United States
Securities and Exchange Commission
Washington, DC 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Registrant; State of Incorporation; IRS Employer
Number Address; and Telephone No. Identification No.
1-11459 PP&L Resources, Inc. 23-2758192
(Pennsylvania)
Two North Ninth Street
Allentown, PA 18101
(610) 774-5151
1-905 Pennsylvania Power & Light Company 23-0959590
(Pennsylvania)
Two North Ninth Street
Allentown, PA 18101
(610) 774-5151
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.
PP&L Resources, Inc. Yes X No
PP&L Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
PP&L Resources, Inc. Common stock, $.01 par value,
159,060,605 shares outstanding at
October 31, 1995
Pennsylvania Power & Light Co. Common stock, no par value,
157,300,382, shares outstanding and
all held by PP&L Resources, Inc. at
October 31, 1995
PP&L RESOURCES, INC.
AND
PENNSYLVANIA POWER & LIGHT COMPANY
FORM 10-Q
FOR THE QUARTER ENDED September 30, 1995
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PP&L Resources, Inc.
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Pennsylvania Power & Light Company
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Notes to Financial Statements
PP&L Resources, Inc. and Pennsylvania Power & Light Company
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PP&L Resources, Inc. and Pennsylvania Power & Light Company
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
PP&L RESOURCES, INC.
Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements
In the opinion of PP&L Resources, Inc. (Resources), the unaudited financial
statements included herein reflect all adjustments necessary to present fairly the
Consolidated Balance Sheets as of September 30, 1995 and December 31, 1994, and the
Consolidated Statement of Income and Consolidated Statement of Cash Flows for
the periods ended September 30, 1995 and 1994. Resources is the parent holding company of
Pennsylvania Power & Light Company (PP&L), Power Markets Development Company (PMDC),
and the newly formed Spectrum Energy Services Corporation (Spectrum). PP&L comprises
99 percent of Resources' assets, revenues and earnings. All nonutility operating
transactions are included in "Other Income and (Deductions)--Other-net" in Resources'
Consolidated Statement of Income.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(Thousands of Dollars, except per share data)
Three Months
Ended September 30,
1995 1994
Operating Revenues ............................... $682,249 $661,142
Operating Expenses
Operation
Fuel......................................... 125,974 117,798
Power purchases.............................. 66,142 66,067
Other........................................ 110,362 118,500
Maintenance..................................... 38,488 43,207
Depreciation.................................... 77,437 72,129
Amortized depreciation.......................... 9,939 6,564
Income taxes.................................... 92,229 57,952
Taxes, other than income........................ 48,217 46,992
Voluntary early retirement program.............. (65,661)
503,127 529,209
Operating Income .................................. 179,122 131,933
Other Income and (Deductions)
Allowance for equity funds used during
construction................................. 68
Income tax credits (expense).................... (8,229) 1,916
Other - net..................................... (20,238) 212
(28,399) 2,128
Income Before Interest Charges & Dividends on Preferred
Stock ........................................... 150,723 134,061
Interest Charges
Long-term debt.................................. 52,851 52,445
Short-term debt and other....................... 6,020 6,605
Allowance for borrowed funds used during
construction and interest capitalized........ (2,270) (1,943)
56,601 57,107
Preferred Stock Dividend Requirements.............. 6,942 6,942
Net Income......................................... $87,180 $70,012
Earnings Per Share of Common Stock (a) ............ $0.55 $0.46
Average Number of Shares Outstanding
(thousands)....................................... 158,131 153,789
Dividends Declared Per Share of Common
Stock............................................. $0.4175 $0.4175
<FN>
(a) Based on average number of shares outstanding.
See accompanying Financial Notes.
PP&L RESOURCES, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(Thousands of Dollars, except per share data)
Nine Months
Ended September 30,
1995 1994
Operating Revenues ...............................$2,018,947 $2,070,813
Operating Expenses
Operation
Fuel......................................... 326,563 365,154
Power purchases.............................. 214,040 221,916
Other........................................ 353,712 365,114
Maintenance..................................... 123,615 133,630
Depreciation.................................... 232,324 216,346
Amortized depreciation.......................... 29,816 19,693
Income taxes.................................... 210,171 186,059
Taxes, other than income........................ 149,547 153,284
Voluntary early retirement program.............. (65,661)
1,574,127 1,661,196
Operating Income .................................. 444,820 409,617
Other Income and (Deductions)
Allowance for equity funds used during
construction................................. 4,072 2,552
Income tax credits (expense).................... (7,998) 4,461
Other - net..................................... (17,376) (2,258)
(21,302) 4,755
Income Before Interest Charges & Dividends on Preferred
Stock ........................................... 423,518 414,372
Interest Charges
Long-term debt.................................. 161,064 159,823
Short-term debt and other....................... 15,404 15,773
Allowance for borrowed funds used during
construction and interest capitalized........ (6,995) (5,843)
169,473 169,753
Preferred Stock Dividend Requirements.............. 20,826 21,463
Net Income......................................... $233,219 $223,156
Earnings Per Share of Common Stock (a) ............ $1.48 $1.46
Average Number of Shares Outstanding
(thousands)....................................... 157,187 152,951
Dividends Declared Per Share of Common
Stock............................................. $1.2525 $1.2525
<FN>
(a) Based on average number of shares outstanding.
See accompanying Financial Notes.
PP&L RESOURCES,INC.
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
Sept. 30, December 31,
1995 1994
(Unaudited) (Audited)
ASSETS
Property, Plant and Equipment
Electric utility plant in service.................. $9,551,516 $9,306,519
Accumulated depreciation......................... (3,051,562) (2,871,129)
Deferred depreciation............................ 226,401 256,021
6,726,355 6,691,411
Construction work in progress...................... 186,929 211,288
Nuclear fuel owned and leased - net
of amortization.................................. 144,856 143,591
Other leased property - net of amortization ....... 84,064 80,385
Electric utility plant - net..................... 7,142,204 7,126,675
Other property - net of depreciation,
amortization and depletion....................... 64,060 67,850
7,206,264 7,194,525
Investments
Associated company - at equity..................... 17,185 17,088
Nuclear plant decommissioning trust fund .......... 102,918 87,490
Financial investments.............................. 136,733 119,632
Other - at cost or less............................ 23,781 8,654
280,617 232,864
Current Assets
Cash and cash equivalents.......................... 9,159 10,079
Marketable securities.............................. 94,363 100,537
Accounts receivable, less reserve
Customers........................................ 181,581 189,771
Interconnection.................................. 1,888 1,610
Other............................................ 11,368 12,861
Unbilled revenues.................................. 59,912 88,668
Fuel (coal and oil) - at average cost.............. 90,661 125,545
Materials and supplies - at average cost........... 124,073 123,630
Prepayments........................................ 33,799 11,015
Deferred income taxes.............................. 38,780 27,572
Other.............................................. 21,401 26,916
666,985 718,204
Deferred Debits
Utility plant carrying charges - net
of amortization.................................. 22,353 23,142
Reacquired debt costs.............................. 117,899 113,466
Assessment for decommissioning uranium
enrichment facilities............................ 31,522 33,492
Retired miners' health care benefits............... 13,783 14,536
Taxes recoverable through future rates............. 989,289 986,292
Postretirement benefits other than pensions........ 31,925
Voluntary early retirement program................. 65,661
Other.............................................. 43,873 55,160
1,316,305 1,226,088
$9,470,171 $9,371,681
<FN>
See accompanying Financial Notes.
PP&L RESOURCES, INC.
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
Sept. 30, December 31,
1995 1994
(Unaudited) (Audited)
LIABILITIES
Capitalization
Common equity
Common stock...................................... $1,584 $1,555
Capital in excess of par value ................... 1,495,941 1,432,946
Earnings reinvested .............................. 1,060,137 1,024,127
Capital stock expense and other .................. (7,249) (4,160)
2,550,413 2,454,468
Preferred stock
With sinking fund requirements.................... 295,000 295,000
Without sinking fund requirements................. 171,375 171,375
Long-term debt...................................... 2,827,356 2,940,750
5,844,144 5,861,593
Current Liabilities
Commercial paper.................................... 120,000 64,000
Bank loans.......................................... 14,887 10,168
Long-term debt due within one year.................. 30,000 39
Capital lease obligations due within one year....... 79,396 73,682
Accounts payable.................................... 107,729 146,073
Taxes accrued....................................... 30,427 46,741
Interest accrued.................................... 66,543 63,958
Dividends payable................................... 73,077 71,710
Other............................................... 112,904 101,924
634,963 578,295
Deferred Credits and Other Noncurrent Liabilities
Deferred investment tax credits..................... 221,954 230,064
Deferred income taxes............................... 2,089,263 2,046,861
Capital lease obligations........................... 150,734 151,083
Unamortized cost of power plant spare parts......... 7,719 26,406
Accrued nuclear plant decommissioning costs......... 105,267 89,713
Accrued mine closing costs.......................... 55,928 56,427
Contract settlement proceeds to be credited
to customers..................................... 24,521 32,931
Accrued pension costs............................... 180,763 163,487
Accrued assessment for decommissioning
uranium enrichment facilities.................... 28,895 28,895
Accrued retired miners' health care benefits........ 30,975 29,568
Accrued postretirement benefits other than
pensions and postemployment benefits.............. 34,275 21,784
Other............................................... 60,770 54,574
2,991,064 2,931,793
Commitments and Contingent Liabilities
(See Note 11)..............................................
$9,470,171 $9,371,681
<FN>
See accompanying Financial Notes.
PP&L RESOURCES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months
Ended Sept. 30,
1995 1994
Cash Flows From Operating Activities
Net income......................................................... $233,219 $223,156
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation.................................................... 263,774 237,732
Amortization of property under capital leases................... 61,022 61,419
Preferred stock dividend requirements .......................... 20,826 21,463
Amortization of contract settlement proceeds and
deferred cost of power plant spare parts....................... (28,721) (28,527)
Deferred income taxes and investment tax credits................ 18,187 (22,831)
Equity component of AFUDC....................................... (4,072) (2,552)
Voluntary early retirement program.............................. (65,661)
Change in current assets and current liabilities
Accounts receivable....................................... 9,405 2,522
Unbilled and refundable electric revenues................. 39,432 34,237
Fuel inventories.......................................... 34,884 (10,274)
Materials and supplies.................................... (443) 3,243
Prepayments .............................................. (22,784) (19,477)
Accounts payable.......................................... (38,344) (47,755)
Accrued interest and taxes................................ (13,729) (28,379)
Other..................................................... 5,623 17,780
Other operating activities - net................................ 26,279 49,610
Net cash provided by operating activities.................... 538,897 491,367
Cash Flows From Investing Activities
Property, plant and equipment expenditures......................... (318,326) (363,983)
Proceeds from sales of nuclear fuel to trust....................... 43,756 13,551
Purchases of available-for-sale securities......................... (247,614) (124,164)
Sales and maturities of available-for-sale securities.............. 242,900 66,842
Net purchases and sales of other financial investments ............ (8,704) 6,531
Other investing activities - net................................... 3,685 19,641
Net cash used in investing activities........................ (284,303) (381,582)
Cash Flows From Financing Activities
Issuance of long-term debt......................................... 55,000 718,750
Issuance of common stock........................................... 56,997 43,073
Issuance of preferred stock.................................................... 80,000
Reduction of long-term debt........................................ (140,250) (637,350)
Retirement of preferred stock.................................................. (120,000)
Payments on capital lease obligations.............................. (61,022) (61,419)
Dividends paid..................................................... (216,667) (212,354)
Net increase in short-term debt.................................... 60,719 101,102
Costs associated with issuance and retirement of securities........ (10,252) (23,551)
Other financing activities - net................................... (39) (39)
Net cash used in financing activities........................ (255,514) (111,788)
Net Decrease In Cash and Cash Equivalents .......................... (920) (2,003)
Cash and Cash Equivalents at Beginning of Period ................... 10,079 8,271
Cash and Cash Equivalents at End of Period ......................... $9,159 $6,268
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for
Interest (net of amount capitalized).............................. $162,039 $151,887
Income taxes...................................................... $195,509 $212,145
<FN>
See accompanying Financial Notes.
PENNSYLVANIA POWER & LIGHT COMPANY
In the opinion of Pennsylvania Power & Light Company (PP&L), the unaudited
financial statements included herein reflect all adjustments necessary to present
fairly the Consolidated Balance Sheets as of September 30, 1995 and December 31, 1994,
and the Consolidated Statement of Income and Consolidated Statement of Cash Flows
for the periods ended September 30, 1995 and 1994. All nonutility operating transactions
are included in "Other Income and (Deductions)--Other-net" in PP&L's Consolidated
Statement of Income.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(Thousands of Dollars, except per share data)
Three Months
Ended September 30,
1995 1994(a)
Operating Revenues ............................... $682,249 $661,142
Operating Expenses
Operation
Fuel......................................... 125,974 117,798
Power purchases.............................. 66,142 66,067
Other........................................ 110,362 118,500
Maintenance..................................... 38,488 43,207
Depreciation.................................... 77,437 72,129
Amortized depreciation.......................... 9,939 6,564
Income taxes.................................... 92,229 57,952
Taxes, other than income........................ 48,217 46,992
Voluntary early retirement program.............. (65,661)
503,127 529,209
Operating Income .................................. 179,122 131,933
Other Income and (Deductions)
Allowance for equity funds used during
construction................................. 68
Income tax credits (expense) ................... (8,620) 1,887
Other - net..................................... (19,207) (115)
(27,759) 1,772
Income Before Interest Charges..................... 151,363 133,705
Interest Charges
Long-term debt.................................. 52,851 52,445
Short-term debt and other....................... 6,020 6,605
Allowance for borrowed funds used during
construction and interest capitalized........ (2,270) (1,943)
56,601 57,107
Net Income......................................... 94,762 76,598
Dividends on Preferred Stock....................... 6,942 6,942
Earnings Available to PP&L Resources, Inc. ....... $87,820 $69,656
<FN>
(a) Restated to reflect the retroactive dividend of Power Markets Development
Company (PMDC) to Resources, as described in Financial Note 2 to the financial
statements.
See accompanying Financial Notes.
PENNSYLVANIA POWER & LIGHT COMPANY
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(Thousands of Dollars, except per share data)
Nine Months
Ended September 30,
1995 1994(a)
Operating Revenues ...............................$2,018,947 $2,070,813
Operating Expenses
Operation
Fuel......................................... 326,563 365,154
Power purchases.............................. 214,040 221,916
Other........................................ 353,712 365,114
Maintenance..................................... 123,615 133,630
Depreciation.................................... 232,324 216,346
Amortized depreciation.......................... 29,816 19,693
Income taxes.................................... 210,171 186,059
Taxes, other than income........................ 149,547 153,284
Voluntary early retirement program.............. (65,661)
1,574,127 1,661,196
Operating Income .................................. 444,820 409,617
Other Income and (Deductions)
Allowance for equity funds used during
construction................................. 4,072 2,552
Income tax credits (expense).................... (9,029) 4,418
Other - net..................................... (15,534) (2,959)
(20,491) 4,011
Income Before Interest Charges..................... 424,329 413,628
Interest Charges
Long-term debt.................................. 161,064 159,823
Short-term debt and other....................... 15,404 15,773
Allowance for borrowed funds used during
construction and interest capitalized........ (6,995) (5,843)
169,473 169,753
Net Income......................................... 254,856 243,875
Dividends on Preferred Stock....................... 20,826 21,463
Earnings Available to PP&L Resources, Inc. ........ $234,030 $222,412
<FN>
(a) Restated to reflect the retroactive dividend of Power Markets Development
Company (PMDC) to Resources, as described in Financial Note 2 to the financial
statements.
See accompanying Financial Notes.
PENNSYLVANIA POWER & LIGHT COMPANY
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
Sept. 30, December 31,
1995 1994(a)
ASSETS
Property, Plant and Equipment
Electric utility plant in service.................. $9,551,516 $9,306,519
Accumulated depreciation......................... (3,051,562) (2,871,129)
Deferred depreciation............................ 226,401 256,021
6,726,355 6,691,411
Construction work in progress...................... 186,929 211,288
Nuclear fuel owned and leased - net
of amortization.................................. 144,856 143,591
Other leased property - net of amortization ....... 84,064 80,385
Electric utility plant - net..................... 7,142,204 7,126,675
Other property - net of depreciation,
amortization and depletion....................... 64,060 67,850
7,206,264 7,194,525
Investments
Associated company - at equity..................... 17,185 17,088
Nuclear plant decommissioning trust fund .......... 102,918 87,490
Financial investments.............................. 127,699 118,115
Other - at cost or less............................ 13,670 8,654
261,472 231,347
Current Assets
Cash and cash equivalents.......................... 3,978 9,109
Marketable securities.............................. 50,607 52,544
Accounts receivable, less reserve
Customers........................................ 181,581 189,771
Interconnection.................................. 1,888 1,610
Other............................................ 11,165 12,390
Unbilled revenues.................................. 59,912 88,668
Fuel (coal and oil) - at average cost.............. 90,661 125,545
Materials and supplies - at average cost........... 124,073 123,630
Prepayments........................................ 33,666 11,015
Deferred income taxes.............................. 38,773 27,524
Other.............................................. 21,518 26,916
617,822 668,722
Deferred Debits
Utility plant carrying charges - net
of amortization.................................. 22,353 23,142
Reacquired debt costs.............................. 117,899 113,466
Assessment for decommissioning uranium
enrichment facilities............................ 31,522 33,492
Retired miners' health care benefits............... 13,783 14,536
Taxes recoverable through future rates............. 989,289 986,292
Postretirement benefits other than pensions ....... 31,925
Voluntary early retirement program ................ 65,661
Other.............................................. 43,873 55,160
1,316,305 1,226,088
$9,401,863 $9,320,682
<FN>
(a) Restated to reflect the retroactive dividend of Power Markets Development
Company (PMDC) to Resources, as described in Financial Note 2 to the financial
statements.
See accompanying Financial Notes.
PENNSYLVANIA POWER & LIGHT COMPANY
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
Sept. 30, December 31,
1995 1994(a)
LIABILITIES
Capitalization
Common equity
Common stock...................................... $1,476,048 $1,440,527
Additional paid-in capital ....................... 3,176
Earnings reinvested............................... 1,010,051 973,230
Capital stock expense and other .................. (7,238) (10,112)
2,482,037 2,403,645
Preferred stock
With sinking fund requirements.................... 295,000 295,000
Without sinking fund requirements................. 171,375 171,375
Long-term debt...................................... 2,827,356 2,940,750
5,775,768 5,810,770
Current Liabilities
Commercial paper.................................... 120,000 64,000
Bank loans.......................................... 14,887 10,168
Long-term debt due within one year.................. 30,000 39
Capital lease obligations due within one year....... 79,396 73,682
Accounts payable.................................... 107,597 145,723
Taxes accrued....................................... 30,676 46,907
Interest accrued.................................... 66,543 63,958
Dividends payable................................... 73,077 71,710
Other............................................... 112,855 101,924
635,031 578,111
Deferred Credits and Other Noncurrent Liabilities
Deferred investment tax credits..................... 221,954 230,064
Deferred income taxes............................... 2,089,263 2,046,869
Capital lease obligations........................... 150,734 151,083
Unamortized cost of power plant spare parts......... 7,719 26,406
Accrued nuclear plant decommissioning costs......... 105,267 89,713
Accrued mine closing costs.......................... 55,928 56,427
Contract settlement proceeds to be credited
to customers..................................... 24,521 32,931
Accrued pension costs............................... 180,763 163,487
Accrued assessment for decommissioning
uranium enrichment facilities.................... 28,895 28,895
Accrued retired miners' health care benefits........ 30,975 29,568
Accrued postretirement benefits other than
pensions and postemployment benefits.............. 34,275 21,784
Other............................................... 60,770 54,574
2,991,064 2,931,801
Commitments and Contingent Liabilities
(See Note 11)..............................................
$9,401,863 $9,320,682
<FN>
(a) Restated to reflect the retroactive dividend of Power Markets Development
Company (PMDC) to Resources, as described in Financial Note 2 to the financial
statements.
See accompanying Financial Notes.
PENNSYLVANIA POWER & LIGHT COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months
Ended Sept. 30,
1995 1994(a)
Cash Flows From Operating Activities
Net income......................................................... $254,856 $243,875
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation.................................................... 263,774 237,732
Amortization of property under capital leases................... 61,022 61,419
Amortization of contract settlement proceeds and
deferred cost of power plant spare parts....................... (28,721) (28,527)
Deferred income taxes and investment tax credits................ 18,187 (22,831)
Equity component of AFUDC....................................... (4,072) (2,552)
Voluntary early retirement program.............................. (65,661)
Change in current assets and current liabilities
Accounts receivable....................................... 9,137 2,794
Unbilled and refundable electric revenues................. 39,432 34,237
Fuel inventories.......................................... 34,884 (10,274)
Materials and supplies.................................... (443) 3,243
Prepayments .............................................. (22,651) (19,477)
Accounts payable.......................................... (38,126) (47,755)
Accrued interest and taxes................................ (13,646) (28,371)
Other..................................................... 5,457 17,780
Other operating activities - net................................ 26,093 49,452
Net cash provided by operating activities.................... 539,522 490,745
Cash Flows From Investing Activities
Property, plant and equipment expenditures......................... (318,326) (363,983)
Proceeds from sales of nuclear fuel to trust....................... 43,756 13,551
Purchases of available-for-sale securities......................... (66,337) (38,323)
Sales and maturities of available-for-sale securities.............. 64,976 31,172
Net purchases and sales of other financial investments ............ 1,407 6,531
Other investing activities - net................................... 3,685 19,641
Net cash used in investing activities........................ (270,839) (331,411)
Cash Flows From Financing Activities
Issuance of long-term debt......................................... 55,000 718,750
Issuance of common stock and capital contribution from parent ..... 38,697 43,073
Issuance of preferred stock.................................................... 80,000
Reduction of long-term debt........................................ (140,250) (637,350)
Retirement of preferred stock.................................................. (120,000)
Payments on capital lease obligations.............................. (61,022) (61,419)
Dividends paid..................................................... (216,667) (212,354)
Dividends for capitalization of PMDC .......................................... (50,000)
Net increase in short-term debt.................................... 60,719 101,102
Costs associated with issuance and retirement of securities........ (10,252) (23,551)
Other financing activities - net................................... (39) (39)
Net cash used in financing activities........................ (273,814) (161,788)
Net Decrease In Cash and Cash Equivalents .......................... (5,131) (2,454)
Cash and Cash Equivalents at Beginning of Period ................... 9,109 8,271
Cash and Cash Equivalents at End of Period ......................... $3,978 $5,817
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for
Interest (net of amount capitalized).............................. $162,039 $151,887
Income taxes...................................................... $196,501 $212,145
<FN>
(a) Restated to reflect the retroactive dividend of Power Markets Development
Company (PMDC) to Resources, as described in Financial Note 2 to the financial
statements.
See accompanying Financial Notes.
PP&L Resources, Inc. and Pennsylvania Power & Light Company
Notes to Financial Statements
1. Interim Financial Statements
Certain information in footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles has been condensed or omitted in this Form 10-Q
pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). These financial statements should be read in conjunction
with the financial statements and notes thereto included in Pennsylvania
Power & Light Company's Annual Report to the SEC on Form 10-K for the year
ended December 31, 1994.
Certain amounts in the September 30, 1994 financial statements have
been reclassified to conform to the presentation in the September 30, 1995
financial statements.
2. Holding Company Formed
Effective April 27, 1995, PP&L Resources, Inc. (Resources), which had
been a wholly owned subsidiary of Pennsylvania Power & Light Company
(PP&L), became the parent holding company of PP&L. As of the effective
date, the holders of PP&L common stock became holders of Resources common
stock and the stock certificates representing PP&L common stock now
represent Resources common stock. Also effective April 27, 1995, Power
Markets Development Company (PMDC), a subsidiary of PP&L, was transferred
as a dividend in the amount of $50.9 million from PP&L to become a direct
subsidiary of Resources. In the accompanying financial statements, for
comparability purposes, the dividend of PMDC was reported retroactive to
March 1994 when PMDC was formed as a subsidiary. In July 1995, Resources
incorporated a new subsidiary, Spectrum Energy Services Corporation
(Spectrum), to pursue unregulated business opportunities that are allied to
the energy business.
PP&L's financial condition and results of operation are currently the
principal factors affecting Resources' financial condition and results of
operations. All nonutility operating transactions are included in "Other
Income and (Deductions)--Other-net" in Resources' and PP&L's Consolidated
Statements of Income.
3. Rate Matters - PP&L
Base Rate Filing with the PUC
On September 27, 1995, the Pennsylvania Public Utility Commission
(PUC) issued a final order with respect to the base rate case filed by PP&L
on December 30, 1994 (PUC decision).
PP&L's request to increase base rates, which was its first in ten
years, sought to increase annual PUC-jurisdictional revenues by $261.6
million, or about 11.7%. The PUC's decision granted PP&L a $107 million
increase based on test year conditions. An allocation of a $22 million
credit to base rates from the Energy Cost Rate (ECR) resulted in an $85
million, or about 3.8%, net increase in PUC-jurisdictional revenues
effective September 28, 1995.
The following table provides a comparison of PP&L's filing and the PUC
decision:
Original
Filing Allowed
Rate Base ($ - Millions) $5,017.7 $5,017.7
Return ($ - Millions) $508.9 $478.7
Rate of Return 10.14% 9.54%
Return on Common Equity 13.00% 11.50%
The PUC decision allows PP&L to levelize the annual amount of
depreciation on pre-1989 property for its Susquehanna station at $173
million for the period October 1, 1995 through December 31, 1998. This
levelization eliminates the previously scheduled annual increase in
depreciation expense resulting from the modified sinking fund method of
depreciation. As part of its proposal to levelize depreciation, PP&L
agreed to automatically reduce annual Susquehanna station depreciation on
January 1, 1999 to reflect the return to straight line depreciation. This
change in depreciation will result in a $90 million annual reduction in
base rates effective January 1, 1999.
The PUC determined that all of PP&L's generating capacity is necessary
to meet customer needs, rejecting the arguments of some intervenors that an
excess capacity adjustment should be imposed on PP&L. As a result of the
PUC's action in this regard, PP&L's base rates include a full return on all
of its generating facilities used to serve retail customers, as well as all
operating expenses associated with those facilities. In its previous base
rate case in 1985, the PUC had found that PP&L had excess generating
capacity and disallowed a return on the common equity PP&L invested in
Susquehanna Unit No. 2.
Also, the PUC decision permits recovery of the PUC-jurisdictional
amount of retiree health care costs applicable to operations, the amount
incurred under the prior "pay-as-you-go" method, about $7 million annually,
and the amount resulting from the adoption of Statement of Financial
Accounting Standards (SFAS) 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions", about $11 million annually. In addition,
the PUC decision permits PP&L to recover, over a period of about 17 years,
the amount of SFAS 106 costs that would have been deferred from January 1,
1993 through September 30, 1995 pursuant to a PUC order but for a
Pennsylvania Commonwealth Court (Commonwealth Court) decision (now awaiting
possible Pennsylvania Supreme Court review) that PP&L could not recover
these deferred costs. As a result of the PUC decision, which provides for
recovery of $27 million of previously expensed SFAS 106 costs, PP&L
recorded a $15.7 million after-tax credit to income, or 10 cents per share
of Resources' common stock, in September 1995.
In addition, the PUC decision permits PP&L to recover through customer
rates the PUC-jurisdictional amount, $65.7 million, of the cost of its 1994
voluntary early retirement program over a period of five years. As a
result, PP&L recorded a $37.8 million after-tax credit to income, or 24
cents per share of Resources' common stock, in September 1995 to reverse
the charge for this program that was recorded in the fourth quarter of
1994. The estimated annual savings of $35 million from the program also
are reflected in the allowed rates.
The PUC decision also permits recovery over a 10-year period of
certain deferred operating and capital costs, net of energy savings,
incurred from the time Susquehanna Unit No. 2 was placed in commercial
operation until the effective date of base rate recognition for that Unit,
but denies recovery of those costs for Susquehanna Unit No. 1. As a result
of the PUC decision with respect to Susquehanna Unit No. 1, PP&L recorded a
one-time charge in September 1995 which, after taxes, reduced PP&L's net
income by $20.4 million, or 13 cents per share of Resources' common stock.
The PUC decision makes several adjustments to the amount requested by
PP&L for the currently estimated cost of decommissioning the Susquehanna
station. These adjustments include the elimination of the $106.6 million
contingency amount included in the decommissioning cost estimate, an
increase in the earnings assumption on the decommissioning fund from 5.5%
to 7.5% and a reflection of post-shutdown earnings on the fund in
calculating the total amount necessary to decommission the Susquehanna
station. After giving effect to these adjustments, the total amount of the
Susquehanna station decommissioning costs included in PUC-jurisdictional
rates is $9.5 million annually.
The PUC decision reduces the return on common equity from the 13.0%
requested by PP&L to 11.5%. In addition to the reduction in the return on
common equity, the PUC makes several other adjustments and disallowances in
its final decision. Except for the reduction in the return on common
equity and the one-time charge relating to the denial of the claim for
deferred operating and capital costs for Susquehanna Unit No. 1, the
adjustments and disallowances included in the PUC decision do not have a
significant adverse impact on PP&L's and Resources' earnings.
In its decision, the PUC ruled that PP&L cannot include in its ECR the
cost of capacity currently being billed to other utilities pursuant to
contractual arrangements as it returns to PP&L. At the same time, however,
the PUC also ruled that PP&L was not required to flow back to PUC-
jurisdictional customers through the ECR the revenues received for off-
system sales of capacity and energy attributable to such returning
capacity. Accordingly, the PUC decision permits the benefits that can be
achieved from sales of the returning capacity to accrue to shareowners.
The Pennsylvania Office of Consumer Advocate has appealed the PUC
decision to the Commonwealth Court. PP&L cannot predict the final outcome
of this matter.
Energy Cost Rate Issues
As a result of the PUC decision, PP&L filed a new ECR rate with the
PUC for the period September 28, 1995 through March 31, 1996. The new rate
reflects the roll-in of all energy costs into base rates. In addition,
PP&L is no longer required to include as a credit to the ECR one-third of
the revenues from its capacity credit sales to other electric utilities.
On October 26, 1995, the PUC approved the revised ECR rate.
In April 1994, the PUC reduced PP&L's 1994-95 ECR claim by
approximately $15.7 million to reflect costs associated with replacement
power during a portion of the period that Susquehanna Unit 1 was out of
service for refueling and repairs. As a result of the PUC's action, PP&L
recorded a charge against income in the first quarter of 1994 for the $15.7
million of unrecovered replacement power costs which reduced earnings by 6
cents per share of PP&L's common stock.
PP&L filed a complaint with the PUC objecting to the decision to
exclude these replacement power costs from the 1994-95 ECR, and
subsequently reached a settlement with the complainants and the PUC's
Office of Trial Staff on this matter.
The PUC approved the settlement agreement on February 24, 1995. As a
result of this PUC action, PP&L in the first quarter of 1995 recorded a
credit to income of $9.7 million which increased earnings by 4 cents per
share of PP&L's common stock.
In March 1995, the PUC approved PP&L's 1995-96 ECR. That ECR, which
is about $2.8 million lower than the previous ECR, reflected the recovery
of the $9.7 million of previously disallowed replacement power costs.
Special Base Rate Credit Adjustment
The Special Base Rate Credit Adjustment (SBRCA) has been in effect
since April 1, 1991 and reduced PUC-jurisdictional customers' bills for the
effects of three nonrecurring items. As a result of the PUC decision,
PP&L's SBRCA was changed to exclude that portion of the credit associated
with a capacity and energy contract with Atlantic City Electric Company
(Atlantic), since the costs recovered from Atlantic were excluded from PUC-
jurisdictional base rates. See Note 4 for more details on this contract.
Refund of State Tax Decrease
In June 1994, legislation was enacted that decreased the Pennsylvania
corporate net income tax rate (Pa. CNI) from 12.25% to 11.99% retroactive
to January 1, 1994, with further reductions to 10.99%, 10.75% and 9.99% in
1995, 1996 and 1997, respectively. In accordance with the terms of its
tariffs, PP&L filed with the PUC a recomputation of its State Tax
Adjustment Surcharge (STAS) to reflect the decreases in state income taxes
for 1994 and the first quarter of 1995. The STAS began in July 1994 and
reduced customer bills through March 1995 by about $2.7 million. A revised
STAS for the April 1995 through March 1996 period went into effect in April
1995 and was expected to reduce customer bills through March 1996 by about
$9.2 million. However, in June 1995, legislation was enacted that
decreased the Pa. CNI from 10.99% to 9.99% retroactive to January 1, 1995.
In July 1995, PP&L filed with the PUC a recomputation of its STAS to
reflect the decrease in the Pa. CNI from 10.99% to 9.99%. This was
expected to reduce customer rates by about $16.6 million rather than the
$9.2 previously filed.
As a result of the PUC decision, the Pa. CNI reflected in base rates
was changed from 12.25% to 10.99%. PP&L filed a recomputation of its STAS
to reflect the new Pa. CNI reflected in base rates as well as revised
revenues and taxable income resulting from the base rate filing. The
revised STAS, which was approved on October 26, 1995, is expected to reduce
customer rates by about $12.9 million. This change will have no effect on
PP&L's net income.
FERC-Jurisdictional Rates
On October 26, 1995, the Federal Energy Regulatory Commission (FERC)
approved PP&L's request to recover postretirement benefits other than
pensions through its contractual agreements with other major electric
utilities, subject to refund after FERC review. Beginning November 1,
1995, PP&L will bill these utilities on an accrual basis for their share of
ongoing postretirement costs other than pensions. In addition, each
utility will be billed a levelized amount of previously deferred
postretirement benefit costs. PP&L expects to recover the previously
deferred costs during the contract periods. See Note 4 for more details on
these contracts.
In the October 26, 1995 order, FERC also ordered hearings to evaluate
the justness and reasonableness of PP&L's rates in its contractual
agreements with Jersey Central Power & Light Company (JCP&L), Atlantic,
Baltimore Gas & Electric Company and UGI Corporation. PP&L cannot predict
the outcome of these hearings.
See "Part II. Other Information - Legal Proceedings" for a discussion
of litigation by JCP&L against PP&L.
4. Sales to Other Major Electric Utilities - PP&L
PP&L provides Atlantic with 125,000 kilowatts of capacity (summer
rating) and related energy from its wholly owned coal-fired stations. The
agreement with Atlantic originally provided for sales to continue through
September 2000.
On March 20, 1995, Atlantic notified PP&L that it will terminate the
agreement on March 20, 1998, pursuant to termination provisions in the
agreement. PP&L expects to be able to resell the capacity and energy at
prices approximately equal to that received from Atlantic. The agreement's
termination is not expected to have a material impact on PP&L's revenues or
net income. In 1994, PP&L received about $23.1 million in revenues from
this agreement.
PP&L provides JCP&L with 945,000 kilowatts of capacity and related
energy from all of its generating units. Sales to JCP&L will continue at
the 945,000 kilowatt level through 1995, with the amount then declining
uniformly each year (189,000 kilowatts per year) until the end of the
agreement on December 31, 1999. PP&L estimates that annual revenues
associated with 189,000 kilowatts of returning capacity from JCP&L are
about $40 million and that economy energy sales for 189,000 kilowatts of
capacity on the Pennsylvania-New Jersey-Maryland Interconnection
Association (PJM) would produce about $25 million of annual revenues. On
April 6, 1995, PP&L entered into a new agreement with JCP&L whereby PP&L
will provide JCP&L increasing amounts of installed capacity credits and
energy from all of its generating units. Sales to JCP&L under this
agreement will begin in June 1997 and will continue through May 2004.
Under this agreement, PP&L will provide JCP&L 150,000 kilowatts of capacity
credits and energy from June 1997 through May 1998, 200,000 kilowatts from
June 1998 through May 1999 and 300,000 kilowatts from June 1999 through May
2004. Sales under the new agreement will be priced based on a
predetermined demand factor that escalates over time, plus an energy
component based on PP&L's actual fuel-related costs. This agreement with
JCP&L must be approved by the FERC and the New Jersey Board of Public
Utilities.
PP&L provides Baltimore Gas & Electric (BG&E) with 129,000 kilowatts
or 6.6 percent of its share of capacity and related energy from the
Susquehanna station. Sales to BG&E will continue through May 2001.
PP&L will continue to seek additional opportunities to market its
capacity and energy in the bulk power markets which would produce revenues
in excess of the amount that would be realized through economy energy sales
on the PJM.
5. Financing Activity - Resources/PP&L
As a result of a corporate restructuring, as of April 27, 1995, PP&L's
157,300,382 shares of outstanding common stock became Resources' common
stock. During the third quarter of 1995, 937,165 shares of Resources'
common stock ($18.3 million) were issued through the Dividend Reinvestment
Plan (DRIP). At September 30, 1995, Resources had 390,000,000 shares of
authorized common stock, $.01 par value, of which 158,407,582 shares were
outstanding. In October 1995, Resources issued an additional 653,023
shares of common stock ($15.2 million) through the DRIP.
In the second quarter of 1995, PP&L acquired in the open market $35.0
million of its First Mortgage Bonds, 9-1/4% Series due 2019, and $50.25
million of its First Mortgage Bonds, 9-3/8% Series due 2021. PP&L intends
to retire these bonds within the coming year. The acquisition of these
bonds reduced long-term debt outstanding on the Consolidated Balance Sheets
of Resources and PP&L.
In August, PP&L issued $55 million principal amount of First Mortgage
Bonds, 6.15% Pollution Control Bonds Series K due 2029, that provided for
the refunding of $55 million principal amount of First Mortgage Bonds,
9.375% Pollution Control Bonds Series G, on September 1, 1995.
6. Credit Arrangements - PP&L
PP&L issues commercial paper and, from time to time, borrows from
banks to provide short-term funds required for general corporate purposes.
In addition, certain subsidiaries also borrow from banks to obtain short-
term funds. Bank borrowings generally bear interest at rates negotiated at
the time of the borrowing. PP&L's weighted average interest rate on short-
term borrowings was 5.9% at September 30, 1995.
PP&L has credit arrangements with banks that produce a total of $295
million of lines of credit to provide back-up for PP&L's commercial paper
and short-term borrowings of certain subsidiaries. No borrowings were
outstanding at September 30, 1995 under these credit arrangements.
PP&L leases its nuclear fuel from a trust. The maximum financing
capacity of the trust under existing credit arrangements is $200 million.
7. New Regulatory Assets - PP&L
PP&L established new regulatory assets as a result of the recent PUC
and FERC decisions. These regulatory assets as of September 30, 1995 are
as follows (millions of dollars):
Voluntary early retirement program $65.7
Postretirement benefits other than pensions 31.9
Rate case expenses 1.5
$99.1
The PUC-jurisdictional portion of PP&L's 1994 voluntary early
retirement program costs will be recovered through rates over a five-year
period beginning September 28, 1995.
Postretirement benefits other than pensions includes $27.0 million
applicable to PUC-jurisdictional customers, which will be recovered through
rates over approximately 17 years beginning September 28, 1995. The
balance represents postretirement benefits other than pensions applicable
to PP&L's contractual agreements with other major electric utilities. PP&L
will recover these costs during the contract periods.
Rate case expenses represent non-payroll costs incurred for the
preparation of the recent base rate case applicable to PUC-jurisdictional
customers. These costs will be recovered through rates over a four-year
period beginning September 28, 1995.
See Note 3 for more details on "Rate Matters".
8. Workforce Reductions - PP&L
As part of its continuing efforts to reduce costs, PP&L offered a
voluntary severance program to employees who are members of the bargaining
unit. Under the program, bargaining unit employees had until July 7, 1995
to request voluntary severance. Seventy-five employees requested and were
granted severance under this program. Additionally, re-engineering efforts
led to the displacement and termination of 100 management employees. The
cost of severance benefits provided to these management and bargaining unit
employees reduced net income for the three and nine months ended September
30, 1995 by $8.3 million, or 5 cents per share of Resources' common stock,
and $10.4 million, or 7 cents per share of Resources' common stock,
respectively. Annual savings in operating expenses associated with this
reduction in employees are estimated to be approximately $12 million.
PP&L continues its ongoing re-engineering and cost reduction efforts,
which are expected to impact the size of PP&L's workforce. As a result of
these efforts, PP&L on November 13, 1995, announced that about 300
bargaining unit positions will be eliminated throughout its service
territory. Although no specific targets have been set, PP&L currently
expects that the present level of 6,730 full time employees will decline to
6,000 or fewer employees over the next few years. As the workforce
declines, additional costs may be incurred due to the reductions, in
amounts that are not currently determinable.
9. New Accounting Standard - Resources
In March 1995, the Financial Accounting Standards Board adopted SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." This statement requires a company to review
certain assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If
an asset is determined to be impaired, an impairment loss is recognized.
SFAS 121 is effective for financial statements for fiscal years beginning
after December 15, 1995.
Resources does not expect the adoption of SFAS 121 to have a material
effect on its net income.
10. Fourth Quarter 1995 Events - PP&L
In October 1995, a PP&L subsidiary entered into an agreement to sell
one of its subsidiaries that owns coal mining assets. PP&L has determined
these assets will not be required for future operations. PP&L estimates
that after-tax income of approximately $24 million will be recorded in the
fourth quarter upon closing this transaction.
PP&L is reviewing the level of spare parts at its power plants and the
capitalized costs of a new information system. The potential write-off
from the above items is not yet determinable, but may eliminate a
substantial portion of the gain associated with the sale of the coal
assets.
11. Commitments and Contingent Liabilities - PP&L
There have been no material changes related to PP&L's commitments and
contingent liabilities since PP&L filed its 1994 Form 10-K, except for the
discussions below regarding the denial of plaintiff's motion for class
certification in the Fuel Oil Dealers' Litigation and environmental
matters.
For discussion pertaining to PP&L's financing matters, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations under the caption "Financial Condition - Financing Programs."
Nuclear Operations
PP&L is a member of certain insurance programs which provide coverage
for property damage to members' nuclear generating stations. Facilities at
the Susquehanna station are insured against property damage losses up to
$3.6 billion under these programs. PP&L is also a member of an insurance
program which provides insurance coverage for the cost of replacement power
during prolonged outages of nuclear units caused by certain specified
conditions. Under the property and replacement power insurance programs,
PP&L could be assessed retrospective premiums in the event of the insurers'
adverse loss experience. The maximum amount PP&L could be assessed under
these programs at September 30, 1995 was about $41.7 million.
Nuclear Regulatory Commission regulations require that in the event of
an accident, where the estimated cost of stabilization and decontamination
exceeds $100 million, proceeds of property damage insurance be segregated
and used, first, to place and maintain the reactor in a safe and stable
condition and, second, to complete required decontamination operations
before any insurance proceeds would be made available to PP&L or the
trustee under the Mortgage. PP&L's on-site property damage insurance
policies for the Susquehanna station conform to these regulations.
PP&L's public liability for claims resulting from a nuclear incident
at the Susquehanna station is limited to about $8.9 billion under
provisions of The Price Anderson Amendments Act of 1988 (the Act). PP&L is
protected against this liability by a combination of commercial insurance
and an industry assessment program. A utility's liability under the
assessment program will be indexed not less than once during each five-year
period for inflation and will be subject to an additional surcharge of 5%
in the event the total amount of public claims and costs exceeds the basic
assessment. In the event of a nuclear incident at any of the reactors
covered by the Act, PP&L could be assessed up to $151 million per incident,
payable at a rate of $20 million per year, plus the additional 5%
surcharge, if applicable.
Fuel Oil Dealers' Litigation
In August 1991, a group of fuel oil dealers in PP&L's service area
filed a complaint against PP&L in United States District Court for the
Eastern District of Pennsylvania (District Court) alleging that certain of
PP&L's marketing activities had violated and continue to violate the
federal antitrust laws. The complaint requested judgment against PP&L for
a sum in excess of $10 million for the alleged antitrust violations, treble
the damages alleged to have been sustained by the plaintiffs. In addition,
the complaint requested a permanent injunction against all activities found
to be illegal.
In April 1992, another fuel oil dealer in PP&L's service area filed a
class action complaint against PP&L in the District Court alleging, as did
the August 1991 complaint, that certain of PP&L's marketing activities had
violated and continue to violate the federal antitrust laws. The complaint
also alleged that PP&L engaged in a civil conspiracy and unfair competition
in violation of Pennsylvania law.
The plaintiff sought to represent as a class all fuel oil dealers in
PP&L's service area. The complaint requested a permanent injunction
against all activities found to be illegal and treble the damages alleged
to have been sustained by the class. No specific damage amount was set
forth in the complaint. This second antitrust complaint was consolidated
with the August 1991 complaint for pre-trial purposes. In April 1995, the
District Court denied plaintiff's motion for class certification.
PP&L has been granted summary judgment on many of these claims. Still
pending before the District Court are the plaintiffs' claims regarding
PP&L's alleged agreements with developers that their developments consist
of only electrically heated units (all-electric agreements) and the state
law claims related to such agreements.
In addition, in June 1994 plaintiffs filed an amended complaint in
District Court alleging that PP&L's former residential conversion program,
under which cash grants were offered to contractors and homeowners to
convert from fossil fuel heating systems to electric systems, also violated
the federal antitrust laws.
PP&L cannot predict the outcome of this litigation.
Environmental Matters
The Federal Clean Air Act Amendments of 1990 (Clean Air Act) deal, in
part, with acid rain under Title IV, attainment of federal ambient ozone
standards under Title I, and toxic air emissions under Title III. PP&L has
complied with the Phase I acid rain provisions under Title IV. More
stringent Phase II limits for sulfur dioxide reductions are required by
January 2000. To meet the Phase II limits, PP&L plans to purchase lower
sulfur coal, consume banked emission allowances and purchase additional
emission allowances instead of relying on flue gas desulfurization
equipment (FGD). PP&L's decision to not install FGD, with an estimated
capital cost of $413 million, on the two 750,000 kilowatt coal-fired
generating units at the Montour station represents a significant reduction
in capital expenditures.
PP&L has met the requirements under Title I to install reasonably
available control technology to reduce nitrogen oxide emissions. A further
two-phase nitrogen oxides reduction from pre-Clean Air Act levels has been
proposed for the area where PP&L's plants are located, a 55% reduction by
May 1999 and a 75% reduction by 2003, unless scientific studies expected to
be completed by 1997 indicate a different reduction is appropriate. The
reductions would be required during a five-month ozone season from May
through September. Expenditures to meet the 1999 requirements are
disclosed in the table of projected construction expenditures and discussed
in Management's Discussion and Analysis of Financial Condition and Results
of Operations under the caption "Financial Condition - Capital Expenditure
Requirements".
In addition to acid rain and ambient ozone attainment provisions, the
legislation requires the Environmental Protection Agency (EPA) to conduct a
study of hazardous air emissions from power plants. EPA is also studying
the health effects of fine particulates which are emitted from power plants
and other sources. Adverse findings from either study could cause the EPA
to mandate additional ultra high efficiency particulate removal baghouses
or specialized flue gas scrubbing to remove certain vaporous trace metals
and certain gaseous emissions.
PP&L currently estimates that additional capital expenditures and
operating costs for environmental compliance will be incurred beyond 2000
in amounts which are not now determinable but could be material.
The Pennsylvania Air Pollution Control Act implements the Clean Air
Act. The state legislation essentially requires that new state air
emission standards be no more stringent than federal standards. This
legislation is not expected to significantly affect PP&L's plans for
compliance with the Clean Air Act.
The PUC's policy regarding the trading and usage of, and the
ratemaking treatment for, emission allowances by Pennsylvania electric
utilities provides, among other things, that the PUC will not require
approval of specific transactions and the cost of allowances will be
recognized as energy-related power production expenses and recoverable
through the ECR.
The Pennsylvania Department of Environmental Protection (DEP),
formerly Department of Environmental Resources, regulations governing the
handling and disposal of industrial (or residual) solid waste require PP&L
to submit detailed information on waste generation, minimization and
disposal practices. They also require PP&L to upgrade and repermit
existing ash basins at all of its coal-fired generating stations by
applying updated standards for waste disposal. Ash basins that cannot be
repermitted are required to close by July 1997. Any groundwater
contamination caused by the basins must also be addressed. Any new ash
disposal facility must meet the rigid site and design standards set forth
in the regulations. In addition, the siting of future facilities at PP&L
facilities could be affected.
To address the DEP regulations, PP&L is moving forward with its plan
to install dry fly ash handling systems at the Brunner Island, Sunbury and
Holtwood stations. PP&L, with siting assistance from a public advisory
group, has chosen mine sites at which to use the dry fly ash from the
Sunbury and Holtwood stations for reclamation. In addition, PP&L is
pursuing opportunities to beneficially use coal ash from the Brunner Island
station in various roadway construction projects in the vicinity of the
plant that may delay or preclude the need for a new disposal facility.
Groundwater degradation related to fuel oil leakage from underground
facilities and seepage from coal refuse disposal areas and coal storage
piles has been identified at several PP&L generating stations. Many
requirements of the DEP regulations address these groundwater degradation
issues. PP&L has reviewed its remedial action plans with the DEP.
Remedial work is substantially completed at two generating stations.
There is nothing to indicate remedial work will be required at other PP&L
generating stations.
The DEP regulations to implement the toxic control provisions of the
Federal Water Quality Act of 1987 and to advance Pennsylvania's toxic
control program authorize the DEP to use both biomonitoring and a water
quality based chemical-specific approach in the National Pollutant
Discharge Elimination System (NPDES) permits to control toxics. The
current Montour station NPDES permit contains very stringent limits for
certain toxic metals and increased monitoring requirements. Toxic
reduction studies are being conducted at the Montour station before the
permit limits become effective. Depending on the results of the studies,
additional water treatment facilities may be needed at the Montour station.
Improvements and upgrades are being planned for the Sunbury, Brunner Island
and Holtwood stations' waste water treatment systems to meet the
anticipated NPDES permit requirements.
In June 1995, the DEP ordered a PP&L subsidiary to abate seepage
allegedly discharged from a mine formerly operated by that subsidiary. The
subsidiary currently does not believe that it is responsible for this
seepage and is contesting the DEP order. A consultant was hired to perform
additional testing to determine the source of the seepage. If no direct
connection exists between the mine water and the seepage, no abatement is
required.
Capital expenditures through 2000, to comply with the residual waste
regulations, correct groundwater degradation at fossil-fueled generating
stations and address waste water control at PP&L facilities, are discussed
in the table of construction expenditures in the Management's Discussion
and Analysis of Financial Condition and Results of Operations under the
caption "Financial Condition - Capital Expenditure Requirements". PP&L
currently estimates that about $30 million of additional capital
expenditures could be required beyond 2000. Actions taken to correct
groundwater degradation, to comply with the DEP's regulations and to
address waste water control are also expected to result in increased
operating costs in amounts which are not now determinable but could be
material.
PP&L has signed a Consent Order with the DEP to address a number of
sites where PP&L may be liable for remediation of contamination. This may
include potential polychlorinated biphenyl contamination at certain of
PP&L's substations and pole sites; potential contamination at a number of
coal gas manufacturing facilities formerly owned and operated by PP&L; and
oil or other contamination which may exist at some of PP&L's former
generating facilities. As a current or past owner or operator of these
sites, PP&L may be liable under the Federal Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended (Superfund),
or other laws for the costs associated with addressing any hazardous
substances at these sites.
These sites have been prioritized based upon a number of factors,
including any potential human health or environmental risk posed by the
site, the public's interest in the site, and PP&L's plans for the site.
Under the Consent Order, PP&L will not be required by DEP to spend more
than $5 million per year on investigation and remediation at those sites
covered by the Consent Order.
At September 30, 1995, PP&L had accrued $11.7 million, representing
the amount PP&L can reasonably estimate it will have to spend to remediate
sites involving the removal of hazardous or toxic substances including
those covered by the Consent Order mentioned above. PP&L is involved in
several other sites where it may be required, along with other parties, to
contribute to such remediation. Some of these sites have been listed by
the EPA under Superfund, and others may be candidates for listing at a
future date. Future cleanup or remediation work at sites currently under
review, or at sites currently unknown, may result in material additional
operating costs which PP&L cannot estimate at this time. In addition,
certain federal and state statutes, including Superfund and the
Pennsylvania Hazardous Sites Cleanup Act, empower certain governmental
agencies, such as the EPA and the DEP, to seek compensation from the
responsible parties for the lost value of damaged natural resources. The
EPA and the DEP may file such compensation claims against the parties,
including PP&L, held responsible for cleanup of such sites. Such natural
resource damage claims against PP&L could result in material additional
liabilities.
Concerns have been expressed by some members of the scientific
community and others regarding the potential health effects of electric and
magnetic fields (EMF). These fields are emitted by all devices carrying
electricity, including electric transmission and distribution lines and
substation equipment. Federal, state and local officials are focusing
increased attention on this issue. PP&L is actively participating in the
current research effort to determine whether or not EMF causes any human
health problems and is taking steps to reduce EMF, where practical, in the
design of new transmission and distribution facilities. PP&L is unable to
predict what effect the EMF issue might have on PP&L operations and
facilities and the associated cost.
In complying with statutes, regulations and actions by regulatory
bodies involving environmental matters, including the areas of water and
air quality, hazardous and solid waste handling and disposal and toxic
substances, PP&L may be required to modify, replace or cease operating
certain of its facilities. PP&L may also incur material capital
expenditures and operating expenses in amounts which are not now
determinable.
PP&L Resources, Inc. and Pennsylvania Power & Light Company
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Effective April 27, 1995, PP&L Resources, Inc. (Resources), which had
been a wholly owned subsidiary of Pennsylvania Power & Light Company
(PP&L), became the parent holding company of PP&L. As of the effective
date, the holders of PP&L common stock became holders of Resources common
stock and the stock certificates representing PP&L common stock now
represent Resources common stock. Also effective April 27, 1995, Power
Markets Development Company (PMDC), a subsidiary of PP&L, became a direct
subsidiary of Resources. In July 1995, Resources incorporated a new
subsidiary, Spectrum Energy Services Corporation (Spectrum), to pursue
unregulated business opportunities that are allied to the energy business.
PP&L is the principal subsidiary of Resources and, as such, this
discussion explains material changes in results of operations as reflected
in both Resources' and PP&L's Consolidated Statements of Income and also
focuses on recent trends and events affecting Resources' and PP&L's
financial conditions. This discussion should be read in conjunction with
the section entitled "Review of the Company's Financial Condition and
Results of Operations" in PP&L's Annual Report to the Securities and
Exchange Commission on Form 10-K for the year ended December 31, 1994.
Results of Operations
The following explains material changes in principal items on the
Consolidated Statements of Income comparing the three months and nine
months ended September 30, 1995 to the comparable periods ended September
30, 1994.
The Consolidated Statements of Income reflect the results of past
operations and are not intended as any representation of the results of
future operations. Future results of operations will necessarily be
affected by various and diverse factors and developments. Because results
for interim periods can be disproportionately influenced by various factors
and developments and by seasonal variations, the results of operations for
interim periods are not necessarily indicative of results or trends for the
year.
Earnings - Resources
Comparison of Earnings
September 30,
3 Months Ended 9 Months Ended
1995 1994 1995 1994
Earnings per share - actual $0.55 $0.46 $1.48 $1.46
Weather variance (0.05) (0.02) 0.01 (0.10)
Earnings per share,
weather-normalized 0.50 0.44 1.49 1.36
Employee reduction programs:
Voluntary early retirement program-PUC (0.24) (0.24)
Other employee reductions 0.07 0.07
One-time adjustments:
Recovery of postretirement benefits
other than pensions-PUC (0.10) (0.10)
Disallowance of Susquehanna Unit No. 1
deferred operating and capital costs 0.13 0.13
Recovery of purchased power costs (0.04)
Recognition of deferred tax liabilities
relating to undeveloped coal
reserves 0.03 0.03
Expensing deferred PUC-jurisdictional
postretirement benefits - applicable
to 1993 0.04
Unrecovered purchased power costs _____ _____ _____ 0.06
Earnings Per Share-Normalized $0.39 $0.44 $1.34 $1.46
The reductions in earnings excluding weather, employee reduction
programs and one-time adjustments for the three and nine months ended
September 30, 1995 and 1994 were primarily due to the annual increase in
depreciation for the Susquehanna station and the depreciation of PP&L's
other new property placed in service.
Several key initiatives have been put in place to improve financial
performance. These initiatives include:
o A $671 million reduction in capital expenditures over the five-year
period 1996-2000, including reductions of $93 million and $220
million for 1996 and 1997, respectively; these reductions reflect,
among other things, a decision to not install flue gas
desulfurization equipment (FGD) at PP&L's Montour station;
o Except for common equity capital to be provided through sales of
common stock under the Dividend Reinvestment Plan (DRIP) by
Resources, PP&L expects to meet all of its construction
expenditures and debt maturities through internally generated funds
during the five-year period 1996-2000;
o A planned 8% ($56 million) reduction in operation and maintenance
costs by the year 2000; and
o Marketing and economic development activities to achieve an average
compound growth rate of about 2% annually in sales to service area
customers through the year 2000.
Resources and PP&L believe that the PUC's September 27, 1995 rate
decision (PUC decision) and these initiatives should result in financial
performance that will permit Resources to increase shareowner value,
including growth in earnings per share and in the dividend on common stock
over the long term. Actual sales growth and improvement in earnings and
financial performance will depend upon economic conditions, the levels of
consumption, the impact of increasing competition in the electric utility
industry, the effects of regulation and other factors. Additionally, PP&L
remains committed to a corporate objective of keeping its prices as stable
as possible and maintaining customer rates that compare favorably with
those of neighboring utilities.
See Financial Note 3 for detailed information about PP&L's recent
Pennsylvania Public Utility Commission (PUC) decision.
Electric Energy Sales - PP&L
System Sales
System, or service area, sales for the three months ended September
30, 1995 were approximately 8.1 billion kwh, an increase of 368 million
kwh, or 4.7%, over the three months ended September 30, 1994. Sales for
the third quarter of 1995 to residential, commercial, and industrial
customers increased 6.9%, 5.3%, and 2.7%, respectively, over the comparable
period in 1994.
System sales were approximately 24.7 billion kwh for the nine months
ended September 30, 1995, essentially unchanged from the nine months ended
September 30, 1994. Sales in the residential customer category were lower
for the nine months ended September 30, 1995 than for the comparable period
in 1994, primarily due to the extreme cold weather in the first quarter of
1994 compared to milder weather in the first quarter of 1995. However,
sales in the commercial and industrial customer categories were higher in
the first nine months of 1995 than in the comparable period in 1994.
Industrial sales, which are not affected by weather conditions, increased
in each of the first three quarters of 1995 and each quarter of 1994.
Industrial sales are an important indicator of the economic health of
PP&L's service area.
Weather-normalized system sales totaled 24.7 billion kwh for the nine
months ended September 30, 1995. This represents an increase of 559
million kwh, or 2.3%, over the same period in 1994. Weather-normalized
sales to residential, commercial, and industrial customers were higher in
the first nine months of 1995 than in the first nine months of 1994.
Sales to Other Major Electric Utilities
For the three months ended September 30, 1995, contractual sales to
other major utilities were 2.3 billion kwh, 31.1% higher than the
comparable period in 1994, while sales to Pennsylvania-New Jersey-Maryland
Interconnection Association (PJM) were 915 million kwh, or 40.4% lower than
the comparable period in 1994. These fluctuations were primarily due to an
increase in direct two-party sales to other utilities versus sales to the
PJM.
Contractual sales to other major utilities for the nine months ended
September 30, 1995 were 5.8 billion kwh, 23.7% higher than the comparable
period in 1994, while sales to the PJM for the nine months ended September
30, 1995, were 1.9 billion kwh, 23.3% lower than the comparable period in
1994. These changes were primarily due to an increase in direct two-party
sales to other utilities versus sales to PJM. See Financial Note 4 for a
discussion on PP&L's long-term contracts with other major utilities.
Rate Matters - PP&L
On September 27, 1995, the PUC issued a final order with respect to
the base rate case filed by PP&L on December 30, 1994.
PP&L's request to increase base rates, which was its first in ten
years, sought to increase PUC-jurisdictional revenues by $261.6 million, or
about 11.7%. The PUC decision in the rate case grants PP&L a $107 million
increase based on test year conditions. An allocation of a $22 million
credit to base rates from the Energy Cost Rate (ECR) will produce an $85
million, or about 3.8%, increase in PUC-jurisdictional revenues effective
September 28, 1995.
See Financial Note 3 for detailed information about PP&L's base rate
filing with the PUC as well as information about other rate matters.
Operating Revenues - PP&L
Changes in total operating revenues were attributable to the
following:
September 30, 1995 vs. September 30, 1994
(Millions of Dollars)
Three Months Nine Months
Ended Ended
Sales volume & sales mix effect $16.3 $ 28.7
Weather effect 8.8 (37.1)
Energy revenues 3.7 (43.0)
Replacement power costs - 25.4
Reduction in PA corporate income tax (2.9) (10.9)
Sales to other major utilities 14.3 12.6
PJM energy sales (13.0) (21.0)
Capacity-related and transmission
entitlement transactions (7.1) (9.0)
Other 1.0 2.4
$21.1 $(51.9)
Lower energy revenues of $43.0 million for the nine months ended
September 30, 1995, were partially offset by a $25.4 million increase in
revenues due to replacement power costs, which was the result of a $15.7
million decrease in revenues in the first quarter of 1994 for the
unrecovered replacement power costs and a $9.7 million increase in revenues
in the first quarter of 1995 for the partial recovery of these replacement
power costs. The net effect on energy costs is a $17.6 million decrease in
1995 from the comparable period in 1994.
Revenues from capacity-related sales and transmission entitlements for
the three and nine months ended September 30, 1995, were lower than the
comparable periods in 1994 due to the end of one of PP&L's long-term
contracts for capacity credit sales.
Fuel Expense - PP&L
Fuel expense for the three months ended September 30, 1995 increased
$8.2 million, 6.9% from the comparable period in 1994 due to:
Components of Steam Stations Combustion
Fuel Cost - Coal- Oil- Nuclear- Turbines &
Thousands of Dollars Fired Fired Fired Diesels Total
Higher (Lower) Output $ 8,917 $ 7,004 $(1,611) $1,052 $15,362
Higher (Lower) Price
of Fuel (2,457) (1,551) (3,183) 5 (7,186)
$ 6,460 $ 5,453 $(4,794) $1,057 $ 8,176
Fuel expense for the nine months ended September 30, 1995 decreased
$38.6 million, 10.6% from the comparable period in 1994 due to:
Components of Steam Stations Combustion
Fuel Cost - Coal- Oil- Nuclear- Turbines &
Thousands of Dollars Fired Fired Fired Diesels Total
Higher (Lower) Output $ 9,903 $(40,533) $ 7,033 $(1,004) $(24,601)
Higher (Lower) Price
of Fuel (7,021) 2,928 (9,920) 23 (13,990)
$ 2,882 $(37,605) $(2,887) $ (981) $(38,591)
Total generation for the three and nine months ended September 30,
1995 increased 4.5% and 3.5% from the comparable periods in 1994,
respectively. The increased generation was due to higher system sales for
the three months ended September 30, 1995 and lower power purchases for the
nine months ended September 30, 1995.
Other Operation, Maintenance and Depreciation Expenses - PP&L
Other operating expenses decreased $8.1 million and $11.4 million,
respectively, for the three and nine months ended September 30, 1995 over
the comparable periods in 1994. These decreases were primarily due to the
regulatory effects of accounting for Statement of Financial Accounting
Standards (SFAS) 106, "Employees' Accounting for Postretirement Benefits
Other Than Pensions", as discussed in 'Post Retirement Benefits Other Than
Pensions'. Excluding these effects, other operating expense increased
$19.2 million and $32.3 million, respectively, for the three and nine
months ended September 30, 1995.
For the three months ended September 30, 1995, $14.3 million of the
increase was applicable to the costs associated with PP&L's workforce
reductions while another $6.5 million was due to its increased re-
engineering efforts and computer network support costs.
The increase for the nine months ended September 30, 1995 was due to
$17.7 million applicable to the costs associated with PP&L's workforce
reductions with an additional $17.0 million applicable to increased costs
for computer network support which should increase future productivity.
Maintenance expense decreased $4.7 and $10.0 million, respectively,
for the three and nine months ended September 30, 1995. This decrease is
primarily due to PP&L's continuing efforts to reduce maintenance costs and
achieve longer operating cycles at selected fossil-fueled plants.
Depreciation expense increased $8.7 million and $26.1 million,
respectively, for the three and nine months ended September 30, 1995,
compared to the same period in 1994. Higher depreciation expense reflects
the annual increase associated with the method of depreciating the
Susquehanna station and the depreciation of new property placed in service
by PP&L. The PUC decision allows PP&L to levelize the annual amount of
depreciation on pre-1989 property for its Susquehanna station at $173
million for the period October 1, 1995 through December 31, 1998. This
levelization eliminates the previously scheduled annual increase in
depreciation expense resulting from the modified sinking fund method of
depreciation. As part of its proposal to levelize depreciation, PP&L
agreed to automatically reduce annual Susquehanna station depreciation on
January 1, 1999 with a related reduction in base rates to reflect the
return to straight line depreciation.
PP&L continues its ongoing re-engineering and cost reduction efforts,
which are expected to impact the size of PP&L's workforce. As a result of
these efforts, PP&L on November 13, 1995, announced that about 300
bargaining unit positions will be eliminated throughout its service
territory. Although no specific targets have been set, PP&L currently
expects that the present level of 6,730 full time employees will decline to
6,000 or fewer employees over the next few years. As the workforce
declines, additional costs may be incurred due to the reductions, in
amounts that are not currently determinable. See Financial Note 8 for
detailed information on workforce reductions.
Postretirement Benefits Other Than Pensions - PP&L
As a result of the PUC decision, PP&L recorded in September 1995 a
$27.0 million credit to income that represents the amount resulting from
the adoption of SFAS 106 that would have been deferred from January 1, 1993
through September 30, 1995 but for a 1994 Pennsylvania Commonwealth Court
(Commonwealth Court) decision [now awaiting possible Pennsylvania Supreme
Court review] which reversed a PUC order and ruled that PP&L could not
recover these deferred costs. At that time, PP&L began to expense the
increased costs applicable to operations that would otherwise have been
deferred and wrote off such costs deferred from January 1, 1993.
For the three and nine months ended September 30, 1995, retiree
benefit costs charged to operating expense decreased $27.3 million and
$43.7 million, respectively, from the comparable periods in 1994. The
change for the third quarter is primarily due to the PUC decision in
September 1995 while the decrease for the nine month periods is due to the
PUC decision and the charge of $17.0 million ($10.8 million of which is
applicable to 1993) in the second quarter of 1994 as a result of the
Commonwealth Court decision.
See Financial Notes 3 and 7 for more details on the PUC decision and
"New Regulatory Assets - PP&L".
Income Taxes - Resources/PP&L
For the three months ended September 30, 1995 income tax expense
increased $44.4 million, or 79.3%, over the comparable period in 1994. This
is primarily due to an increase in Resources' pre-tax income of $61.6
million, expensing deferred tax assets of $11.4 million as a result of the
PUC decision, and recognizing deferred tax liabilities of $4.1 million
relative to undeveloped coal reserves. Partially offsetting these
increases was a $1.2 million decrease resulting from the reduction of the
Pennsylvania corporate net income tax rate from 11.99% to 9.99%.
For the nine months ended September 30, 1995 income tax expense
increased $36.6 million, or 20.1%, over the comparable period in 1994.
This resulted primarily from an increase in Resources' pre-tax income of
$46.0 million and the one-time adjustments related to the PUC decision and
undeveloped coal reserves described above. Partially offsetting these
increases was a $5.9 million decrease resulting from the reduction of the
Pennsylvania corporate net income tax rate.
See Financial Note 3 for more details on "Rate Matters".
Voluntary Early Retirement Program - PP&L
In the PUC decision, PP&L was permitted to recover the PUC-
jurisdictional portion of the cost, or $65.7 million, of its 1994 voluntary
early retirement program in customer rates over a period of five years.
The estimated annual savings of $35 million were also reflected in the
allowed base rates.
See Financial Notes 3 and 7 for more details on the PUC decision and
"New Regulatory Assets - PP&L".
Other Income and (Deductions) - Other-Net - Resources
'Other-net' decreased for the three and nine months ended September
30, 1995, $20.5 and $15.1 million, respectively, compared to the same
periods in 1994. These decreases are primarily due to a $10.5 million
charge to expense associated with evaluating and responding to PECO Energy
Company's unsolicited proposal to acquire Resources and the $8.9 million
write-off of the Susquehanna Unit No. 1 deferred operating and capital
costs which were disallowed in the PUC decision. Partially offsetting
these decreases was an increase of $2.9 million in the equity earnings in
PP&L's subsidiaries for the nine months ended September 30, 1995 over the
comparable period in 1994.
Fourth Quarter 1995 Events - PP&L
In October 1995, a PP&L subsidiary entered into an agreement to sell
one of its subsidiaries that owns coal mining assets. PP&L has determined
these assets will not be required for future operations. PP&L estimates
that after-tax income of approximately $24 million will be recorded in the
fourth quarter upon closing this transaction.
PP&L is reviewing the level of spare parts at its power plants and the
capitalized costs of a new information system. The potential write-off
from the above items is not yet determinable, but may eliminate a
substantial portion of the gain associated with the sale of the coal
assets.
Financial Condition
Reduction in Capital Expenditure Requirements - PP&L
The schedule below shows PP&L's current capital expenditure
projections for the years 1995-2000. This schedule reflects the $671
million reduction in capital expenditures over the period 1996 through
2000, as previously discussed.
Capital Expenditure Requirements (a)
------------Projected---------------
1995 1996 1997 1998 1999 2000
(Millions of Dollars)
Construction expenditures
Generating facilities $102 $ 80 $ 63 $ 68 $ 56 $ 61
Transmission and distribution
facilities 167 146 140 142 145 150
Environmental 42 33 25 33 25 3
Other 60 49 30 22 18 17
371 308 258 265 244 231
Nuclear fuel owned and leased 54 91 64 64 65 66
Other leased property 39 7 7 7 8 8
Total $464 $406 $329 $336 $317 $305
(a) Construction expenditures include Allowance for Funds Used During
Construction which is expected to be less than $20 million in each of
the years 1995-2000.
A significant portion of the reduction in construction expenditures
during this period reflects PP&L's decision to not install flue gas
desulfurization equipment (FGD) on the two 750,000 kilowatt coal-fired
generating units at the Montour station with an estimated capital cost of
$413 million. Instead of relying on the FGD to achieve compliance with the
Phase II requirements of the Federal Clean Air Act Amendments of 1990
(Clean Air Act), PP&L plans to purchase low sulfur coal, consume banked
emission allowances and purchase additional emission allowances.
PP&L also has reduced its projected construction expenditures for
transmission and distribution facilities during this period by about $120
million and reduced its expenditures for construction improvements at
fossil-fueled and hydro generating stations by $78 million from the amounts
included in the 1995 Construction Budget. Reductions in construction
expenditures previously expected to be spent for the development of a new
customer information system and other projects over the 1996-2000 period
account for another $60 million of reductions in capital spending.
Financing Programs - Resources/PP&L
Resources will continue to obtain common equity capital through the
operation of the DRIP and PP&L's Employee Stock Ownership Plan (ESOP).
From January through October 1995, Resources obtained $72.2 million of
common equity through the DRIP. It is expected that the DRIP will be
continued during the years 1996 and 1997, resulting in proceeds of about
$70 million annually, and that the ESOP will be continued during the years
1996 through 2000, with expected proceeds of about $8 million annually.
In August 1995, PP&L issued $55 million of First Mortgage Bonds, 6.15%
Pollution Control Bonds Series K due 2029, that provided for the refunding
of $55 million First Mortgage Bonds, 9.375% Pollution Control Bonds Series
G, on September 1, 1995. In addition, PP&L plans to issue up to $250
million of first mortgage bonds in 1995 to retire higher cost bonds
purchased in the open market earlier in 1995 and to reduce its short-term
debt.
PP&L also anticipates the issuance of $116 million of unsecured notes
in early 1996 in order to redeem higher-cost bonds through the maintenance
and replacement fund provisions of PP&L's Mortgage.
Except for funds derived from sales of common stock by Resources, as
described above, Resources expects that internally generated funds (after
provision for dividends) will be adequate to meet its capital requirements
and $415 million of debt maturities for the years 1996-2000. PP&L has no
preferred stock sinking fund requirements during 1996-2000.
To enhance financing flexibility, a $250 million revolving credit
arrangement is maintained with a group of banks and is used principally as
a back-up for PP&L's commercial paper, and $45 million in credit
arrangements are maintained with a group of banks to provide back-up for
PP&L's commercial paper and short-term borrowings of certain subsidiaries.
No borrowings were outstanding at September 30, 1995 under these
arrangements.
Financial Indicators - Resources
The ratio of pre-tax income to interest charges was 3.5 and 3.3,
respectively, for the nine months ended September 30, 1995 and 1994. The
annual per share dividend rate on common stock remained unchanged at $1.67
per share. The ratio of the market price to book value of common stock was
145% at September 30, 1995 compared with 123% at September 30, 1994.
Commitments and Contingent Liabilities - PP&L
There have been no material changes related to PP&L's commitments and
contingent liabilities since PP&L filed its 1994 Form 10-K, except for the
discussions in Financial Note 11, "Commitments and Contingent Liabilities",
regarding the denial of plaintiff's motion for class certification in the
Fuel Oil Dealers' Litigation and environmental matters.
Increasing Competition
See "Earnings-Resources" for a discussion of PP&L's strategic
initiatives to improve financial performance and enhance its competitive
position.
Regulatory Developments - PP&L
In May 1994, the PUC ordered a generic investigation to examine the
role of competition in Pennsylvania's electric utility industry. The
purpose of the investigation is to solicit input regarding the potential
impact of competition on the state's electric utilities and their
customers. The first phase of the investigation was a paper proceeding to
gather and analyze data at both the wholesale and retail levels of the
electric utility industry. Interested parties filed written comments
addressing the following specific topics: wheeling - issues and impact,
consumer issues, safety and reliability, the impact of market structure
changes and legal issues. PP&L submitted comments in response to the PUC
order.
The second phase of the investigation will involve hearings to accept
testimony from interested parties. These hearings, commencing in December
1995, will be presided over by the PUC Commissioners and an Administrative
Law Judge.
In March 1995, the Federal Energy Regulatory Commission (FERC) issued
a major Notice of Proposed Rulemaking (NOPR) primarily dealing with open
access to transmission lines and recovery of stranded costs. The NOPR
would require all utilities to file open access tariffs available to all
wholesale sellers and buyers of electricity. The tariffs must offer point-
to-point and network services, as well as ancillary services. A utility
would have to offer these services to all eligible customers on a basis
comparable to the services the utility provides to itself. A utility must
take service under its transmission access tariff for its own wholesale
sales and purchases. The NOPR would not affect existing transmission
agreements.
The NOPR also provides that utilities are entitled to recover all
"legitimate, prudent and verifiable stranded costs" incurred as a result of
rendering transmission services pursuant to their tariffs. The FERC
proposes to provide recovery mechanisms for wholesale stranded costs,
including stranded costs resulting from municipalization. The NOPR
contains filing requirements for utilities to seek recovery of wholesale
stranded costs. Wholesale contracts signed after July 11, 1994 must
contain explicit provisions authorizing recovery of stranded costs. For
contracts signed before this date, a utility may seek recovery if it can
show that it had a reasonable expectation of continuing to serve the
customer after the contract term and that it has made reasonable efforts to
mitigate any stranded costs. PP&L's contracts with its 18 FERC wholesale
customers were signed before July 11, 1994.
The states have responsibility for adopting policies concerning
recovery of stranded costs resulting from retail wheeling transactions.
Under the NOPR, the FERC will assert jurisdiction over such costs only if
the states lack authority to deal with stranded costs.
Initial comments on the open access and stranded cost recovery
portions of the NOPR were due by August 7, 1995. PP&L filed comments on
the NOPR.
New Markets - Resources
One of Resources' strategic initiatives is to invest in power-related
businesses outside of PP&L's service territory, both domestically and in
foreign countries. To take advantage of these new business opportunities,
PP&L formed a holding company structure, effective April 27, 1995, after
receiving all necessary regulatory approvals and shareowner approval at
PP&L's 1995 annual meeting. As a result of this restructuring, PP&L became
a direct subsidiary of Resources.
In March 1994, PP&L incorporated a new subsidiary, PMDC, and made an
initial investment of $50 million in this new subsidiary. Effective April
27, 1995, PMDC became a subsidiary of Resources. PMDC will engage in
unregulated business activities through investments in world-wide power
markets. On July 13, 1995, PMDC invested $10.1 million as part of a
consortium that is part owner of an electric generating company in Bolivia
and , on October 11, 1995, committed to invest up to $10 million as a
partner in a fund which will invest in Latin American generation,
transmission and distribution business.
In July 1995, Resources formed another unregulated subsidiary,
Spectrum, to pursue opportunities to offer energy-related products and
services to PP&L's existing customers and to others beyond PP&L's service
territory. Other subsidiaries may be formed to take advantage of new
business opportunities.
Proposed Acquisition by
PECO Energy Company
On August 14, 1995, PECO publicly announced a proposal to acquire
Resources. The PECO proposal was made to the Board of Directors of
Resources. Under this proposal, each share of Resources common stock would
have been converted into 0.865 of a share of PECO common stock.
On September 5, 1995, the Resources' Board of Directors, after due
consideration and review of the PECO proposal, unanimously voted to reject
the PECO proposal. The Resources' Board of Directors concluded that the
PECO proposal was not in the best interests of Resources, its shareowners,
customers, employees or the communities it serves.
On October 23, 1995, PECO made a revised acquisition proposal for
consideration by the Resources' Board of Directors. Under the revised
proposal, Resources' shareowners would have received 0.921 shares of PECO
common stock for each share of outstanding Resources' common stock which
they owned. PECO stated that the revised proposal was its "final offer."
On November 1, 1995, Resources' Board of Directors, after a comprehensive
analysis, unanimously voted to reject PECO's revised proposal. The Board
concluded that PECO's revised proposal was not in the best interests of
Resources and its shareowners, customers, employees or the communities it
serves. Later that same day, PECO withdrew its proposal to acquire
Resources and stated that it would take no further action to pursue such a
transaction.
Certain Litigation
On October 2, 1995, a shareowner of Resources sent a letter to the
Board (Demand Letter) which, among other things, requested that Resources
"commence legal proceedings" against each of the directors "for failing to
prudently exercise [their] fiduciary duties to Resources and its
shareholders" in regard to the PECO proposal. Resources' Board considered
the Demand Letter at meetings held on October 25 and November 1, 1995, and
determined unanimously in the exercise of its business judgment that
commencement by Resources of legal proceedings against the directors as
requested in the Demand Letter would not be in the best interests of
Resources. On November 1, 1995, Resources filed an action for declaratory
judgment in the Court of Common Pleas for Lehigh County, Pennsylvania
against this shareowner. The action seeks, among other things, a judgment
that the Resources Board's determination to refuse the shareowner's demand
was a valid exercise of its business judgment.
PP&L RESOURCES, INC. AND
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 3 to Financial Statements for information
concerning rate matters.
Reference is made to Note 11 to Financial Statements for information
concerning two complaints filed against PP&L by fuel oil dealers alleging
that PP&L's promotion of electric heat pumps and off-peak storage systems
had violated and continues to violate the federal antitrust laws.
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations - "Proposed Acquisition by PECO Energy
Company - Certain Litigation" for information concerning a Demand Letter
sent to the Resources Board by a shareowner and a declaratory judgment
action by Resources.
In August 1995, Jersey Central Power & Light Company (JCP&L) filed a
complaint against the Company with the Federal Energy Regulatory Commission
(FERC). JCP&L purchases 945 MW of capacity and energy from PP&L pursuant
to an agreement that was accepted by FERC in 1984. (Under the terms of
that agreement, beginning on January 1, 1996, the amount of capacity and
energy purchased by JCP&L decreases yearly by 189 MW until the contract
terminates on December 31, 1999). In its complaint, JCP&L alleges that
PP&L inappropriately allocated certain costs to JCP&L related to
Susquehanna depreciation, auxiliary facilities and services, PP&L's
voluntary early retirement program, environmental liability reserves, and
other items. JCP&L also alleges that it should receive Clean Air Act
emission allowances from PP&L. JCP&L is seeking refunds (with interest) in
an unspecified amount, an amendment to the agreement, and corrections by
PP&L of its billing practices. On September 18, 1995, PP&L filed an answer
denying JCP&L's allegations and requesting that FERC dismiss the complaint.
PP&L cannot predict the final outcome of this proceeding.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4 - Copy of the Sixty-fourth Supplemental Indenture, dated as of
August 1, 1995, to PP&L's Mortgage and Deed of Trust, dated as of
October 1, 1945, pursuant to which PP&L's First Mortgage Bonds,
Pollution Control Series K, were issued.
27 - Financial Data Schedule
(b) Reports on Form 8-K
Report Dated October 6, 1995
Item 5. Other Events
Information regarding the Pennsylvania Public Utility Commission's
final order with respect to the base rate case filed by PP&L.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized. The signature for each
undersigned company shall be deemed to relate only to matters having
reference to such company or its subsidiary.
PP&L Resources, Inc.
(Registrant)
Pennsylvania Power & Light Company
(Registrant)
Date: November 14, 1995
R. E. Hill
Senior Vice President-Financial and
Treasurer (PP&L Resources, Inc.)
Senior Vice President-Financial
(Pennsylvania Power & Light Company)
J. J. McCabe
Vice President & Controller (PP&L
Resources, Inc. and Pennsylvania
Power & Light Company)