. Partially offsetting these was lower O&M expenses of approximately $43 million as a result of the sale of Oyster Creek in August 2000 and lower pension costs. For the six months ended June 30, 2001, operating income increased $6.6 million to $202.1 million, versus the same period last year. The increase was primarily due to increased KWH revenues, as discussed above; and lower O&M expenses of approximately $76 million as a result of the sale of Oyster Creek in August 2000. Partially offsetting these was higher amortization expenses of approximately $12 million, and higher energy costs due to increased demand for electricity and the need to purchase more electricity as a result of the sale of Oyster Creek. OTHER INCOME AND DEDUCTIONS: ---------------------------- Other income and deductions for the second quarter 2001 increased $11.5 million to $10.3 million, as compared to the second quarter 2000. For the six months ended June 30, 2001, other income and deductions increased $13.2 8 GPU, Inc. and Subsidiary Companies million to $17.6 million, versus the same period last year. The change in both periods was primarily due to the absence in 2001 of the effect of discounting a long-term receivable due from AmerGen related to Oyster Creek outage costs, which had the effect of reducing 2000 earnings by $8.8 million pre-tax; and higher interest income of approximately $2 million. INTEREST CHARGES AND PREFERRED DIVIDENDS: ----------------------------------------- Interest charges and preferred dividends for the second quarter 2001 increased $3.7 million to $30.4 million, as compared to the second quarter 2000. For the six months ended June 30, 2001, interest charges and preferred dividends increased $3.2 million to $58.1 million, versus the same period last year. The increase was primarily due to interest on the issuance of $150 million of senior notes in May 2001, and higher average short-term debt levels. Partially offsetting these was lower dividends due to the redemption of $16.7 million stated value cumulative preferred stock pursuant to mandatory and optional sinking fund provisions in 2000. MET-ED's RESULTS OF OPERATIONS ------------------------------ Met-Ed's earnings for the second quarter 2001 were $15.9 million, compared to second quarter 2000 earnings of $8.7 million. The increase in earnings was primarily due to the PaPUC's June 2001 order that allows Met-Ed to defer, for future rate recovery from customers, energy costs in excess of its fixed generation tariff rates starting June 1, 2001. As a result, in June 2001, Met-Ed was able to defer approximately $22 million pre-tax of energy costs that it otherwise would have had to expense. Partially offsetting this was higher energy costs primarily due to the fact that Met-Ed had to purchase electricity at prices above the retail rate caps at which it could resell it, and the effect of increasing numbers of shopping customers returning from alternate generation suppliers. For the six months ended June 30, 2001, Met-Ed's earnings were $31.9 million, compared to $35.2 million for the same period in 2000. Excluding a non-recurring charge of $5.4 million after-tax for costs related to a VERP offered to certain bargaining unit employees, earnings for the first half of 2001 would have been $37.3 million. The same factors affecting the comparable quarterly results also affected the year to date comparison. The higher energy costs had a greater impact on the first half of 2001 earnings than it did for the second quarter since Met-Ed did not start deferring certain of its under-recovered energy costs until June 1, 2001. OPERATING REVENUES: ------------------- Operating revenues for the second quarter 2001 increased $24.7 million to $222.5 million, as compared to the second quarter 2000. For the six months ended June 30, 2001, operating revenues increased $42.7 million to $443.6 million, compared to the same period last year. The components of the changes are as follows: 9 GPU, Inc. and Subsidiary Companies 2001 vs. 2000 (in millions) ---------------------------------------- Three Months Ended Six Months Ended June 30, June 30, ----------------- ---------------- KWH revenues $28.6 $47.1 CTC revenues (0.3) 0.8 Other revenues (3.6) (5.2) ---- ---- Increase in revenues $24.7 $42.7 ==== ==== KWH revenues ------------ The increase for both periods was primarily due to the return of numerous shopping customers from alternate generation suppliers in 2001, partially offset by a decrease of sales to other utilities. Other revenues -------------- The decrease for both periods was primarily due to lower transmission revenues as a result of fewer customers shopping for their energy supply. OPERATING INCOME: ----------------- Operating income for the second quarter 2001 increased $12.6 million to $31.8 million, as compared to the second quarter 2000. The increase was primarily due to lower O&M expenses (approximately $8 million) resulting primarily from lower pension costs; and higher T&D revenues. Partially offsetting these was: higher energy costs (approximately $38 million) reflecting the fact that Met-Ed had to purchase electricity at prices above the retail rate caps at which it could resell it, which impact was made worse because of the increasing number of shopping customers returning from alternate generation suppliers in the first half of 2001. Starting June 1, 2001, however, Met-Ed began to defer, for future rate recovery from customers, its energy cost in excess of its fixed generation tariff rates (approximately $22 million through June 30). For the six months ended June 30, 2001, operating income decreased $11.9 million to $62.6 million, as compared to the same period last year. The decrease for the first half of 2001 reflects a non-recurring charge to other O&M of $9.2 million pre-tax, for costs related to the VERP. In addition, the same factors affecting the comparable quarterly results also affected the year to date comparison. These factors include higher energy costs (approximately $71 million), partially offset by lower O&M expense (approximately $9 million, excluding the VERP) and increased KWH revenues, as discussed above. OTHER INCOME AND DEDUCTIONS: ---------------------------- Other income and deductions for the second quarter 2001 increased $0.9 million to $9.2 million, as compared to the second quarter 2000. For the six months ended June 30, 2001, other income and deductions increased $6.3 million to $17.4 million, versus the same period last year. The increase in the six-month period was primarily due to higher CTC interest income of approximately $10 million; partially offset by lower interest income of approximately $4 million. 10 GPU, Inc. and Subsidiary Companies PENELEC's RESULTS OF OPERATIONS ------------------------------- Penelec's earnings for the second quarter 2001 were $7.2 million, compared to second quarter 2000 earnings of $4.5 million. The increase in earnings was primarily due to the PaPUC's June 2001 order that allows Penelec to defer, for future rate recovery from customers, energy costs in excess of its fixed generation tariff rates starting June 1, 2001. As a result, in June 2001, Penelec was able to defer approximately $22 million pre-tax of energy costs that it otherwise would have had to expense. Partially offsetting this was higher energy costs primarily due to the fact that Penelec had to purchase electricity at prices above the retail rate caps at which it could resell it, and the effect of increasing numbers of shopping customers returning from alternate generation suppliers. For the six months ended June 30, 2001, Penelec's earnings were $5.1 million, compared to $31.5 million for the same period in 2000. Excluding a non-recurring charge of $9.4 million after-tax for costs related to the termination of a wholesale energy contract with AEC, and a non-recurring charge of $5.3 million after-tax for costs related to a VERP offered to certain bargaining unit employees, earnings for the first half of 2001 would have been $19.8 million. The same factors affecting the comparable quarterly results also affected the year to date comparison on this basis. The higher energy costs had a greater impact on the first half of 2001 earnings than it did for the second quarter since Penelec did not start deferring certain of its under-recovered energy costs until June 1, 2001. OPERATING REVENUES: ------------------- Operating revenues for the second quarter 2001 increased $23.8 million to $230.6 million, as compared to the second quarter 2000. For the six months ended June 30, 2001, operating revenues increased $47.5 million to $474.4 million, compared to the same period last year. The components of the changes are as follows: 2001 vs. 2000 (in millions) ---------------------------------------- Three Months Ended Six Months Ended June 30, June 30, ----------------- ---------------- KWH revenues $22.1 $46.0 CTC revenues 1.4 1.2 Other revenues 0.3 0.3 ---- ---- Increase in revenues $23.8 $47.5 ==== ==== KWH revenues ------------ The increase in KWH revenues was primarily due to the return of numerous shopping customers from alternate generation suppliers during the first half of 2001, partially offset by a decrease of sales to other utilities. OPERATING INCOME: ----------------- Operating income for the second quarter 2001 increased $8.4 million to $23.1 million, as compared to the second quarter 2000. The increase was primarily due to lower O&M expenses (approximately $7 million) resulting primarily from lower pension costs; and higher T&D revenues. Partially offsetting these was: higher energy costs (approximately $40 million) 11 GPU, Inc. and Subsidiary Companies reflecting the fact that Penelec had to purchase electricity at prices above the retail rate caps at which it could resell it, which impact was made worse because of the increasing number of shopping customers returning from alternate generation suppliers in the first half of 2001. Starting June 1, 2001, however, Penelec began to defer, for future rate recovery from customers, its energy cost in excess of its fixed generation tariff rates (approximately $22 million through June 30). For the six months ended June 30, 2001, operating income decreased $39.8 million to $28.5 million, as compared to the same period last year. The decrease for the first half of 2001 reflects a non-recurring charge of $16 million pre-tax, for costs related to the termination of the AEC contract; and a non-recurring charge to other O&M of $9.1 million pre-tax, for costs related to the VERP. In addition, the same factors affecting the comparable quarterly results also affected the year to date comparison. These factors include higher energy costs (approximately $88 million), partially offset by lower O&M expense (approximately $12 million, excluding the VERP) and increased KWH revenues, as discussed above. OTHER INCOME AND DEDUCTIONS: ---------------------------- Other income and deductions for the second quarter 2001 decreased $1.3 million to $2.5 million, as compared to the second quarter 2000. For the six months ended June 30, 2001, other income and deductions decreased $1 million to $3.7 million, versus the same period last year. The decrease in both periods was primarily due to lower interest income. INTEREST CHARGES: ----------------- Interest charges for the second quarter 2001 increased $1.5 million to $12.6 million, as compared to the second quarter 2000. For the six months ended June 30, 2001, interest charges increased $3.9 million to $24.1 million, versus the same period last year. The increase in both periods was primarily due to interest on the issuance of $93 million of senior notes during 2000. PENDING MERGER OF FIRSTENERGY CORP. AND GPU ------------------------------------------- On August 8, 2000, GPU, Inc. entered into an agreement to merge with FirstEnergy, an Ohio corporation, headquartered in Akron, Ohio. Under the merger agreement, FirstEnergy would acquire all of the outstanding shares of GPU's common stock for approximately $4.5 billion in cash and FirstEnergy common stock. The merger has been approved by the Boards of Directors and stockholders of GPU, Inc. and FirstEnergy and is expected to close promptly after all of the conditions to the consummation of the merger (including the receipt of all necessary regulatory approvals, provided that such approvals will not impose terms and conditions that would reasonably be expected to result in a "material adverse effect," as defined in the merger agreement, on the combined company, and there being no "material adverse effect" on either GPU or FirstEnergy since June 30, 2000 or March 31, 2000, respectively), are fulfilled or waived. Relevant factors would include the nature of any order issued by the regulatory authorities, the financial and business conditions of each company, and whether, and the extent by which, any developments relate to general economic conditions. The majority of regulatory approvals 12 GPU, Inc. and Subsidiary Companies required for the merger, including that of the PaPUC, have been received, and the companies are awaiting approval by the NJBPU and the Securities and Exchange Commission (SEC). GPU and FirstEnergy expect to receive the remaining regulatory approvals and to complete the merger during the fall of 2001. There can be no assurance as to the outcome of these matters. INVESTMENTS IN FUCOs AND EWGs ----------------------------- GPU, Inc. has SEC authorization to finance investments in foreign utility companies (FUCOs) and exempt wholesale generators (EWGs) up to an aggregate amount equal to 100% of GPU's average consolidated retained earnings, or approximately $2.4 billion as of June 30, 2001. At June 30, 2001, GPU, Inc. has remaining authorization to finance approximately $536 million of additional investments in FUCOs and EWGs. GPU, Inc.'s investments in FUCOs and EWGs are made through GPU Electric and GPU Power. GPU ELECTRIC ------------ GPU Electric owns electric distribution and gas transmission businesses in England, Australia and Argentina. Through its ownership of GPU Power UK, GPU Electric also has investments in operating generating facilities located in foreign countries totaling 2,939 megawatts (MW) (of which GPU Electric's equity interest represents 882 MW) of capacity. At June 30, 2001, GPU, Inc.'s aggregate investment in GPU Electric was $576 million. GPU, Inc. has also guaranteed up to an additional $1.4 billion of outstanding GPU Electric obligations. GPU POWER --------- GPU Power has ownership interests in four operating generating facilities located in foreign countries totaling 1,229 MW (of which GPU Power's equity interest represents 424 MW) of capacity. At June 30, 2001, GPU, Inc.'s aggregate investment in GPU Power was $144 million. GPU, Inc. has also guaranteed up to an additional $26.6 million of GPU Power obligations. GPU TELCOM ---------- GPU Telcom is a telecommunications infrastructure development and management company and wholesale telecommunications provider with operations primarily in the Mid-Atlantic region of the US. Its customers consist of telecommunications end-use service providers including: interexchange carriers; competitive local exchange carriers; competitive access providers and multiple system operators; commercial and industrial companies (private networks) and governmental agencies; cable television and telephone companies; and internet service providers. At June 30, 2001, GPU, Inc.'s aggregate investment in GPU Telcom was $102 million. In April 2001, GPU, Inc. guaranteed GPU Telcom's 22.5% portion, but not to exceed $50 million, of the obligations to be incurred by America's Fiber Network LLC, a high-speed fiber optics company, under a $180 million syndicated debt facility. 13 GPU, Inc. and Subsidiary Companies MYR GROUP --------- MYR is a utility infrastructure construction services company which provides power line and commercial/industrial electrical construction for electric utilities, telecommunications providers, commercial and industrial facilities and government agencies. MYR also builds cellular towers for the wireless communications market. At June 30, 2001, GPU, Inc.'s aggregate investment in MYR was $244 million. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- The California electricity market was deregulated in 1998. In recent months, certain aspects of that state's restructuring plan have created instability and price volatility in the electricity market, negatively affecting the California electric utilities. These utilities have defaulted on various contractual and financial obligations and have experienced rapid deterioration of their credit quality. Reaction of the financial markets has included a careful review of overall credit exposure to the electric utility industry. As a result of this instability, coupled with the inability to pass on increasing wholesale power costs to its customers, Pacific Gas & Electric Company, California's largest utility, filed for reorganization under Chapter 11 of the US Bankruptcy Code in April 2001. Consequently, the amount of new financing capacity available to GPU, Inc. or its subsidiaries may be less than it had previously been. While the GPU companies do not expect to require significant levels of new borrowings in 2001, certain existing credit facilities are due for renewal or refinancing during 2001. These credit facilities currently include: $326 million available to GPU, Inc. and the GPU Energy companies under a $314 million revolving credit agreement and various committed bank lines of credit; $1 billion under GPU Capital, Inc.'s (GPU Capital) senior revolving credit agreement; $180 million under GPU Australia Holdings, Inc.'s (GPU Australia Holdings) senior revolving credit agreement; and (pound)245 million (US $344 million) under EI UK Holdings, Inc.'s two year term loan agreement. These credit facilities expire at various times through November 2001. Renewal or refinancing of these facilities may require GPU's acceptance of higher pricing and/or more restrictive terms and conditions. If renewal or refinancing of the existing credit facilities is limited or cannot be achieved, GPU will be required to reduce capital spending and other discretionary cash uses, including the amount and timing of future common stock dividends. There can be no assurance as to the outcome of these matters. Capital Expenditures and Investments ------------------------------------ GPU Energy companies The GPU Energy companies' capital spending for the six months ended June 30, 2001 was $132 million (JCP&L $78 million; Met-Ed $25 million; Penelec $29 million), and was used primarily to expand and improve existing transmission and distribution (T&D) facilities and for new customer connections. For 2001, capital expenditures for the GPU Energy companies are estimated to be $371 million (JCP&L $184 million; Met-Ed $83 million; Penelec $97 million; Other $7 million), primarily for ongoing T&D system development. 14 GPU, Inc. and Subsidiary Companies Management estimates that a substantial portion of the GPU Energy companies' 2001 capital spending will be supplied through internally generated funds. GPU Electric GPU Electric's capital spending for the six months ended June 30, 2001 of $79 million was used primarily to make improvements to Emdersa's and GPU Power UK's distribution networks. For 2001, GPU Electric's capital expenditures are estimated to be $200 million, and management expects that a substantial portion of this amount will be supplied through internally generated funds. GPU Telcom GPU Telcom's capital spending for the six months ended June 30, 2001 of $41 million was used primarily to make investments in telecommunications infrastructure and businesses. In 2001, GPU Telcom's capital expenditures are estimated to be $90 million, which management expects will be supplied by capital contributions and internally generated funds. Financing --------- GPU, Inc. GPU has various credit facilities in place, the most significant of which are discussed below. These credit facilities generally provide GPU bank loans at negotiated market rates. GPU, Inc. and the GPU Energy companies currently have available $326 million of short-term borrowing facilities, which include a $314 million revolving credit agreement expiring on October 31, 2001 and various bank lines of credit. GPU, Inc., JCP&L, Met-Ed and Penelec also have commercial paper programs in amounts of up to $100 million, $150 million, $75 million and $100 million, respectively. Because the short-term borrowing facilities backstop the commercial paper programs, the aggregate commercial paper and short-term borrowings outstanding at any one time cannot exceed $326 million. Under its revolving credit agreement, GPU, Inc. is limited to having $100 million of short-term borrowings outstanding at any one time. JCP&L, Met-Ed and Penelec are limited by their charters or SEC authorization to $282 million, $150 million and $150 million, respectively, of short-term debt outstanding at any one time. As of August 3, 2001, the GPU Energy companies had $38 million (all at Met-Ed) of short-term debt outstanding from these facilities. GPU Energy companies JCP&L, Met-Ed and Penelec have regulatory approval to issue senior notes through December 31, 2002 in the amounts of $150 million, $150 million and $157 million, respectively. JCP&L and Met-Ed intend to issue secured senior notes (collateralized by first mortgage bonds (FMBs) issued to the senior note trustee) until such time as more than 80% of the outstanding FMBs are held by the senior note trustee. At that time, the FMBs will be cancelled and the outstanding senior notes will become unsecured obligations. Penelec's senior notes are unsecured. 15 GPU, Inc. and Subsidiary Companies In May 2001, JCP&L issued $150 million of 6.45% five-year fixed rate senior notes. Maturing long-term debt is expected to total $40 million (JCP&L) in 2001, and $130 million (JCP&L $50 million; Met-Ed $30 million; Penelec $50 million) in 2002. Current plans call for each of the GPU Energy companies to issue senior notes during the next three years to fund the redemption of maturing senior securities, refinance outstanding senior securities and finance construction activities. Following their initial issuance of senior notes, the GPU Energy companies would not issue any additional FMBs other than as collateral for the senior notes. The senior note indentures prohibit (subject to certain exceptions) the GPU Energy companies from issuing any debt which is senior to the senior notes. JCP&L's and Met-Ed's bond indentures include provisions that limit the amount of FMBs the companies may issue. JCP&L's and Met-Ed's interest coverage ratios are currently in excess of indenture restrictions. In addition, JCP&L's certificate of incorporation includes provisions that limit the amount of preferred stock it may issue. JCP&L's preferred dividend coverage ratio is currently in excess of this charter restriction. JCP&L has filed a petition with the NJBPU requesting authorization to issue $320 million of transition bonds to securitize the recovery of bondable stranded costs attributable to the projected net investment in Oyster Creek. The petition also requests that the NJBPU order provide for the imposition and collection of a usage-based non-bypassable transition bond charge (TBC) and for the transfer of the bondable transition property relating to the TBC to another entity. JCP&L currently plans to sell transition bonds in the fourth quarter of 2001. At June 30, 2001, JCP&L, Met-Ed and Penelec had retained earnings available to pay common stock dividends of $813 million, $84 million and $39 million, respectively, net of amounts restricted under each company's respective FMB indentures. GPU Electric GPU Capital has entered into a $1 billion 364-day senior revolving credit agreement which expires in November 2001. All of the outstanding obligations under the agreement are guaranteed by GPU, Inc. At June 30, 2001, $1 billion was outstanding under the revolving credit agreement and included in Notes payable on the Consolidated Balance Sheet. GPU GasNet has an A$750 million (US $381 million) debt issuance program jointly arranged by two banks to refinance a portion of GPU GasNet's maturing bank debt. The various agreements under the program facilitate the issuance of GPU GasNet commercial paper and medium term notes. An A$250 million (US $127 million) GPU GasNet revolving credit agreement serves as backstop for the issuance of commercial paper. At June 30, 2001, A$250 million (US $127 million) of commercial paper and A$150 million (US $76 million) of medium term notes were outstanding under this program and included in Long-term debt on the Consolidated Balance Sheet. In addition, GPU GasNet has an A$375 million (US $190 million) senior credit facility. At June 30, 2001, A$211 million (US $107 million) of bank debt was outstanding under this facility and included in Securities due within one year on the Consolidated Balance Sheet. 16 GPU, Inc. and Subsidiary Companies GPU Electric has a $150 million credit facility, which expires in May 2002, to accommodate short-term borrowing needs. Borrowings under this facility are guaranteed by GPU, Inc. At June 30, 2001, $150 million was outstanding under this facility. GPU Australia Holdings has a $180 million senior revolving credit facility, which expires in November 2001. Borrowings under this facility are guaranteed by GPU, Inc. At June 30, 2001, $176 million was outstanding under this facility and included in Notes payable on the Consolidated Balance Sheet. EI UK Holdings, Inc. has a (pound)245 million (US $344 million) credit facility consisting of two tranches ((pound)144 million and (pound)101 million). Borrowings under the (pound)144 million tranche (US $203 million) are guaranteed by GPU, Inc. This credit facility will expire on October 31, 2001. At June 30, 2001, (pound)245 million (US $344 million) was outstanding under this facility and included in Securities due within one year on the Consolidated Balance Sheet. GPU Power UK maintains separate revolving credit facilities with six banks totaling (pound)150 million (US $211 million) for working capital purposes, expiring at various dates through July 2005. At June 30, 2001, (pound)30 million (US $42 million) was outstanding under these facilities and included in Notes payable on the Consolidated Balance Sheet. In addition, GPU Power UK maintains a (pound)75 million (US $105 million) bank facility for working capital purposes. Outstanding borrowings are collateralized by portions of trade accounts receivable. At June 30, 2001, (pound)75 million (US $105 million) was outstanding under this facility and included in Notes payable on the Consolidated Balance Sheet. Maturing long-term debt is expected to total $865 million in 2001, of which $511 million of this amount has already been retired or refinanced in 2001. For 2002, maturing long-term debt is expected to total $457 million. GPU Power Maturing long-term debt is expected to total $7 million in each of 2001 and 2002. Management anticipates meeting these obligations through internally generated funds. MYR Group MYR maintains a $50 million revolving credit facility, which expires in November 2003, of which up to $10 million is available for the issuance of standby letters of credit. GPU, Inc. has guaranteed MYR's borrowings under this facility. As of June 30, 2001, $20 million was outstanding under this facility and included in Notes payable on the Consolidated Balance Sheet. COMPETITIVE ENVIRONMENT AND RATE MATTERS ---------------------------------------- In March 2001, 207 employees (Met-Ed 101 employees; Penelec 106 employees) accepted Voluntary Enhanced Retirement Programs (VERP) offered to certain bargaining unit employees in Pennsylvania. As a result, a pre-tax charge of $18.3 million (Met-Ed $9.2 million; Penelec $9.1 million) has been recorded in 2001 Operating Income for the cost of pension and other postretirement benefits. 17 GPU, Inc. and Subsidiary Companies Recent Regulatory Actions ------------------------- With the transition to a competitive marketplace for generation service in New Jersey and Pennsylvania, certain generation-related costs, which generally would be recoverable in a regulated environment, may no longer be recoverable. These costs are generally referred to as stranded costs. New Jersey Restructuring In March 2001, the NJBPU issued a Final Decision and Order (Final Order) with respect to JCP&L's rate unbundling, stranded cost and restructuring filings, which supersedes a Summary Order issued by the NJBPU in May 1999. The Final Order confirms rate reductions set forth in the Summary Order, which began in August 1999 and will remain in effect at increasing levels through July 2003, and provides for, among other things, deregulation of the costs associated with providing electric generation service. The Final Order confirms the establishment of a non-bypassable societal benefits charge to recover costs associated with, among other things, nuclear plant decommissioning and manufactured gas plant remediation, as well as a non-bypassable market transition charge (MTC). The Final Order provides for the ability to recover stranded costs; however, the NJBPU deferred making a final determination of the net proceeds and stranded costs related to the generating asset divestitures until GPU's request for an Internal Revenue Service (IRS) ruling regarding the treatment of associated federal income tax benefits is acted upon. In addition, JCP&L is permitted to defer for future collection from customers the amounts by which its costs of supplying basic generation service (BGS) to non-shopping customers and costs incurred under nonutility generation (NUG) agreements exceed amounts collected in BGS and MTC rates. As of June 30, 2001, such deferred balance totaled $373 million. The Final Order allows for securitization of the NUG portion of JCP&L's deferred balance so long as conditions of the New Jersey restructuring legislation are met. However, JCP&L must seek NJBPU authorization to securitize that portion of its deferred balance related to above-market NUG costs. There can be no assurance as to the extent, if any, that the NJBPU will permit such securitization. The Final Order also provides for the ability to securitize stranded costs associated with Oyster Creek. JCP&L has filed a petition with the NJBPU requesting authorization to issue $320 million of transition bonds to securitize the recovery of certain of these costs. Pennsylvania Restructuring In 1998, the PaPUC issued amended Restructuring Orders approving Settlement Agreements entered into by Met-Ed and Penelec which, among other things, provide for customer choice of electric generation supplier beginning January 1, 1999 and a one-year (1999) reduction in retail distribution rates for all consumers. The Orders also provide for recovery of a substantial portion of what otherwise would have become stranded costs, subject to Phase II proceedings following the completion of Met-Ed's and Penelec's generating asset divestitures, to make a final determination of the extent of that stranded cost recovery. In 2000, Met-Ed and Penelec submitted Phase II Reports to the PaPUC supporting their actual net divestiture proceeds and providing a reconciliation of stranded costs pursuant to the 1998 Restructuring Orders. 18 GPU, Inc. and Subsidiary Companies In 2000, the PaPUC issued a Phase II Order which, among other things, disallowed a portion of the requested additional stranded costs above those amounts granted in the 1998 Orders. The Phase II Order also deferred a decision on Met-Ed's requested increase in rates, beginning in 2006, for recovery of Met-Ed's generation-related stranded costs. In addition, the Order requires Met-Ed and Penelec to seek an IRS ruling regarding the return of certain unamortized investment tax credits and excess deferred income tax benefits to ratepayers. If the IRS ruling ultimately supports returning these tax benefits to ratepayers, Met-Ed and Penelec would then reduce stranded costs by $40 million plus interest and record a corresponding charge to income. GPU Energy Supply Plan ---------------------- As a result of the NJBPU's and the PaPUC's Restructuring Orders, the GPU Energy companies are required to act as provider of last resort (PLR) by supplying electricity to customers who do not choose an alternate supplier. In 1999 and 2000, the GPU Energy companies completed the sales of substantially all their electric generating stations. As a result, the GPU Energy companies now have to supply electricity to non-shopping customers almost entirely from contracted and open market purchases, as discussed below. (For additional information regarding the increased risks associated with supplying that electricity, see GPU Energy Supply Market Risk section.) Generation Agreements As of June 30, 2001, the GPU Energy companies have 285 MW of generation capacity and related energy remaining to meet customer needs. The GPU Energy companies also have contracts with nonutility generators totaling 1,595 MW (JCP&L 926 MW; Met-Ed 273 MW; Penelec 396 MW) and agreements with other parties to provide varying amounts of capacity through May 31, 2004. These capacity amounts from third parties vary from a monthly high of approximately 4,200 MW in 2002 to 500 MW in May 2004. Based on the exercise of call options, the GPU Energy companies may take the energy associated with up to 150 MW of this capacity through May 2003. The GPU Energy companies have also purchased all of the capacity and energy from their previously owned Three Mile Island Unit 1 (TMI-1) and Oyster Creek (sold by JCP&L) nuclear generating stations through December 31, 2001 and March 31, 2003, respectively. In addition, the GPU Energy companies have the right to 3,970 MW of capacity through May 31, 2002. This 3,970 MW of capacity is associated with generating stations sold in 1999. GPU Energy's remaining capacity and energy needs will be met by short- to intermediate-term commitments (one month to three years). Any residual needs will be purchased from the short-term market (one hour to one month). Payments pursuant to these agreements, which include firm commitments as well as certain assumptions regarding, among other things, call/put arrangements, are estimated to be $839 million for the remainder of 2001, $708 million in 2002, $79 million in 2003, and $5 million in 2004. Pursuant to the mandates of the Public Utility Regulatory Policies Act and state regulatory directives, the GPU Energy companies were required to enter into long-term power purchase agreements with NUGs for the purchase of energy and capacity, which agreements have remaining terms of up to 19 years. The NJBPU Final Order provides JCP&L full recovery of its NUG costs (including above-market NUG costs and certain buyout costs); and the PaPUC Restructuring Orders provide Met-Ed and Penelec full recovery of their above-market NUG costs and certain NUG buyout costs. The GPU Energy companies have recorded, on a present value basis, a total liability of $2.5 billion (JCP&L $1.5 billion; Met-Ed $0.5 billion; Penelec $0.5 billion) on the Consolidated 19 GPU, Inc. and Subsidiary Companies Balance Sheet for above-market NUG costs. These amounts are offset by corresponding regulatory assets. The GPU Energy companies are continuing efforts to reduce the above-market costs of these agreements; however, there can be no assurance as to the extent to which these efforts will be successful. Basic Generation Service ("BGS") Provider JCP&L is required to provide BGS to retail customers who choose to remain with JCP&L as generation customers for a three-year period ending July 31, 2002. Thereafter, BGS is to be bid out, with the details of the bidding process to be the subject of a NJBPU proceeding. On June 29, 2001, the New Jersey electric utilities, including JCP&L, filed a joint proposal seeking NJBPU approval of a competitive bidding process to procure supply for the provision of BGS for the period from August 1, 2002 through July 31, 2003. The NJBPU has established a procedural schedule which provides for a decision in November 2001. Under its Final Order, JCP&L is permitted to defer for future recovery the amount by which its reasonable and prudently incurred costs associated with providing BGS to non-shopping customers exceed amounts currently reflected in its rates for BGS. Provider of Last Resort ("PLR") Under the 1998 PaPUC Restructuring Orders, Met-Ed and Penelec customers have been permitted to shop for their generation supplier since January 1, 1999. The PaPUC approved a competitive bid process designed to assign PLR service to licensed generation suppliers, referred to as Competitive Default Service (CDS), for 20% of Met-Ed's and Penelec's retail customers on June 1, 2000, 40% on June 1, 2001, 60% on June 1, 2002 and 80% on June 1, 2003. Any retail customers assigned to CDS may return to Met-Ed and Penelec as the default PLR. 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's and Penelec's rate cap. In 2000, the absence of acceptable bids required Met-Ed and Penelec to supply 550 megawatts (MW) (Met-Ed 250 MW; Penelec 300 MW) of electric power more than they had planned. In addition, customers requiring approximately 600 MW (Met-Ed 240 MW; Penelec 360 MW) of power returned to Met-Ed and Penelec from their alternate suppliers for the peak Summer months. During that same period, market prices at which Met-Ed and Penelec were required to purchase electricity for their retail supply customers at times substantially exceeded the amounts Met-Ed and Penelec were allowed to charge for that electricity under their capped rates. This situation resulted in GPU's Pennsylvania supply business recording a loss for 2000 of approximately $28 million (Met-Ed $14 million; Penelec $14 million) after-tax, or $0.22 per share. Under the terms of their restructuring settlements, in 2001 Met-Ed and Penelec again sought alternative providers through a CDS bidding process for 40% of their customers; however, the companies did not receive any bids in response to their request. In November 2000, Met-Ed and Penelec filed a petition with the PaPUC seeking permission to defer for future recovery their energy costs in excess of amounts reflected in their capped generation rates. In January 2001, the PaPUC consolidated this petition with the GPU/FirstEnergy merger proceeding for consideration and resolution in accord with the merger procedural schedule. 20 GPU, Inc. and Subsidiary Companies In June 2001, Met-Ed, Penelec and FirstEnergy entered into a Settlement Stipulation with all of the major intervenors in the combined merger and rate relief proceedings, that, in addition to resolving certain issues concerning the PaPUC's approval of the GPU/FirstEnergy merger, also addressed Met-Ed's and Penelec's request for PLR rate relief. On June 20, 2001, the PaPUC entered orders approving the Settlement Stipulation, thus approving the merger and providing Met-Ed and Penelec PLR rate relief, as discussed below. For additional information with respect to the effects PLR rate relief would have on Met-Ed and Penelec upon consummation of the merger, refer to the Settlement Stipulation filed as an exhibit to GPU's Form 8-K on June 15, 2001. As a result of the PaPUC's order approving the Settlement Stipulation, Met-Ed and Penelec are permitted to defer for future recovery the difference between their actual energy costs and those reflected in their capped generation rates, retroactive to January 1, 2001. Predicated upon consummation of the GPU/FirstEnergy merger, these "PLR deferrals" will continue through December 31, 2005. If energy costs incurred by Met-Ed and Penelec during this period are below their respective capped generation rates, the difference would be used to reduce their PLR deferrals. Met-Ed and Penelec have established regulatory assets for the deferral of excess energy costs incurred during the period of January 1, 2001 through June 30, 2001. However, if the GPU/FirstEnergy merger fails to be consummated, the Settlement Stipulation requires the write-off of Met-Ed's and Penelec's PLR deferrals for the period of January 1, 2001 through May 31, 2001. Therefore, pending consummation of the merger, GPU has recorded an offsetting reserve of $29.3 million ($13.1 million for Met-Ed and $16.2 million for Penelec) for the PLR deferrals during the period of January 1, 2001 through May 31, 2001. If the GPU/FirstEnergy merger is consummated, Met-Ed's and Penelec's PLR obligations will be extended through December 31, 2010. Additionally, if the merger is consummated, the companies' respective CTC revenues will be applied first to PLR costs, then to non-NUG stranded costs and lastly to NUG stranded costs through December 31, 2010. Remaining PLR deferrals not recovered as of December 31, 2010 would have to be written off. Last, if the merger is consummated, the Settlement Stipulation requires a revised calculation of NUG stranded costs being recovered under the terms of Met-Ed's and Penelec's 1998 Restructuring Orders, retroactive to January 1, 2001. In addition, subject to consummation of the merger, the Settlement Stipulation allows Penelec to access its NUG Trust to fund all costs payable under its NUG agreements, retroactive to January 1, 2001. If the merger is abandoned, the Settlement Stipulation provides that the PLR proceeding would be reopened by the PaPUC to permit parties to submit testimony and otherwise address prospectively the overall retail rate levels of Met-Ed and Penelec, including whether or at what level PLR deferrals would continue on a prospective basis. This proceeding, however, would not prevent the recovery of Met-Ed's and Penelec's PLR deferrals from June 1, 2001 through the date of the final PaPUC order in the reopened proceeding. Several parties have filed Petitions for Review with the Commonwealth Court of Pennsylvania regarding the PaPUC's orders. The Court has consolidated most of these appeals, and has granted an expedited schedule under which oral argument is scheduled for November 2001. There can be no assurance as to the outcome of these matters. 21 GPU, Inc. and Subsidiary Companies GPU Energy Supply Market Risk ----------------------------- With the divestiture of essentially all their generating plants, the GPU Energy companies are in a net short position (load in excess of supply). Consequently, the GPU Energy companies must manage their purchase and sale of installed capacity and ancillary services to minimize business risk associated with their reliability obligation in the PJM Interconnection, LLC (PJM). Supply/risk management transactions will be made based on the objective of decreasing price uncertainty. The GPU Energy companies will enter into supply/hedging market arrangements for hedging purposes only. Electricity The GPU Energy companies are generally at risk of rising prices for electricity and electricity-related products and services. These risks may differ during some months of the year. To manage these risks, the GPU Energy companies employ a portfolio approach which primarily consists of two party forward purchases and options, but may also include New York Mercantile Exchange (NYMEX) PJM electricity futures and similar instruments, as they become widely available. This portfolio includes transactions of various durations ranging from one hour to greater than one year. The GPU Energy companies' electricity market risks can be price-related, volume-related or cost recovery-related as follows: - Price-related risk refers to the price exposure associated with having to purchase amounts of electricity, installed capacity and ancillary services for load requirements from the PJM interchange spot market. To the extent the GPU Energy companies must rely on the PJM pool to satisfy load requirements, financial exposure exists for the difference between the PJM energy and installed capacity spot market prices and the fixed rates paid by customers. - Volume-related risk refers to the uncertainty associated with the amount of load the GPU Energy companies are required to serve. Deregulation of the electric utility industry has resulted in the ability of customers to purchase electricity from other electric suppliers. This customer shopping, combined with weather changes, which affect customer energy usage, can affect the GPU Energy companies' position. - Cost recovery-related risk refers to the financial risk associated with the potential prudency audits of the NJBPU that are part of JCP&L's deferred energy and capacity cost recovery mechanism (Market Transition Charge). Cost recovery-related risk also refers to the prudency risk associated with future NUG cost recovery under the Restructuring Orders approved by the PaPUC and the NJBPU which require continued mitigation of above-market NUG costs. Natural Gas GPU Energy purchases natural gas for JCP&L's Forked River generating facility. In addition, as part of its NUG cost mitigation program, GPU Energy also manages the natural gas requirements of certain NUGs that produce and sell energy to JCP&L under long-term contracts. Prudently incurred costs associated with natural gas commodity and transportation are included in JCP&L's BGS costs to be recovered through BGS charges and the Market Transition Charge. 22 GPU, Inc. and Subsidiary Companies GPU Energy employs a portfolio approach consisting of two party forward purchases and NYMEX natural gas futures contracts. GPU Energy is exposed to price-related, volume-related and cost recovery-related market risks for its natural gas purchases, similar to those electricity market risks previously described. 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, air and water 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 facilities; modify or replace existing and proposed equipment; or remediate, decommission or clean up waste disposal and other sites currently or formerly used by it, including formerly owned manufactured gas plants (MGP), coal mine refuse piles and generation facilities. In addition, federal and state law provide for payment by responsible parties for damage to natural resources. GPU records environmental liabilities (on an undiscounted basis) where it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated, and adjusts these liabilities as required to reflect changes in circumstances. At June 30, 2001, GPU had liabilities recorded on its Consolidated Balance Sheet for environmental remediation totaling $64 million (JCP&L $53 million; Met-Ed $2 million; Penelec $5 million; other $4 million). For more information, see the Environmental Matters section of Note 1, Commitments and Contingencies, of the Combined Notes to Consolidated Financial Statements. LEGAL MATTERS - TMI-2 ACCIDENT CLAIMS ------------------------------------- As a result of the 1979 Three Mile Island Unit 2 (TMI-2) accident, individual claims for alleged personal injury (including claims for punitive damages), which are material in amount, were asserted against GPU, Inc. and the GPU Energy companies. Approximately 2,100 of such claims were filed in the US District Court for the Middle District of Pennsylvania. Some of the claims also seek recovery for injuries from alleged emissions of radioactivity before and after the accident. In 1996, the District Court granted a motion for summary judgment filed by GPU, Inc. and the GPU Energy companies, and dismissed the ten initial "test cases" which had been selected for a test case trial, as well as all of the remaining 2,100 pending claims. The Court ruled that there was no evidence which created a genuine issue of material fact warranting submission of plaintiffs' claims to a jury. The plaintiffs appealed the District Court's ruling to the Court of Appeals for the Third Circuit. In November 1999, the Third Circuit affirmed the District Court's dismissal of the ten "test cases," but set aside the dismissal of the additional pending claims, remanding them to the District Court for further proceedings. In remanding these claims, the Third Circuit held that the District Court had erred in extending its summary judgment decision to the other plaintiffs and imposing on these plaintiffs the District Court's finding that radiation exposures below 10 rems were too speculative to establish a causal link to cancer. The Court of Appeals stated that the non-test case plaintiffs should be permitted to present their own individual evidence that exposure to radiation from the 23 GPU, Inc. and Subsidiary Companies accident caused their cancers. In June 2000, the US Supreme Court denied petitions for review filed by GPU, Inc., the GPU Energy companies and the plaintiffs. In September 2000, the defendants filed a Motion for Summary Judgment in the District Court. Meanwhile, the plaintiffs took an interlocutory appeal to the Third Circuit seeking review of the District Court's determination that the remaining plaintiffs should be allowed to advance causation theories based only on the admissible evidence of record at the close of discovery in the case. On April 30, 2001, the Third Circuit affirmed the District Court's decision. In July 2001, the defendants renewed their motion for Summary Judgment of the remaining 2,100 claims in the District Court. There can be no assurance as to the outcome of this litigation. 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. 24 (This page intentionally left blank.) 25

The accompanying notes are an integral part of the consolidated financial statements. 38

41 GPU, Inc. and Subsidiary Companies COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GPU, Inc. owns all the outstanding common stock of three domestic electric utilities -- Jersey Central Power & Light Company (JCP&L), Metropolitan Edison Company (Met-Ed) and Pennsylvania Electric Company (Penelec). These electric utilities are conducting business under the name GPU Energy and considered together are referred to as the "GPU Energy companies." GPU Capital, Inc. and GPU Electric, Inc. and their subsidiaries own, operate and fund the acquisition of electric distribution and gas transmission systems in foreign countries, and are referred to as "GPU Electric." GPU Electric's foreign utility companies include Midlands Electricity plc (conducting business as GPU Power UK); GPU Empresa Distribuidora Electrica Regional S.A. (Emdersa); and GPU GasNet. GPU Power, Inc. and its subsidiaries (GPU Power) develop, own and operate generation facilities in foreign countries. Other subsidiaries of GPU, Inc. include GPU Advanced Resources, Inc. (GPU AR), which sells electric energy at retail; GPU Telcom Services, Inc. (GPU Telcom), which is engaged in telecommunications-related businesses; MYR Group Inc. (MYR), which is a utility infrastructure construction services company; GPU Service, Inc. (GPUS), which provides legal, accounting, financial and other services to the GPU companies; GPU Diversified Holdings LLC, which makes investments in energy-related businesses; and GPU Nuclear, Inc. (GPUN). All of these companies considered together are referred to as "GPU." 1. COMMITMENTS AND CONTINGENCIES PENDING MERGER OF FIRSTENERGY CORP. AND GPU ------------------------------------------- In August 2000, GPU, Inc. entered into an agreement to merge with FirstEnergy, an Ohio corporation, headquartered in Akron, Ohio. Under the merger agreement, FirstEnergy would acquire all of the outstanding shares of GPU's common stock for approximately $4.5 billion in cash and FirstEnergy common stock. Under the agreement, GPU stockholders would receive $36.50 for each share of GPU common stock they own, payable in cash or the equivalent of $36.50 per share in FirstEnergy common stock, as long as FirstEnergy's common stock price is between $24.24 and $29.63. Each GPU stockholder would be able to elect the form of consideration, subject to proration so that the aggregate consideration to all GPU stockholders will be 50 percent cash and 50 percent FirstEnergy common stock. Each GPU share converted into FirstEnergy common stock would be exchanged for not less than 1.2318 and not more than 1.5055 shares of FirstEnergy common stock, depending on the average closing price of FirstEnergy stock during the 20-day trading period ending on the sixth trading date prior to the merger closing. The merger has been approved by the Boards of Directors and stockholders of GPU, Inc. and FirstEnergy and is expected to close promptly after all of the conditions to the consummation of the merger (including the receipt of all necessary regulatory approvals, provided that such approvals will not impose terms and conditions that would reasonably be expected to result in a "material adverse effect," as defined in the merger agreement, on the combined company, and there being no "material adverse effect" on either GPU or FirstEnergy since June 30, 2000 or March 31, 2000, respectively), are fulfilled or waived. Relevant factors would include the nature of any order 42 GPU, Inc. and Subsidiary Companies issued by the regulatory authorities, the financial and business conditions of each company, and whether, and the extent to which, any developments relate to general economic conditions. The majority of regulatory approvals required for the merger, including that of the Pennsylvania Public Utility Commission (PaPUC), have been received, and the companies are awaiting approval by the New Jersey Board of Public Utilities (NJBPU) and the Securities and Exchange Commission (SEC). GPU and FirstEnergy expect to receive the remaining regulatory approvals and to complete the merger during the fall of 2001. There can be no assurance as to the outcome of these matters. COMPETITION AND THE CHANGING REGULATORY ENVIRONMENT --------------------------------------------------- Stranded Costs and Regulatory Restructuring Orders: -------------------------------------------------- With the transition to a competitive marketplace for generation service in New Jersey and Pennsylvania, certain generation-related costs, which generally would be recoverable in a regulated environment, may no longer be recoverable. These costs are generally referred to as stranded costs. In March 2001, the NJBPU issued a Final Decision and Order (Final Order) with respect to JCP&L's rate unbundling, stranded cost and restructuring filings, which supersedes a Summary Order issued by the NJBPU in May 1999. The Final Order confirms rate reductions set forth in the Summary Order, which began in August 1999 and will remain in effect at increasing levels through July 2003, and provides for, among other things, deregulation of the costs associated with providing electric generation service. The Final Order confirms the establishment of a non-bypassable societal benefits charge to recover costs associated with, among other things, nuclear plant decommissioning and manufactured gas plant remediation, as well as a non-bypassable market transition charge (MTC). The Final Order provides for the ability to recover stranded costs; however, the NJBPU deferred making a final determination of the net proceeds and stranded costs related to the generating asset divestitures until GPU's request for an Internal Revenue Service (IRS) ruling regarding the treatment of associated federal income tax benefits is acted upon. In addition, JCP&L is permitted to defer for future collection from customers the amounts by which its costs of supplying basic generation service (BGS) to non-shopping customers and costs incurred under nonutility generation (NUG) agreements exceed amounts collected in BGS and MTC rates. As of June 30, 2001, such deferred balance totaled $373 million. The Final Order allows for securitization of the NUG portion of JCP&L's deferred balance so long as conditions of the New Jersey restructuring legislation are met. However, JCP&L must seek NJBPU authorization to securitize that portion of its deferred balance related to above-market NUG costs. There can be no assurance as to the extent, if any, that the NJBPU will permit such securitization. The Final Order also provides for the ability to securitize stranded costs associated with Oyster Creek. JCP&L has filed a petition with the NJBPU requesting authorization to issue $320 million of transition bonds to securitize the recovery of certain of these costs. In 1998, the PaPUC issued amended Restructuring Orders approving Settlement Agreements entered into by Met-Ed and Penelec which, among other things, provide for customer choice of electric generation supplier beginning 43 GPU, Inc. and Subsidiary Companies January 1, 1999 and a one-year (1999) reduction in retail distribution rates for all consumers. The Orders also provide for recovery of a substantial portion of what otherwise would have become stranded costs, subject to Phase II proceedings following the completion of Met-Ed's and Penelec's generating asset divestitures, to make a final determination of the extent of that stranded cost recovery. In 2000, Met-Ed and Penelec submitted Phase II Reports to the PaPUC supporting their actual net divestiture proceeds and providing a reconciliation of stranded costs pursuant to the 1998 Restructuring Orders. In 2000, the PaPUC issued a Phase II Order which, among other things, disallowed a portion of the requested additional stranded costs above those amounts granted in the 1998 Orders. The Phase II Order also deferred a decision on Met-Ed's requested increase in rates, beginning in 2006, for recovery of Met-Ed's generation-related stranded costs. In addition, the Order requires Met-Ed and Penelec to seek an IRS ruling regarding the return of certain unamortized investment tax credits and excess deferred income tax benefits to ratepayers. If the IRS ruling ultimately supports returning these tax benefits to ratepayers, Met-Ed and Penelec would then reduce stranded costs by $40 million plus interest and record a corresponding charge to income. Supply of Electricity: --------------------- As a result of the NJBPU's and the PaPUC's Restructuring Orders, the GPU Energy companies are required to act as provider of last resort (PLR) by supplying electricity to customers who do not choose an alternate supplier. Given that the GPU Energy companies have essentially exited the generation business and will have to supply electricity to non-shopping customers almost entirely from contracted and open market purchases, there will be increased risks associated with supplying that electricity. JCP&L is permitted to defer for future recovery the amount by which its reasonable and prudently incurred costs associated with providing basic generation service to non-shopping customers exceeds amounts currently reflected in its rates for basic generation service. However, under the 1998 Restructuring Orders, Met-Ed and Penelec have been unable to recover energy costs in excess of amounts reflected in their capped generation rates, which are in effect for varying periods. During 2000, market prices at which Met-Ed and Penelec were required to purchase electricity for their retail supply customers at times substantially exceeded the amounts Met-Ed and Penelec were allowed to charge for that electricity under their capped rates. This situation resulted in GPU's Pennsylvania supply business recording a loss for 2000 of approximately $28 million (Met-Ed $14 million; Penelec $14 million) after-tax, or $0.22 per share. In November 2000, Met-Ed and Penelec filed a petition with the PaPUC seeking permission to defer for future recovery their energy costs in excess of amounts reflected in their capped generation rates. In January 2001, the PaPUC consolidated this petition with the GPU/FirstEnergy merger proceeding for consideration and resolution in accord with the merger procedural schedule. In June 2001, Met-Ed, Penelec and FirstEnergy entered into a Settlement Stipulation with all of the major intervenors in the combined merger and rate relief proceedings, that, in addition to resolving certain issues concerning the PaPUC's approval of the GPU/FirstEnergy merger, also addressed Met-Ed's and Penelec's request for PLR rate relief. On June 20, 2001, the PaPUC 44 GPU, Inc. and Subsidiary Companies entered orders approving the Settlement Stipulation, thus approving the merger and providing Met-Ed and Penelec PLR rate relief, as discussed below. For additional information with respect to the effects PLR rate relief would have on Met-Ed and Penelec upon consummation of the merger, refer to the Settlement Stipulation filed as an exhibit to GPU's Form 8-K on June 15, 2001. As a result of the PaPUC's order approving the Settlement Stipulation, Met-Ed and Penelec are permitted to defer for future recovery the difference between their actual energy costs and those reflected in their capped generation rates, retroactive to January 1, 2001. Predicated upon consummation of the GPU/FirstEnergy merger, these "PLR deferrals" will continue through December 31, 2005. If energy costs incurred by Met-Ed and Penelec during this period are below their respective capped generation rates, the difference would be used to reduce their PLR deferrals. Met-Ed and Penelec have established regulatory assets for the deferral of excess energy costs incurred during the period of January 1, 2001 through June 30, 2001. However, if the GPU/FirstEnergy merger fails to be consummated, the Settlement Stipulation requires the write-off of Met-Ed's and Penelec's PLR deferrals for the period of January 1, 2001 through May 31, 2001. Therefore, pending consummation of the merger, GPU has recorded an offsetting reserve of $29.3 million ($13.1 million for Met-Ed and $16.2 million for Penelec) for the PLR deferrals during the period of January 1, 2001 through May 31, 2001. If the GPU/FirstEnergy merger is consummated, Met-Ed's and Penelec's PLR obligations will be extended through December 31, 2010. Additionally, if the merger is consummated, the companies' respective Competitive Transition Charge (CTC) revenues will be applied first to PLR costs, then to non-NUG stranded costs and lastly to NUG stranded costs through December 31, 2010. Remaining PLR deferrals not recovered as of December 31, 2010 would have to be written off. Last, if the merger is consummated, the Settlement Stipulation requires a revised calculation of NUG stranded costs being recovered under the terms of Met-Ed's and Penelec's 1998 Restructuring Orders, retroactive to January 1, 2001. In addition, subject to consummation of the merger, the Settlement Stipulation allows Penelec to access its NUG Trust to fund all costs payable under its NUG agreements, retroactive to January 1, 2001. If the merger is abandoned, the Settlement Stipulation provides that the PLR proceeding would be reopened by the PaPUC to permit parties to submit testimony and otherwise address prospectively the overall retail rate levels of Met-Ed and Penelec, including whether or at what level PLR deferrals would continue on a prospective basis. This proceeding, however, would not prevent the recovery of Met-Ed's and Penelec's PLR deferrals from June 1, 2001 through the date of the final PaPUC order in the reopened proceeding. Several parties have filed Petitions for Review with the Commonwealth Court of Pennsylvania regarding the PaPUC's orders. The Court has consolidated most of these appeals, and has granted an expedited schedule under which oral argument is scheduled for November 2001. There can be no assurance as to the outcome of these matters. 45 GPU, Inc. and Subsidiary Companies Generation Agreements: --------------------- The evolving competitive generation market has created uncertainty regarding the forecasting of the GPU Energy companies' energy supply needs, which has caused the GPU Energy companies to seek shorter-term agreements offering more flexibility. The GPU Energy companies' supply plan focuses on short- to intermediate-term commitments (one month to three years), with any residual needs then being purchased from the short-term market (one hour to one month). The GPU Energy companies have entered into agreements with third party suppliers to purchase capacity and energy through 2004. As of June 30, 2001, payments pursuant to these agreements, which include firm commitments as well as certain assumptions regarding, among other things, call/put arrangements, are estimated to be $839 million for the remainder of 2001, $708 million in 2002, $79 million in 2003 and $5 million in 2004. Pursuant to the mandates of the federal Public Utility Regulatory Policies Act and state regulatory directives, the GPU Energy companies were required to enter into long-term power purchase agreements with NUGs for the purchase of energy and capacity, which agreements have remaining terms of up to 19 years. The rates under virtually all of the GPU Energy companies' NUG agreements are substantially in excess of current and projected prices from alternative sources, except for periods when GPU Energy is required to meet high customer demand, typically during periods of extremely hot weather or when power supplies are limited. The following table shows actual payments from 1999 through June 30, 2001, and estimated payments thereafter through 2006: Payments Under NUG Agreements ----------------------------- (in millions) Calendar Year Total JCP&L Met-Ed Penelec ---- ----- ----- ------ ------- 1999 $774 $388 $167 $219 2000 734 364 153 217 2001 756 412 148 196 2002 821 480 149 192 2003 829 480 153 196 2004 831 472 158 201 2005 822 462 162 198 2006 826 458 167 201 The NJBPU Final Order provides JCP&L assurance of full recovery of its NUG costs (including above-market NUG costs and certain buyout costs); and the PaPUC Restructuring Orders provide Met-Ed and Penelec assurance of full recovery of their above-market NUG costs and certain NUG buyout costs. At June 30, 2001, the GPU Energy companies have recorded, on a present value basis, a total estimated liability of $2.5 billion (JCP&L $1.5 billion; Met-Ed $0.5 billion; Penelec $0.5 billion) on the Consolidated Balance Sheet for above-market NUG costs which is offset by corresponding regulatory assets. The GPU Energy companies are continuing efforts to reduce the above-market costs of these agreements. There can be no assurance as to the extent to which these efforts will be successful. 46 GPU, Inc. and Subsidiary Companies In 1997, the NJBPU approved a Stipulation of Final Settlement which, among other things, provided for the recovery of costs associated with the buyout of the Freehold Cogeneration power purchase agreement (Freehold buyout). The NJBPU approved the cost recovery of up to $135 million, over a seven-year period, on an interim basis subject to refund. The NJBPU's Final Order provides for the continued recovery of the Freehold buyout in the MTC, but has not altered the interim nature of such recovery, pending a final decision by the NJBPU. There can be no assurance as to the outcome of this matter. ACCOUNTING MATTERS ------------------ JCP&L, in 1999, and Met-Ed and Penelec in 1998, discontinued the application of Statement of Financial Accounting Standards No. 71 (FAS 71), "Accounting for the Effects of Certain Types of Regulation," and adopted the provisions of Statement of Financial Accounting Standards No. 101 (FAS 101), "Regulated Enterprises - Accounting for the Discontinuation of Application of FASB Statement No. 71," and Emerging Issues Task Force (EITF) Issue 97-4, "Deregulation of the Pricing of Electricity - Issues Related to the Application of FAS 71 and FAS 101," with respect to their electric generation operations. The transmission and distribution portion of the GPU Energy companies' operations continues to be subject to the provisions of FAS 71. Regulatory assets, net as reflected in the June 30, 2001 and December 31, 2000 Consolidated Balance Sheets in accordance with the provisions of FAS 71 and EITF Issue 97-4 were as follows: (in thousands) June 30, December 31, GPU, Inc. and Subsidiary Companies 2001 2000 ---------------------------------- ----------- ------------ Market transition charge (MTC) / basic generation service $2,520,678 $2,646,027 Competitive transition charge (CTC) 958,129 1,492,531 Costs recoverable through distribution rates 634,342 644,287 Societal benefits charge 117,441 153,191 Income taxes recoverable through future MTC / distribution rates, net 93,353 87,588 --------- --------- Total regulatory assets, net $4,323,943 $5,023,624 ========= ========= JCP&L ----- MTC / basic generation service $2,520,678 $2,646,027 Costs recoverable through distribution rates 281,285 298,266 Societal benefits charge 117,441 153,191 Income taxes recoverable through future MTC / distribution rates, net 93,353 87,588 --------- --------- Total regulatory assets, net $3,012,757 $3,185,072 ========= ========= Met-Ed ------ CTC $ 802,545 $1,053,085 Costs recoverable through distribution rates: Income taxes recoverable through future rates, net 120,433 114,543 TMI-2 decommissioning costs 29,391 27,610 Other, net 27,707 29,132 --------- --------- Total regulatory assets, net $ 980,076 $1,224,370 ========= ========= 47 GPU, Inc. and Subsidiary Companies (in thousands) June 30, December 31, Penelec 2001 2000 ------- ----------- ------------ CTC $ 155,584 $ 439,446 Costs recoverable through distribution rates: Income taxes recoverable through future rates, net 148,799 149,399 TMI-2 decommissioning costs 20,140 18,479 Other, net 6,587 6,858 --------- --------- Total regulatory assets, net $ 331,110 $ 614,182 ========= ========= As of June 30, 2001, Regulatory assets, net includes $252 million (JCP&L $373 million; Met-Ed $37 million; Penelec $(158) million) of deferred energy-related costs plus interest (net of collections), which deferred balance includes the under-recovered costs of supplying electricity to customers who did not choose an alternate supplier, as well as above-market NUG costs. The $252 million excludes the net generation asset divestiture gains which were used to reduce stranded costs. For additional information, see Competition and the Changing Regulatory Environment section. NUCLEAR FACILITIES ------------------ Investments: ----------- In 1999, the GPU Energy companies sold Three Mile Island Unit 1 (TMI-1) to AmerGen Energy Company, LLC (AmerGen) for approximately $100 million, and in 2000, JCP&L sold Oyster Creek to AmerGen for approximately $10 million. As part of the sales, AmerGen has assumed full responsibility for decommissioning the plants, and the GPU Energy companies have transferred $320 million and $430 million of TMI-1 and Oyster Creek decommissioning trust funds, respectively, to AmerGen. JCP&L, Met-Ed and Penelec jointly own TMI-2, which was damaged during a 1979 accident, in the percentages of 25%, 50% and 25%, respectively. JCP&L's net investment in TMI-2 as of June 30, 2001 and December 31, 2000 was $52 million and $55 million, respectively. JCP&L is collecting revenues for TMI-2 on a basis which provides for the recovery of its remaining investment in the plant by 2008. Met-Ed's and Penelec's remaining investments in TMI-2 were written off in 1998 after receiving the PaPUC's Restructuring Orders. TMI-2: ------ As a result of the 1979 TMI-2 accident, individual claims for alleged personal injury (including claims for punitive damages), which are material in amount, were asserted against GPU, Inc. and the GPU Energy companies. Approximately 2,100 of such claims were filed in the US District Court for the Middle District of Pennsylvania. Some of the claims also seek recovery for injuries from alleged emissions of radioactivity before and after the accident. At the time of the TMI-2 accident, as provided for in the Price-Anderson Act, the GPU Energy companies had (a) primary financial protection in the form of insurance policies with groups of insurance companies providing an aggregate of $140 million of primary coverage, (b) secondary financial protection in the form of private liability insurance under an industry retrospective rating plan providing for up to an aggregate of $335 million in premium charges under such plan and (c) an indemnity agreement with the Nuclear Regulatory Commission (NRC) for up to $85 million, bringing 48 GPU, Inc. and Subsidiary Companies 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 1995, the US Court of Appeals for the Third Circuit ruled that the Price-Anderson Act provides coverage under its primary and secondary levels for punitive as well as compensatory damages, but that punitive damages could not be recovered against the Federal Government under the third level of financial protection. In so doing, the Court of Appeals referred to the "finite fund" (the $560 million of financial protection under the Price- Anderson Act) to which plaintiffs must resort to get compensatory as well as punitive damages. The Court of Appeals also ruled that the standard of care owed by the defendants to a plaintiff was determined by the specific level of radiation which was released into the environment, as measured at the site boundary, rather than as measured at the specific site where the plaintiff was located at the time of the accident (as the defendants proposed). The Court of Appeals also held that each plaintiff still must demonstrate exposure to radiation released during the TMI-2 accident and that such exposure had resulted in injuries. In 1996, the US Supreme Court denied petitions filed by GPU, Inc. and the GPU Energy companies to review the Court of Appeals' rulings. In 1996, the District Court granted a motion for summary judgment filed by GPU, Inc. and the GPU Energy companies, and dismissed the ten initial "test cases" which had been selected for a test case trial, as well as all of the remaining 2,100 pending claims. The Court ruled that there was no evidence which created a genuine issue of material fact warranting submission of plaintiffs' claims to a jury. The plaintiffs appealed the District Court's ruling to the Court of Appeals for the Third Circuit. In November 1999, the Third Circuit affirmed the District Court's dismissal of the ten "test cases," but set aside the dismissal of the additional pending claims, remanding them to the District Court for further proceedings. In remanding these claims, the Third Circuit held that the District Court had erred in extending its summary judgment decision to the other plaintiffs and imposing on these plaintiffs the District Court's finding that radiation exposures below 10 rems were too speculative to establish a causal link to cancer. The Court of Appeals stated that the non-test case plaintiffs should be permitted to present their own individual evidence that exposure to radiation from the accident caused their cancers. In June 2000, the US Supreme Court denied petitions for review filed by GPU, Inc., the GPU Energy companies and the plaintiffs. In September 2000, the defendants filed a Motion for Summary Judgment in the District Court. Meanwhile, the plaintiffs took an interlocutory appeal to the Third Circuit seeking review of the District Court's determination that the remaining plaintiffs should be allowed to advance causation theories based only on the admissible evidence of record at the close of discovery in the case. On April 30, 2001, the Third Circuit affirmed the District Court's decision. In July 2001, the defendants renewed their motion for Summary Judgment of the remaining 2,100 claims in the District Court. There can be no assurance as to the outcome of this litigation. 49 GPU, Inc. and Subsidiary Companies 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 US Department of Energy (DOE). In 1995, a consultant performed a site-specific study of TMI-2 that considered various decommissioning methods and estimated the cost of decommissioning the radiological portion and the cost of removal of the nonradiological portion of the plant, using the prompt removal/dismantlement method. Management has reviewed the methodology and assumptions used in this study, is in agreement with them, and believes the results are reasonable. The TMI-2 funding completion date is 2014, consistent with TMI-2 remaining in long-term storage. The retirement cost estimate under the 1995 site-specific study, assuming decommissioning of TMI-2 in 2014, is $458 million for radiological decommissioning and $37 million for non-radiological removal costs (net of $12.6 million spent as of June 30, 2001)(in 2001 dollars). Each of the GPU Energy companies is responsible for retirement costs in proportion to its respective ownership percentage. The ultimate cost of retiring TMI-2 may be different from the cost estimate contained in this site-specific study. The NRC has established a decommissioning funding target which, while not an actual cost estimate, is a reference level designed to assure that licensees demonstrate adequate financial responsibility for decommissioning. The current NRC funding target exceeds the site-specific study cost estimate by $13 million. The estimated liability for future TMI-2 retirement costs (reflected as Three Mile Island Unit 2 future costs on the Consolidated Balance Sheets) as of June 30, 2001 and December 31, 2000 is $523 million (JCP&L $131 million; Met-Ed $261 million; Penelec $131 million) and $515 million (JCP&L $129 million; Met-Ed $257 million; Penelec $129 million), respectively. This liability is based upon the 1995 site-specific study estimate (in 2001 and 2000 dollars, respectively) discussed above and an estimate for remaining incremental monitored storage costs of $29 million (JCP&L $7 million; Met-Ed $15 million; Penelec $7 million) and $29 million (JCP&L $7 million; Met-Ed $15 million; Penelec $7 million) as of June 30, 2001 and December 31, 2000, respectively, as a result of TMI-2 entering long-term monitored storage in 1993. Offsetting the $523 million liability as of June 30, 2001 is $129 million (JCP&L $16 million; Met-Ed $93 million; Penelec $20 million), which management believes is probable of recovery from customers and included in Regulatory assets, net on the Consolidated Balance Sheet, and $373 million (JCP&L $116 million; Met-Ed $159 million; Penelec $98 million) in trust funds for TMI-2 and included in Nuclear decommissioning trusts, at market on the Consolidated Balance Sheet. The NJBPU has granted JCP&L revenues for TMI-2 retirement costs based on the 1995 site-specific study estimate. In addition, JCP&L is recovering a portion of its share of TMI-2 incremental monitored storage costs. The PaPUC Restructuring Orders granted Met-Ed and Penelec recovery of TMI-2 decommissioning costs as part of the CTC; however, Penelec has recovered 50 GPU, Inc. and Subsidiary Companies these costs through the divestiture of its generating assets. The 1996 Customer Choice Act also allows Met-Ed and Penelec to defer as a regulatory asset those amounts that are above the level provided for in the CTC for future recovery. As of June 30, 2001, the accident-related portion of TMI-2 radiological decommissioning costs is estimated to be $81 million (JCP&L $20 million; Met-Ed $41 million; Penelec $20 million), which is based on the 1995 site-specific study (in 2001 dollars). In connection with rate case resolutions, JCP&L, Met-Ed and Penelec made contributions to irrevocable external trusts for their respective shares of the accident-related portion of the decommissioning liability in amounts of $15 million, $40 million and $20 million, respectively. These contributions were not recoverable from customers and were expensed in 1990, in the case of JCP&L, and in 1991 for Met-Ed and Penelec. The GPU Energy companies intend to seek recovery for any increases in TMI-2 retirement costs, but recognize that recovery cannot be assured. The GPU Energy companies own all of the common stock of the Saxton Nuclear Experimental Corporation, which owns a small demonstration nuclear reactor. Decommissioning of the plant is expected to be completed in 2002. The estimated liability for future Saxton decommissioning costs at June 30, 2001 was $17 million (JCP&L $8 million; Met-Ed $5 million; Penelec $4 million), net of $40 million spent as of June 30, 2001. 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. 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. GPU has purchased property and decontamination insurance coverage for TMI-2 totaling $150 million. The Price-Anderson Act limits an owner's liability to third parties resulting from a nuclear incident to approximately $9.5 billion. Coverage for the first $200 million of such liability is provided by private insurance. The remaining coverage, or secondary financial protection, is provided by retrospective premiums payable by all nuclear reactor owners. Although TMI-2 is exempt from retrospective premium assessments, the plant is still covered by the provisions of the Price-Anderson Act. In addition, the GPU Energy companies are subject to other retrospective premium assessments related to policies applicable to TMI-1 prior to its sale to AmerGen. 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, air and water 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 facilities; modify or replace existing and proposed equipment; or remediate, decommission 51 GPU, Inc. and Subsidiary Companies or clean up waste disposal and other sites currently or formerly used by it, including formerly owned manufactured gas plants (MGP), coal mine refuse piles and generation facilities. In addition, federal and state laws provide for payment by responsible parties for damage to natural resources. At June 30, 2001, GPU had liabilities recorded on its Consolidated Balance Sheet for environmental remediation totaling $64 million (JCP&L $53 million; Met-Ed $2 million; Penelec $5 million; other $4 million). These liabilities are discussed in further detail below. GPU has been formally notified by the US Environmental Protection Agency (EPA) and state environmental authorities that it is among the potentially responsible parties (PRPs) who may be jointly and severally liable to pay for the costs associated with the investigation and remediation at 11 hazardous and/or toxic waste sites (in some cases, more than one company is named for a given site). JCP&L MET-ED PENELEC GPUN GPU,INC. TOTAL ----- ------ ------- ---- ------- ----- 7 4 3 1 1 11 In addition, certain of the GPU companies have been requested to participate in the remediation or supply information to the EPA and state environmental authorities on several other sites for which they have not been formally named as PRPs, although the EPA and/or state authorities may nevertheless consider them as PRPs. Certain of the GPU companies have also been named in lawsuits requesting damages (which are material in amount) for hazardous and/or toxic substances allegedly released into the environment. As of June 30, 2001, a liability of approximately $4.9 million (JCP&L $0.8 million; Met-Ed $0.2 million; Penelec $0.2 million; other $3.7 million) was recorded for PRP sites where it is probable that a loss has been incurred and the amount could be reasonably estimated. The ultimate cost of remediation of all these and other hazardous waste sites will depend upon changing circumstances as site investigations continue, including (a) the existing technology required for site cleanup, (b) the remedial action plan chosen and (c) the extent of site contamination and the portion attributed to the GPU companies involved. In 1997, the EPA filed a complaint against GPU, Inc. in the US District Court for the District of Delaware for enforcement of its Unilateral Order (Order) issued against GPU, Inc. to clean up the former Dover Gas Light Company (Dover) manufactured gas production site (Site) in Dover, Delaware. Dover was part of the AGECO/AGECORP group of companies from 1929 until 1942; GPU, Inc. emerged from the AGECO/AGECORP reorganization proceedings in 1946. All of Dover's common stock, which was sold in 1942 to an unaffiliated entity, was subsequently acquired by Chesapeake Utilities Corporation (Chesapeake), which merged with Dover in 1960. In its complaint, the EPA sought (1) enforcement of the Order against GPU; (2) recovery of its past response costs; (3) a declaratory judgment that GPU is liable for any remaining cleanup costs of the Site; and (4) statutory penalties for noncompliance with the Order. As of December 31, 2000, the EPA claimed past costs of $1.1 million, and GPU, Inc.'s maximum penalty exposure for noncompliance with the Order was approximately $44 million. Chesapeake has also filed suit against GPU, Inc. for contribution to the cleanup of the Site. As of December 31, 2000, Chesapeake claimed to have spent in excess of $10 million on site cleanup costs, and was seeking recovery of at least $5 million from GPU, Inc. through the contribution claim. 52 GPU, Inc. and Subsidiary Companies The parties have reached agreement in principle on the terms of a global settlement, which is to be contained in a Consent Decree. The total estimated cost to GPU, Inc. under the global settlement terms, if ultimately implemented, would be $3.65 million, which is comprised of the following elements. Under the global settlement terms, GPU, Inc. would perform certain work at the Site, at an estimated cost of $0.6 million. GPU, Inc. would also pay $1.7 million for a portion of the EPA's and Chesapeake's past costs. In addition, GPU, Inc. would make a cash-out payment of $1.25 million for future costs and would make a penalty payment to the EPA of $0.1 million for noncompliance with the Order. In August 2000, Rochester Gas & Electric Corporation (RG&E) filed suit against GPU, Inc. in the US District Court for the Western District of New York for the reimbursement of $5.2 million of costs and damages it has allegedly incurred, and a declaratory judgment with respect to future costs and damages, in connection with two former MGP sites and a third property where wastes from one of those sites were allegedly deposited. All of the properties are located in Rochester, New York. RG&E was an indirect subsidiary of AGECO from May 1929 until January 1946, and a subsidiary of GPU, Inc. from January 1946 until October 1949, when it was divested by order of the SEC under the Public Utility Holding Company Act. GPU, Inc. filed a motion with the Court requesting that portions of RG&E's complaint be dismissed on various substantive grounds. RG&E responded and filed a motion for summary judgment on the issue of GPU, Inc.'s alleged liability for the sites. By Order dated July 17, 2001, the Court granted in part GPU's motion and denied without prejudice RG&E's State law claims. The Court also denied RG&E's motion for summary judgment. There can be no assurance as to the outcome of this matter. JCP&L has entered into agreements with the New Jersey Department of Environmental Protection for the investigation and remediation of 17 formerly owned MGP sites. JCP&L has also entered into various cost-sharing agreements with other utilities for most of the sites. As of June 30, 2001, JCP&L has spent approximately $48 million in connection with the cleanup of these sites. In addition, JCP&L has recorded an estimated environmental liability of $49.1 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. The cost to clean up these sites could be materially in excess of the $49.1 million due to significant uncertainties, including changes in acceptable remediation methods and technologies. The NJBPU has granted JCP&L recovery of MGP remediation costs through the Societal Benefits Charge. As of June 30, 2001, JCP&L had recorded on its Consolidated Balance Sheet a regulatory asset of $40.2 million. In 1994, JCP&L filed a complaint with the Superior Court of New Jersey against several of its insurance carriers, relating to these MGP sites. JCP&L has settled with those carriers and the recoveries from those settlements will be used to reduce the amounts collected from ratepayers to remediate these sites. 53 GPU, Inc. and Subsidiary Companies OTHER COMMITMENTS AND CONTINGENCIES ----------------------------------- Class Action Litigation: ----------------------- GPU Energy In July 1999, the Mid-Atlantic states experienced a severe heat storm which resulted in power outages throughout the service territories of many electric utilities, including the territory of JCP&L. Following these outages, the NJBPU initiated an investigation into the causes of the outages and the reliability of the transmission and distribution systems of all four New Jersey electric utilities. This investigation was essentially completed in May 2000, with the issuance of Phase I and Phase II reports and orders from the NJBPU. Both the Phase I and Phase II reports and orders contain, among other things, directions for JCP&L to undertake certain actions and report back to the NJBPU on the results. Additionally, the NJBPU Phase II order concluded that there is not a prima facie case demonstrating that, overall, JCP&L provided unsafe, inadequate or improper service to its customers. Two class action lawsuits were commenced in New Jersey Superior Court in July 1999. These suits were subsequently consolidated into a single proceeding, and they seek compensatory and punitive damages arising from the service interruptions of July 1999 in the JCP&L territory. The GPU defendants named in these suits (i.e., GPU, Inc., JCP&L, GPUS and GPU Generation, Inc.) moved to dismiss or stay the litigation pending the NJBPU's exercise of its primary jurisdiction to investigate the causes of the outages. The trial court denied that motion, and also certified a plaintiff class consisting of JCP&L customers and their "dependents, tenants, employees and other intended beneficiaries of customers who suffered damages as a result" of the service interruptions. In January 2000, the New Jersey Appellate Division granted the GPU defendants' motion for leave to take an interlocutory appeal of the trial court's decision on the issue of primary jurisdiction. On June 14, 2000, the Appellate Division affirmed the trial court but determined that the NJBPU's findings in the exercise of its "exclusive jurisdiction" could be "probative...but not determinative" of at least some of the issues in the litigation, and leaving it to the trial court to "decide in the first instance just what weight and validity to give the [NJBPU's] findings and conclusions." In response to the GPU defendants' demand for a statement of damages, the plaintiffs have stated that they are seeking $700 million, subject to the results of pretrial discovery. JCP&L has notified its insurance carriers of the plaintiffs' allegations. The primary insurance carrier has stated that, while the substance of the plaintiffs' allegations is covered under the policy, it is reserving its rights concerning coverage as circumstances develop. JCP&L has received indemnification payments from its primary insurance carrier for certain expenses incurred by JCP&L relative to this action. Discovery continues in the class action, and no trial date has been set. In May 2001, the court denied without prejudice GPU's motion seeking decertification of the class. There can be no assurance as to the outcome of these matters. 54 GPU, Inc. and Subsidiary Companies GPU Electric As a result of the September 1998 fire and explosion at the Longford natural gas plant in Victoria, Australia, Victorian gas users (plaintiffs) have brought a class action in the Australian Federal Court against Esso Australia Limited and its affiliate (Esso), the owner and operator of the plant, for losses suffered due to the lack of natural gas supply and related damages. The plaintiffs claim that Esso was, among other things, negligent in designing, maintaining and operating the Longford plant, and also assert claims under Australian fair trade practices law. Esso has joined as third party defendants the State of Victoria (State) and various State-owned entities which operated the Victorian gas industry prior to its privatization, including Transmission Pipelines Australia (TPA) and its affiliate Transmission Pipelines (Assets) Australia (TPAA). GPU, Inc., through GPU GasNet, acquired the assets of TPA and the shares of TPAA from the State in June 1999. Esso asserts that the State and the gas industry were negligent in that, among other things, they failed to ensure that the gas system would provide a secure supply of gas to users, and also asserts claims under the Australian fair trade practices law. In addition, GPU GasNet and other private entities that purchased the Victorian gas assets from the State have joined Esso as third party defendants. Esso asserts that if the gas industry is liable as alleged, that liability has been transferred to the Buyers as part of the State's privatization process. The Australian Federal Court has recently ordered that the proceeding be transferred to the Superior Court of the State of Victoria. Under the acquisition agreement with the State, GPU GasNet has indemnified TPA and the State against third party claims arising out of, among other things, the operation of TPA's business. TPA and the State have commenced proceedings against GPU GasNet to enforce the indemnity in respect of any liability that may flow to TPA as a result of Esso's claim. GPU GasNet and TPAA have filed answers denying liability to Esso, the State and TPA, which could be material. GPU GasNet and TPAA have notified their insurance carriers of this action. The insurers have notified GPU GasNet that they have formed the preliminary view that GPU GasNet is not entitled to coverage under the liability policy. GPU GasNet believes that it is entitled to coverage, and discussions with the insurers are continuing. There can be no assurance as to the outcome of this matter. Investments and Guarantees: -------------------------- GPU, Inc. GPU, Inc. has made significant investments in foreign businesses and facilities through its subsidiaries, GPU Electric and GPU Power. As of June 30, 2001, GPU, Inc.'s investments in GPU Electric and GPU Power were $576 million and $144 million, respectively. As of that date, GPU, Inc. has also guaranteed an additional $1.4 billion and $26.6 million of GPU Electric and GPU Power outstanding obligations, respectively. Although management attempts to mitigate the risks of investing in certain foreign countries by, among other things, securing political risk insurance, GPU faces additional risks inherent in operating in such locations, including foreign currency fluctuations. 55 GPU, Inc. and Subsidiary Companies GPU Electric GPU Power UK has a 40% equity interest in a 586 MW power project in Pakistan (the Uch Power Project), which commenced commercial operations in October 2000. GPU's investment in the Uch Power Project as of June 30, 2001 was approximately $38 million, plus a guaranty letter of credit of $3.6 million, and its share of the projected completion costs represents an additional $3.1 million commitment. Cinergy (the former owner of 50% of Midlands Electricity plc) agreed to fund up to an aggregate of $20 million of the required capital contributions, for a period of one year from July 15, 1999, and "cash losses," which could be incurred on the Uch Power Project, for a period of up to ten years from July 15, 1999. Cinergy has reimbursed GPU Electric $4.9 million through June 30, 2001, leaving a remaining commitment for future cash losses of up to $15.1 million. There can be no assurance as to the outcome of this matter. GPU Power UK has gas contracts, extending to 2002, which require GPU Power UK to purchase or sell gas at fixed prices. The estimated out-of-market position of these contracts at June 30, 2001 was $23 million; however, GPU Power UK's exposure to future price changes is reduced since these contracts include both sales and purchases. Emdersa's operating companies are subject to a number of government claims related to Value-added tax liabilities and to Social Security taxes collected in their electric rates, which aggregate approximately $29 million. The claims are generally related to transitional issues surrounding the privatization of Argentina's electricity industry. There can be no assurance as to the outcome of these matters. GPU Power EI Barranquilla, a wholly owned subsidiary of GPU Power, is an equity investor in Termobarranquilla S.A., Empresa de Servicios Publicos (TEBSA), which owns a Colombian independent power generation project. A subsidiary of GPU Power provides operations and maintenance services for the project. EI Barranquilla and ABB Barranquilla, an affiliate of the engineering, procurement and construction contractor for the project, each own a 28.7% interest in TEBSA; Corporacion Electrica de la Costa Atlantica (CORELCA), a government owned Colombian electric utility, owns a 42.5% interest; and Distral Group owns a 0.1% interest. Pursuant to a related power purchase agreement, all of the output of the TEBSA project is sold to CORELCA. As of June 30, 2001, GPU Power has an investment of approximately $100.1 million in TEBSA and is committed, under certain circumstances, to make additional standby equity contributions of $21.3 million, which obligation GPU, Inc. has guaranteed. The total outstanding senior debt of the TEBSA project is $344 million at June 30, 2001. The lenders include the Overseas Private Investment Corporation (OPIC), US Export Import Bank (Ex-Im Bank) and a commercial bank syndicate. GPU, Inc. has guaranteed the obligations of the operators of the TEBSA project, up to a maximum of $5 million, under the project's operations and maintenance agreement. 56 GPU, Inc. and Subsidiary Companies GPU believes that various events of default have occurred under the loan agreements relating to the TEBSA project. As a result, certain required certifications have not been delivered to Ex-Im Bank, OPIC and the other project lenders, the non-delivery of such certification themselves constituting independent events of default under the loan agreements. In addition, questions have been raised as to the accuracy and completeness of information which was provided to the various parties to the project in connection with the formation of the project. These issues and related matters have been discussed with the project lenders and are being reviewed by the Government of Colombia. Also, in March 2001, the DIAN (the Colombian national tax authority) initiated a review of documents relating to the TEBSA Project. The DIAN has advised TEBSA that, based upon its preliminary review, certain tax deductions taken during 1999 and 2000 may not be allowable and has requested that TEBSA provide additional information and respond to the DIAN position. TEBSA has provided a response to the DIAN supporting the deductions. Previously, in July 1999, the DIAN issued a "Special Requirement" on the TEBSA 1996 income tax return, which challenges the exclusion from taxable income of an inflation adjustment related to the value of assets used for power generation. The DIAN asserts that TEBSA is liable for approximately $4.5 million consisting of $1.3 million in additional tax and $3.2 million in penalties and interest. TEBSA has filed both procedural and substantive objections to these assertions, the DIAN has responded to the objections reiterating its previous position, and TEBSA, in turn, filed an appeal with the DIAN in June 2000. In June 2001, the DIAN rejected TEBSA's appeal. TEBSA intends to appeal this matter to the Colombian courts. In July 2000, the DIAN issued a "Special Requirement" on the 1997 income tax return of TEBSA challenging a tax exemption benefit under a Colombian income tax statue. The DIAN requested payment of approximately $1.2 million in additional tax, penalties and interest. In July 2001, TEBSA settled this matter with the DIAN for approximately $270 thousand. In July 2001, the Controller of Colombia was quoted as saying that he considers many of the power purchase agreements entered into by CORELCA with various projects, including TEBSA, to be overpriced and that he considers it necessary, if circumstances permit, to seek to renegotiate such agreements. There can be no assurance as to the outcome of these matters. Other: ----- JCP&L and Public Service Electric & Gas Company (PSE&G) each hold a 50% undivided ownership interest in Yards Creek Pumped Storage Facility (Yards Creek). In December 1998, JCP&L filed a petition with the NJBPU seeking a declaratory order that PSE&G's right of first refusal to purchase JCP&L's ownership interest at its current book value under a 1964 agreement between the companies is void and unenforceable. Management believes that the fair market value of JCP&L's ownership interest in Yards Creek is substantially in excess of its June 30, 2001 book value of $22 million. There can be no assurance as to the outcome of this matter. 57 GPU, Inc. and Subsidiary Companies In March 1999, Penelec and New York State Electric & Gas Corporation (NYSEG) each sold their 50% undivided ownership interests in the Homer City Station to a subsidiary of Edison Mission Energy (EME) for a total of $1.9 billion. In connection with the sale, Penelec and NYSEG indemnified the buyer with respect to certain contingent liabilities, including costs or expenses which the EPA might impose for failure to comply with New Source Performance Standards, Prevention of Significant Deterioration and New Source Review regulations under the Clean Air Act prior to the date of the sale. In 1998, the EPA had conducted inspections at Homer City with regard to the plant's compliance with these regulations. On October 30, 2000, EME notified Penelec and NYSEG that the EPA had concluded that these regulations applied to Homer City prior to the sale to EME and that Homer City was operating in violation of these Clean Air Act regulations. If it is ultimately determined that these regulations were applicable to Homer City, the EPA could assess substantial monetary penalties and require capital modifications to the plant, the costs of which would be material. To the extent Penelec and NYSEG are obligated to indemnify EME for any of these costs, they would each be severally liable for a 50% share. There can be no assurance as to the outcome of this matter. In July 1999, GPU began to evaluate existing restructuring plans at GPU Power UK and formulate additional plans to reduce operating expenses and achieve ongoing cost reductions. In total, the final cost reduction plan, which was approved in 1999, identified 631 employees to be terminated, and, as a result, a liability of $65 million was recorded. In early 2000, the liability for the then remaining employees was reduced by approximately $6.9 million, due to a change in investment return assumptions. At June 30, 2001, GPU had a remaining severance liability of $1.2 million, included in Other current liabilities on the Consolidated Balance Sheet, related to 13 employees. Management expects the remaining employees to terminate by December 31, 2001. GPU AR has entered into contracts to supply electricity to retail customers through May 2002. In connection with meeting its supply obligations, GPU AR has entered into purchase commitments for energy and capacity with payment obligations totaling approximately $50 thousand as of June 30, 2001. GPU, Inc. has guaranteed these payments, as well as certain other obligations, up to a maximum of $19 million. In accordance with the Nuclear Waste Policy Act of 1982 (NWPA), the GPU Energy companies have entered into contracts with, and paid fees to, the DOE for the future disposal of spent nuclear fuel in a repository or interim storage facility. In 1996, the DOE notified the GPU Energy companies and other Standard Contract holders that it would be unable to begin acceptance of spent nuclear fuel for disposal by January 31, 1998, as mandated by the NWPA. The DOE requested recommendations from contract holders for handling the delay. 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 storage facility for spent nuclear fuel in Utah. At June 30, 2001, GPU has recorded a liability of $215 million owed to the Nuclear Waste Fund, related to spent nuclear fuel generated prior to the sales of TMI-1 and Oyster Creek to AmerGen. AmerGen has assumed all liability for disposal costs related to spent nuclear fuel generated following its purchase of the plants. 58 GPU, Inc. and Subsidiary Companies On July 26, 2000, GPUN filed suit in the United States Court of Federal Claims seeking to recover damages as a result of the DOE's failure to commence disposal of GPUN's spent nuclear fuel by January 31, 1998, as required by the terms of the Standard Contracts between GPUN and DOE. The complaint seeks damages from the Government in an amount to be determined at trial. GPUN has alleged that it is entitled to damages attributable to operations at both TMI-1 and Oyster Creek. In filings made in the Court of Federal Claims related to suits brought against the DOE by other utilities for breach of the Standard Contract, the Government acknowledged that the DOE's inability to begin providing the services required by the Standard Contract by January 31, 1998 constituted a partial breach of the Standard Contract. The Government stated in those filings that GPUN may lack standing to maintain its suit because it sold its interests in TMI-1 and Oyster Creek and notified DOE that it assigned the Standard Contract to the facilities' buyer. There can be no assurance as to the outcome of this matter. GPU, Inc. and consolidated affiliates have approximately 13,700 employees worldwide, of whom 9,600 are employed in the US, 3,600 are in the United Kingdom (UK) and the remaining 500 are in South America and Australia. The majority of the US workforce is employed by the GPU Energy companies (4,800) and MYR (4,600), of which approximately 2,800 and 4,100, respectively, are represented by unions for collective bargaining purposes. In the UK, approximately 2,400 GPU Power UK employees are represented by unions, and the terms and conditions of various bargaining agreements are generally reviewed annually, on April 1. The JCP&L, Met-Ed and Penelec collective bargaining agreements with the International Brotherhood of Electrical Workers expire on October 31, 2004, May 1, 2005 and May 14, 2004, respectively. Penelec's collective bargaining agreement with the Utility Workers Union of America expires on August 31, 2003. 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 In May 2001, GPU Power UK sold its 18.75% interest in Humber Power Limited. As a result of the sale, GPU recorded a pre-tax gain in the quarter ended June 30, 2001 of $17.8 million ($11.6 million after-tax, or $0.10 per share) in Other income, net on the Consolidated Statements of Income. In March 2001, 207 employees (Met-Ed 101 employees; Penelec 106 employees) accepted Voluntary Enhanced Retirement Programs offered to certain bargaining unit employees in Pennsylvania. As a result, in the quarter ended March 31, 2001, a pre-tax charge of $18.3 million (Met-Ed $9.2 million; Penelec $9.1 million), or $10.7 million after-tax (Met-Ed $5.4; Penelec $5.3), or $0.09 per share, was recorded in Operating Income for the cost of pension and other postretirement benefits. 59 GPU, Inc. and Subsidiary Companies In February 2001, Penelec paid Allegheny Electric Cooperative (AEC), a wholesale customer, $16 million pre-tax ($9.4 million after-tax, or $0.08 per share), for costs related to the termination of a wholesale energy contract. The $16 million payment was recorded in Operating Income in the quarter ended March 31, 2001. In June 2000, GPU, Inc. sold GPU PowerNet, its Australian electric transmission company, to Singapore Power International for A$2.1 billion (approximately US $1.26 billion). As a result of the sale, GPU recorded, in Operating Income on the Consolidated Statements of Income, a pre-tax loss in the quarter ended June 30, 2000 of $372 million ($295 million after-tax, or $2.43 per share), including a $94 million foreign currency loss. During the fourth quarter 2000, there was a change in the estimated tax benefits, which reduced GPU's after-tax loss on the sale to $276.6 million, or $2.28 per share. 3. ACCOUNTING FOR DERIVATIVE INSTRUMENTS GPU's use of derivative instruments is intended to manage the risk of price, interest rate and foreign currency fluctuations. GPU does not hold or issue derivative instruments for trading purposes. Effective January 1, 2001, GPU adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by FAS 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" and FAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - An Amendment of FASB Statement No. 133" (collectively, FAS 133). FAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In general, FAS 133 requires that companies recognize all derivatives as either assets or liabilities on the balance sheet, measured at their fair value. Derivatives not designated as hedges must be adjusted to fair value with an offset to income. If the derivative is designated as a hedge, depending on the nature of the hedge, changes in fair value of the derivative are either offset against the change in fair value of the asset or liability through income, or recognized in accumulated other comprehensive income until the hedged item is recognized in income. To the extent the hedge is determined to be ineffective, that portion of the derivative's change in fair value is immediately recognized in income. FAS 133 provides an exemption for certain contracts that qualify as "normal purchases and sales." To qualify for this exclusion, certain criteria, including that it must be probable that the contract will result in physical delivery, must be met. The adoption of FAS 133 on January 1, 2001 resulted in the recognition of derivative assets on the Consolidated Balance Sheet at January 1, 2001 in the amount of $114.8 million (JCP&L $21.8 million; Met-Ed $13 million; Penelec $26 million; GPU Electric $54 million), with offsetting amounts, net of tax, recorded in Accumulated other comprehensive income, of $59.1 million (JCP&L $5.1 million; GPU Electric $54 million) and Regulatory assets, net, of $51.1 million (JCP&L $13 million; Met-Ed $12.2 million; Penelec $25.9 million). As of January 1, 2001, derivative liabilities in the amount of 60 GPU, Inc. and Subsidiary Companies $5.8 million (Penelec $1 million; GPU Electric $4.8 million) were also recorded as a result of adopting FAS 133, with an offsetting amount, net of tax, recorded in Accumulated other comprehensive income, of $3.4 million (Penelec $0.5 million; GPU Electric $2.9 million). As of January 1, 2001, a cumulative effect of accounting change was recognized as an expense in Other income, net on the Consolidated Statement of Income in an amount totaling $1 million (Met-Ed $.1 million; Penelec $.8 million; GPU Electric $(1.9) million). Commodity Derivatives: --------------------- The GPU Energy companies use New York Mercantile Exchange (NYMEX) futures and Over-the-Counter (OTC) forward contracts and options on forward contracts to manage the risk of fluctuations in the market price of electricity. The GPU Energy companies also manage the natural gas requirements of certain NUG facilities that generate and sell energy to JCP&L under long-term contracts. The majority of the forward commodity contracts are considered "normal purchases and sales," as defined by FAS 133, and therefore are excluded from the scope of FAS 133. The energy options, forward contracts and gas futures contracts determined to be derivatives under FAS 133 are accounted for as cash flow hedges and expire on various dates through August 2002. These contracts are recorded at fair value on the Consolidated Balance Sheet in the amount of $24.2 million (JCP&L $7.8 million; Met-Ed $9.6 million; Penelec $6.8 million) as of June 30, 2001. The offset of the change in fair value is recorded in Accumulated other comprehensive income, net of tax, and subsequently recognized as a component of Power purchased and interchanged on the Consolidated Statement of Income when the underlying power being hedged is purchased. Of the $19.7 million (JCP&L $6.1 million; Met-Ed $9 million; Penelec $4.6 million) recorded in Accumulated other comprehensive income as of June 30, 2001, GPU expects a pre-tax gain of approximately $36.6 million (JCP&L $10.4 million; Met-Ed $15.4 million; Penelec $10.8 million) to be recognized in income within the next twelve months. The ineffective portion of these commodity contracts was immaterial for the quarter ended June 30, 2001. When GPU sold TMI-1 to AmerGen, the parties entered into an agreement which calls for an adjustment to the purchase price of TMI-1 in the event of future energy price increases. If the future price of energy exceeds the strike price during the contract year as defined per the agreement, GPU will receive payments from AmerGen, subject to a market price cap. However, if the future price of energy is less than the strike price during a contract year, a credit is applied against future contract payments that would be received from AmerGen. This agreement qualifies as a derivative as defined by FAS 133, and its value is recorded on the Consolidated Balance Sheet based on the present value of the contract's projected future cash flows. As of June 30, 2001, this amount totaled $53.9 million (JCP&L $13.5 million; Met-Ed $26.9 million; Penelec $13.5 million) and was included in Other Property and Investments - Other, net. An offsetting regulatory liability in the amount of $52 million (JCP&L $13.2 million; Met-Ed $26.3 million; Penelec $12.5 million) was recorded against Regulatory assets, net on the Consolidated Balance Sheet as of June 30, 2001, representing the obligation to treat the retail portion of payments received as stranded cost revenues when received. The non-retail portion is recorded on the Consolidated Statement of Income in Other income, net. This amount was immaterial for the quarter ended June 30, 2001. 61 GPU, Inc. and Subsidiary Companies Interest Rate Swap Agreements: ----------------------------- Penelec and GPU Electric (through GPU GasNet and GPU Power UK) use interest rate swap agreements to manage the risk of increases in variable interest rates. The interest rate swap agreements were entered into to convert variable rate debt to fixed rate debt. The interest rate swap agreements of Penelec and GPU GasNet are accounted for as cash flow hedges under FAS 133 and are recorded at fair value on the Consolidated Balance Sheet in Deferred Credits and Other Liabilities - Other in the amount of $3.2 million (Penelec $1.7 million; GPU Electric $1.5 million) as of June 30, 2001. The offset of the change in fair value is recorded in Accumulated other comprehensive income, net of tax, and subsequently recognized as a component of Interest expense when the related interest payments being hedged are recognized. Of the $2.5 million (Penelec $1 million; GPU Electric $1.5 million) recorded in Accumulated other comprehensive income as of June 30, 2001, GPU expects a pre-tax loss of approximately $2.6 million (Penelec $1.5 million; GPU Electric $1.1 million) to be recognized in income within the next twelve months. The ineffective portion of the interest rate swaps was immaterial for the quarter ended June 30, 2001. The interest rate swaps of GPU Power UK were not designated as hedges because hedge effectiveness could not be demonstrated for the period in accordance with FAS 133. As a result, these interest rate swaps are recorded at fair value as a liability on the Consolidated Balance Sheet in the amount of $0.9 million as of June 30, 2001. The offset of the change in fair value is recorded in Other income, net on the Consolidated Statement of Income in the amount of $1.6 million for the quarter ended June 30, 2001. As of June 30, 2001, the interest rate swap agreements covered approximately $492.6 million (Penelec $50 million; GPU Electric $442.6 million) of debt, and were scheduled to expire on various dates through 2006. For the quarter ended June 30, 2001, the amount by which fixed rate interest expense exceeded variable rate interest was immaterial. Currency Swap Agreements: ------------------------ GPU Electric uses currency swap agreements to manage currency risk caused by fluctuations in the US dollar exchange rate related to debt issued in the US by Avon Energy Partners Holdings. These swap agreements effectively convert principal and interest payments on this US dollar debt to fixed sterling principal and interest payments, and expire on the maturity dates of the bonds. These instruments are accounted for as cash flow hedges under FAS 133 and are recorded at fair value on the Consolidated Balance Sheet in the amount of $112.1 million as of June 30, 2001. The offset of the change in fair value is recorded in Accumulated other comprehensive income, net of tax, and subsequently recognized as a component of Interest expense on the Consolidated Statement of Income when the related interest payments being hedged are recognized. Of the $77.1 million recorded in Accumulated other comprehensive income as of June 30, 2001, GPU expects a pre-tax gain of approximately $13.2 million to be recognized in income within the next twelve months. The ineffective portion of the currency swaps agreements was immaterial for the quarter ended June 30, 2001. As of June 30, 2001, these currency swap agreements covered (pound)604 million (US $850 million) of debt. Interest expense would have been (pound)19.8 million (US $28.4 million) as compared to (pound)19.4 million (US $27.8 million) for the quarter ended June 30, 2001 had these agreements not been in place. 62 GPU, Inc. and Subsidiary Companies 4. SEGMENT INFORMATION The following is presented in accordance with Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." GPU's reportable segments are strategic business units that are managed separately due to their different operating and regulatory environments. GPU's management evaluates the performance of its business units based upon income before extraordinary and non-recurring items (the adjustments to income for each of the periods presented are described below). For the purpose of providing segment information, domestic electric utility operations (GPU Energy) is comprised of the three electric utility operating companies serving customers in New Jersey and Pennsylvania, as well as GPUN and GPUS. For additional information on GPU's organizational structure and businesses, see preface to the Combined Notes to Consolidated Financial Statements. For the six months ended June 30, 2001, GPU's non-recurring items totaled a net charge of $8.5 million after-tax, and consisted of the following: a gain of $11.6 million after-tax on the sale of GPU Power UK's interest in Humber Power Limited; a charge of $10.7 million after-tax, for costs related to Voluntary Enhanced Retirement Programs offered to certain bargaining unit employees in Pennsylvania; and a charge of $9.4 million after-tax, for costs related to the termination of a wholesale energy contract with Allegheny Electric Cooperative. For the six months ended June 30, 2000, GPU's non-recurring items totaled a net charge of $295 million after-tax, relating to the sale of GPU PowerNet. 63

(a) Represents income taxes on income before extraordinary and non-recurring items. (b) The comparative 2000 Total Assets is as of December 31, 2000. (c) MYR was acquired in April 2000. (d) Represents GPU PowerNet, which was sold in June 2000. (e) GPU International was sold in December 2000. (f) Includes income from GPU Power UK's investments in independent power projects accounted for under the equity and cost methods of $3.1 million. (g) Includes income from GPU Power UK's investments in independent power projects accounted for under the cost method of $15.6 million. 64 GPU, Inc. and Subsidiary Companies 5. COMPREHENSIVE INCOME For the six months ended June 30, 2001 and 2000, comprehensive income is summarized below. In Thousands ---------------------- Six months Ended June 30, ---------------------- GPU, Inc. and Subsidiary Companies 2001 2000 ---------------------------------- ---- ----- Net income $155,646 $ (79,815) ------- -------- Other comprehensive income/(loss), net of tax: Net unrealized gain/(loss) on investments (5,844) 13,028 Foreign currency translation (47,162) (41,852) Cumulative effect of change in accounting for derivative instruments at 1/1/01 55,730 - Net unrealized gains on derivative instruments 32,059 - ------- -------- Total other comprehensive income/(loss) 34,783 (28,824) ------- -------- Comprehensive income/(loss) $190,429 $(108,639) ======= ======= JCP&L ----- Net income $ 97,436 $ 90,004 ------- -------- Other comprehensive income, net of tax: Cumulative effect of change in accounting for derivative instruments at 1/1/01 5,180 - Net unrealized loss on derivative instruments (1,537) - ------- -------- Total other comprehensive income 3,643 - ------- -------- Comprehensive income $101,079 $ 90,004 ======= ========= Met-Ed ------ Net income $ 31,909 $ 35,160 ------- -------- Other comprehensive income/(loss), net of tax: Net unrealized gain/(loss) on investments - (2,141) Net unrealized gain on derivative instruments 5,269 - ------- -------- Total other comprehensive income/(loss) 5,269 (2,141) ------- -------- Comprehensive income $ 37,178 $ 33,019 ======= ======== Penelec ------- Net income/(loss) $ 5,085 $ 31,481 ------- -------- Other comprehensive income/(loss), net of tax: Net unrealized gain/(loss) on investments 1 (1,076) Cumulative effect of change in accounting for derivative instruments at 1/1/01 (535) - Net unrealized loss on derivative instruments 3,237 - ------- -------- Total other comprehensive income/(loss) 2,703 (1,076) ------- -------- Comprehensive income $ 7,788 $ 30,405 ======= ======== 65 GPU, Inc. and Subsidiary Companies 6. COMPANY-OBLIGATED TRUST PREFERRED SECURITIES In 1999, Met-Ed Capital Trust, a wholly-owned subsidiary of Met-Ed, issued $100 million of trust preferred securities (Met-Ed Trust Preferred Securities) at 7.35%, due 2039. The sole assets of Met-Ed Capital Trust are the 7.35% Cumulative Preferred Securities of Met-Ed Capital II, L.P. (Met-Ed Partnership Preferred Securities) and its only revenues are the quarterly cash distributions it receives on the Met-Ed Partnership Preferred Securities. Each Met-Ed Trust Preferred Security represents a Met-Ed Partnership Preferred Security. Met-Ed Capital II, L.P. is a wholly-owned subsidiary of Met-Ed and the sponsor of Met-Ed Capital Trust. The sole assets of Met-Ed Capital II, L.P. are Met-Ed's 7.35% Subordinated Debentures, Series A, due 2039, which have an aggregate principal amount of $103.1 million. Met-Ed has fully and unconditionally guaranteed the Met-Ed Partnership Preferred Securities, and, therefore, the Met-Ed Trust Preferred Securities. In 1999, Penelec Capital Trust, a wholly-owned subsidiary of Penelec, issued $100 million of trust preferred securities (Penelec Trust Preferred Securities) at 7.34%, due 2039. The sole assets of Penelec Capital Trust are the 7.34% Cumulative Preferred Securities of Penelec Capital II, L.P. (Penelec Partnership Preferred Securities) and its only revenues are the quarterly cash distributions it receives on the Penelec Partnership Preferred Securities. Each Penelec Trust Preferred Security represents a Penelec Partnership Preferred Security. Penelec Capital II, L.P. is a wholly-owned subsidiary of Penelec and the sponsor of Penelec Capital Trust. The sole assets of Penelec Capital II, L.P. are Penelec's 7.34% Subordinated Debentures, Series A, due 2039, which have an aggregate principal amount of $103.1 million. Penelec has fully and unconditionally guaranteed the Penelec Partnership Preferred Securities, and, therefore, the Penelec Trust Preferred Securities. 66 GPU, Inc. and Subsidiary Companies PART II ITEM 1 - LEGAL PROCEEDINGS ----------------- Information concerning the current status of certain legal proceedings instituted against GPU, Inc. and the GPU Energy companies discussed in Part I of this report in Combined Notes to Consolidated Financial Statements is incorporated herein by reference and made a part hereof. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Exhibits (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 (b) Reports on Form 8-K GPU, Inc.: --------- Dated May 8, 2001, under Item 5 (Other Events) Dated May 25, 2001, under Item 5 (Other Events) Dated June 12, 2001, under Item 5 (Other Events) Dated June 15, 2001, under Item 5 (Other Events) Jersey Central Power & Light Company: ------------------------------------ Dated May 8, 2001, under Item 5 (Other Events) Dated May 25, 2001, under Item 5 (Other Events) Dated June 12, 2001, under Item 5 (Other Events) Dated June 15, 2001, under Item 5 (Other Events) Metropolitan Edison Company: --------------------------- Dated May 8, 2001, under Item 5 (Other Events) Dated May 25, 2001, under Item 5 (Other Events) Dated June 12, 2001, under Item 5 (Other Events) Dated June 15, 2001, under Item 5 (Other Events) Pennsylvania Electric Company: ----------------------------- Dated May 8, 2001, under Item 5 (Other Events) Dated May 25, 2001, under Item 5 (Other Events) Dated June 12, 2001, under Item 5 (Other Events) Dated June 15, 2001, under Item 5 (Other Events) 67 GPU, Inc. and Subsidiary Companies Signatures ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. GPU, INC. August 7, 2001 By: /s/ B. L. Levy ----------------------------------- B. L. Levy, Senior Vice President and Chief Financial Officer August 7, 2001 By: /s/ P. E. Maricondo ----------------------------------- P. E. Maricondo, Vice President and Comptroller (principal accounting officer) JERSEY CENTRAL POWER & LIGHT COMPANY METROPOLITAN EDISON COMPANY PENNSYLVANIA ELECTRIC COMPANY August 7, 2001 By: /s/ M. J. Chesser ----------------------------------- M. J. Chesser, President and Chief Executive Officer August 7, 2001 By: /s/ P. E. Maricondo ----------------------------------- P. E. Maricondo, Comptroller (principal accounting officer) 68

GPU INC /PA/ 10-Q