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 March 31, 1996
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,
160,729,489 shares outstanding at
April 30, 1996
Pennsylvania Power & Light Co. Common stock, no par value,
157,300,382, shares outstanding and
all held by PP&L Resources, Inc. at
April 30, 1996
PP&L RESOURCES, INC.
AND
PENNSYLVANIA POWER & LIGHT COMPANY
FORM 10-Q
FOR THE QUARTER ENDED March 31, 1996
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
GLOSSARY OF TERMS AND ABBREVIATIONS
SIGNATURES
PP&L RESOURCES, INC. AND SUBSIDIARIES
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 Sheet as of March 31, 1996 and December 31, 1995, and the
Consolidated Statement of Income and Consolidated Statement of Cash Flows for
the periods ended March 31, 1996 and 1995. Resources is the parent holding company of
Pennsylvania Power & Light Company (PP&L), Power Markets Development Company (PMDC),
and 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)
(Millions of Dollars, except per share data)
Three Months
Ended March 31,
1996 1995
Operating Revenues .................................... $789 $727
Operating Expenses
Operation
Fuel.............................................. 124 118
Power purchases................................... 91 74
Other............................................. 122 116
Maintenance.......................................... 40 35
Depreciation......................................... 73 77
Amortized depreciation............................... 17 10
Income taxes......................................... 89 82
Taxes, other than income............................. 57 54
613 566
Operating Income ....................................... 176 161
Other Income and (Deductions)
Allowance for equity funds used during
construction...................................... 1 2
Other - net.................................................. 1
1 3
Income Before Interest Charges & Dividends on Preferred
Stock ................................................ 177 164
Interest Charges
Long-term debt....................................... 52 55
Short-term debt and other............................ 4 3
Allowance for borrowed funds used during
construction and interest capitalized............. (2) (2)
54 56
Preferred Stock Dividend Requirements................... 7 7
Net Income.............................................. $116 $101
Earnings Per Share of Common Stock (a) ................. $0.73 $0.65
Average Number of Shares Outstanding
(thousands)............................................159,890 156,163
Dividends Declared Per Share of Common
Stock..................................................$0.4175 $0.4175
<FN>
(a) Based on average number of shares outstanding.
See accompanying Notes to Financial Statements.
PP&L RESOURCES,INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
March 31, December 31,
1996 1995
(Unaudited)(Audited)
ASSETS
Property, Plant and Equipment
Electric utility plant in service -
at original cost................................. $9,673 $9,637
Accumulated depreciation ........................ (3,179) (3,113)
Deferred depreciation ........................... 192 209
6,686 6,733
Construction work in progress - at cost............ 181 170
Nuclear fuel owned and leased - net
of amortization ................................. 129 134
Other leased property - net of amortization ....... 82 85
Electric utility plant - net..................... 7,078 7,122
Other property - (net of depreciation, amortization
and depletion 1996, $56; 1995, $56).............. 57 57
7,135 7,179
Investments
Associated company - at equity .................... 17 17
Nuclear plant decommissioning trust fund .......... 110 110
Financial investments.............................. 151 142
Other - at cost or less ........................... 21 20
299 289
Current Assets
Cash and cash equivalents ......................... 22 20
Current financial investments ..................... 103 96
Accounts receivable (less reserve: 1996, $36;
1995, $35)....................................... 238 211
Unbilled revenues.................................. 79 92
Fuel (coal and oil) - at average cost.............. 91 82
Materials and supplies - at average cost........... 106 108
Prepayments........................................ 72 11
Deferred income taxes ............................. 45 42
Other.............................................. 31 31
787 693
Deferred Debits
Taxes recoverable through future rates............. 992 1,003
Other ............................................. 318 328
1,310 1,331
$9,531 $9,492
<FN>
See accompanying Notes to Financial Statements.
PP&L RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
March 31, December 31,
1996 1995
(Unaudited)(Audited)
LIABILITIES
Capitalization
Common equity
Common stock................................ $2 $2
Capital in excess of par value ............. 1,531 1,513
Earnings reinvested ........................ 1,133 1,083
Capital stock expense and other ............ (2) (1)
2,664 2,597
Preferred stock
With sinking fund requirements.............. 295 295
Without sinking fund requirements........... 171 171
Long-term debt................................ 2,830 2,829
5,960 5,892
Current Liabilities
Commercial paper .................................... 68
Bank loans ................................... 26 21
Long-term debt due within one year............ 30 30
Capital lease obligations due within one year. 80 81
Accounts payable.............................. 114 128
Taxes accrued................................. 135 47
Interest accrued.............................. 62 66
Dividends payable............................. 74 74
Other......................................... 90 86
611 601
Deferred Credits and Other Noncurrent Liabilities
Deferred investment tax credits .............. 217 219
Deferred income taxes ........................ 2,087 2,106
Capital lease obligations .................... 124 139
Other ........................................ 532 535
2,960 2,999
Commitments and Contingent Liabilities
(See Note 5).........................................
$9,531 $9,492
<FN>
See accompanying Notes to Financial Statements.
PP&L RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Millions of Dollars)
Three Months
Ended March 31,
1996 1995
Cash Flows From Operating Activities
Net income................................................ $116 $101
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation............................................ 90 88
Amortization of property under capital leases........... 22 23
Preferred stock dividend requirements................... 7 7
Amortization of contract settlement proceeds and
deferred cost of power plant spare parts.............. (8) (10)
Deferred income taxes and investment tax credits........ (14) (13)
Change in current assets and current liabilities
Prepayments........................................... (61) (65)
Accounts payable...................................... (14) (35)
Accrued interest and taxes............................ 84 83
Other................................................. (15) 4
Other operating activities -- net....................... 13 14
Net cash provided by operating activities........... 220 197
Cash Flows From Investing Activities
Property, plant and equipment expenditures................ (68) (103)
Proceeds from sales of nuclear fuel to trust.............. 3 10
Purchases of available-for-sale securities ............... (152) (41)
Sales and maturities of available-for-sale securities .... 138 43
Other investing activities -- net......................... 1 3
Net cash used in investing activities............... (78) (88)
Cash Flows From Financing Activities
Issuance of long-term debt................................ 116
Issuance of common stock.................................. 17 19
Retirement of long-term debt.............................. (115)
Payments on capital lease obligations..................... (22) (23)
Common and preferred dividends paid....................... (73) (71)
Net decrease in short-term debt........................... (63) (36)
Net cash used in financing activities............... (140) (111)
Net Increase (Decrease) in Cash and
Cash Equivalents............................................ 2 (2)
Cash and Cash Equivalents at Beginning of Period............ 20 10
Cash and Cash Equivalents at End of Period.................. $22 $8
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for
Interest (net of amount capitalized).................... $55 $51
Income taxes............................................ $14 $14
<FN>
See accompanying Notes to Financial Statements.
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES
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 Sheet as of March 31, 1996 and December 31, 1995,
and the Consolidated Statement of Income and Consolidated Statement of Cash Flows
for the periods ended March 31, 1996 and 1995. 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)
(Millions of Dollars)
Three Months
Ended March 31,
1996 1995
Operating Revenues .................................. $789 $727
Operating Expenses
Operation
Fuel............................................ 124 118
Power purchases................................. 91 74
Other........................................... 122 116
Maintenance........................................ 40 35
Depreciation....................................... 73 77
Amortized depreciation............................. 17 10
Income taxes....................................... 89 82
Taxes, other than income........................... 57 54
613 566
Operating Income ..................................... 176 161
Other Income and (Deductions)
Allowance for equity funds used during
construction.................................... 1 2
Other - net........................................ 2 1
3 3
Income Before Interest Charges........................ 179 164
Interest Charges
Long-term debt..................................... 52 55
Short-term debt and other.......................... 4 3
Allowance for borrowed funds used during
construction and interest capitalized........... (2) (2)
54 56
Net Income............................................ 125 108
Dividends on Preferred Stock.......................... 7 7
Earnings Available to PP&L Resources, Inc. .......... $118 $101
<FN>
See accompanying Notes to Financial Statements.
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
March 31, December 31,
1996 1995
(Unaudited)(Audited)
ASSETS
Property, Plant and Equipment
Electric utility plant in service -
at original cost................................. $9,673 $9,637
Accumulated depreciation ........................ (3,179) (3,113)
Deferred depreciation ........................... 192 209
6,686 6,733
Construction work in progress - at cost............ 181 170
Nuclear fuel owned and leased - net
of amortization ................................. 129 134
Other leased property - net of amortization ....... 82 85
Electric utility plant - net..................... 7,078 7,122
Other property - net of depreciation,
amortization and depletion (1996, $56;
1995, $56) ...................................... 57 57
7,135 7,179
Investments
Associated company - at equity .................... 17 17
Nuclear plant decommissioning trust fund .......... 110 110
Financial investments ............................. 134 132
Other - at cost or less ........................... 9 9
270 268
Current Assets
Cash and cash equivalents ......................... 17 15
Current financial investments ..................... 56 55
Accounts receivable (less reserve: 1996, $36;
1995, $35)...................................... 238 210
Unbilled revenues.................................. 79 92
Fuel (coal and oil) - at average cost.............. 91 82
Materials and supplies - at average cost........... 106 108
Prepayments........................................ 72 11
Deferred income taxes ............................. 45 42
Other.............................................. 32 31
736 646
Deferred Debits
Taxes recoverable through future rates............. 992 1,003
Other ............................................. 318 328
1,310 1,331
$9,451 $9,424
See accompanying Notes to Financial Statements.
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
March 31, December 31,
1996 1995
(Unaudited)(Audited)
LIABILITIES
Capitalization
Common equity
Common stock...................................... $1,476 $1,476
Additional paid-in capital ....................... 28 25
Earnings reinvested............................... 1,085 1,034
Capital stock expense and other .................. (8) (7)
2,581 2,528
Preferred stock
With sinking fund requirements.................... 295 295
Without sinking fund requirements................. 171 171
Long-term debt...................................... 2,830 2,829
5,877 5,823
Current Liabilities
Commercial paper .......................................... 68
Bank loans ......................................... 26 21
Long-term debt due within one year.................. 30 30
Capital lease obligations due within one year....... 80 81
Accounts payable.................................... 114 128
Taxes accrued....................................... 138 48
Interest accrued.................................... 62 66
Dividends payable................................... 74 74
Other............................................... 90 86
614 602
Deferred Credits and Other Noncurrent Liabilities
Deferred investment tax credits..................... 217 219
Deferred income taxes .............................. 2,087 2,106
Capital lease obligations .......................... 124 139
Other .............................................. 532 535
2,960 2,999
Commitments and Contingent Liabilities
(See Note 5)...............................................
$9,451 $9,424
See accompanying Notes to Financial Statements.
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Millions of Dollars)
Three Months
Ended March 31,
1996 1995
Cash Flows From Operating Activities
Net income................................................ $125 $108
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation............................................ 90 88
Amortization of property under capital leases........... 22 23
Amortization of contract settlement proceeds and
deferred cost of power plant spare parts.............. (8) (10)
Deferred income taxes and investment tax credits........ (14) (13)
Change in current assets and current liabilities
Prepayments........................................... (61) (65)
Accounts payable...................................... (14) (35)
Accrued interest and taxes............................ 85 83
Other................................................. (16) 4
Other operating activities -- net....................... 13 14
Net cash provided by operating activities........... 222 197
Cash Flows From Investing Activities
Property, plant and equipment expenditures................ (68) (103)
Proceeds from sales of nuclear fuel to trust.............. 3 10
Purchases of available-for-sale securities ............... (49) (19)
Sales and maturities of available-for-sale securities .... 48 22
Other investing activities -- net......................... 1 3
Net cash used in investing activities............... (65) (87)
Cash Flows From Financing Activities
Issuance of long-term debt................................ 116
Issuance of common stock and capital
contribution from parent................................ 2 19
Retirement of long-term debt.............................. (115)
Payments on capital lease obligations..................... (22) (23)
Common and preferred dividends paid....................... (73) (71)
Net decrease in short-term debt........................... (63) (36)
Net cash used in financing activities............... (155) (111)
Net Increase (Decrease) in Cash and
Cash Equivalents............................................ 2 (1)
Cash and Cash Equivalents at Beginning of Period............ 15 9
Cash and Cash Equivalents at End of Period.................. $17 $8
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for
Interest (net of amount capitalized).................... $55 $51
Income taxes............................................ $14 $14
<FN>
See accompanying Notes to Financial Statements.
PP&L Resources, Inc. and Pennsylvania Power & Light Company
Notes to Financial Statements
Terms and abbreviations appearing in Notes to Financial Statements are
explained in the glossary on page 22.
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 SEC. These financial
statements should be read in conjunction with the financial statements and
notes included in Resources' and PP&L's Annual Report to the SEC on Form
10-K for the year ended December 31, 1995.
Certain amounts in the March 31, 1995 financial statements have been
reclassified to conform to the presentation in the March 31, 1996 financial
statements.
2. Rate Matters - PP&L
Appeal of Base Rate Case
Reference is made to Resources' and PP&L's Annual Report to the SEC on
Form 10-K for the year ended December 31, 1995 regarding the PUC Decision.
The OCA has appealed certain aspects of the PUC Decision to the
Commonwealth Court. PP&L cannot predict the final outcome of this matter.
Energy Cost Rate Issues
In March 1996, the PUC approved PP&L's 1996-97 ECR, effective April 1,
1996. That ECR, which is about $42 million lower than the previous ECR,
reflects lower projected energy costs largely due to lower coal prices,
only one nuclear refueling outage, the start of gas and oil dual fuel
capability at Martins Creek Units 3 and 4, and the end of a settlement
adjustment charge for replacement power costs associated with the 1993
Susquehanna Unit 1 refueling outage.
3. Sales to Other Major Electric Utilities - PP&L
In March 1996, the New Jersey Board of Public Utilities approved an
agreement between PP&L and JCP&L signed in April 1995. 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. Prices under the new agreement are based on a predetermined
reservation rate that escalates over time, plus an energy component based
on PP&L's actual fuel-related costs. PP&L expects to file the agreement
for FERC review and acceptance in May 1996.
4. Financing Activity - Resources/PP&L
During the first quarter of 1996, 699,474 shares of Resources' common
stock ($17 million) were issued through the DRIP. In April 1996, Resources
issued an additional 626,749 shares of common stock ($15 million) through
the DRIP.
Resources has a commitment from certain banks to provide loans under
an unsecured revolving credit facility up to an aggregate $300 million from
time to time. The proceeds of the facility will be used for working
capital and general corporate purposes, including investments in, or loans
to, Resources' subsidiaries.
In March 1996, PP&L issued $116 million principal amount of unsecured
promissory notes which mature in March 2001. At the option of PP&L,
interest rates can be based on Eurodollar deposit rates or the prime rate.
The proceeds from the issuance of these notes were used for the redemption
in March 1996 of $115 million principal amount of First Mortgage Bonds ($40
million principal amount of the 8-1/8 Series due 1999 and $75 million
principal amount of the 7-5/8% Series due 2002) pursuant to the maintenance
and replacement fund provisions of PP&L's Mortgage.
5. Commitments and Contingent Liabilities - Resources/PP&L
There have been no material changes related to Resources' or PP&L's
commitments and contingent liabilities since the companies filed their
joint 1995 Form 10-K.
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 Insurance
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
$2.75 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 March 31, 1996 was about $38 million.
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. PP&L is protected
against this liability by a combination of commercial insurance and an
industry assessment program. In the event of a nuclear incident at any of
the reactors covered by The Price Anderson Amendments Act of 1988, PP&L
could be assessed up to $151 million per incident, payable at a rate of $20
million per year, plus an additional 5% surcharge, if applicable.
Environmental Matters
Air
The Clean Air Act deals, in part, with acid rain, attainment of
federal ambient ozone standards and toxic air emissions. PP&L has complied
with the Phase I acid rain provisions required to be implemented by 1995 by
installing continuous emission monitors on all units, burning with lower
sulfur coal and installing low nitrogen oxide burners on the applicable
units. To comply with the 2000 acid rain provisions, PP&L plans to
purchase lower sulfur coal and use banked or purchased emission allowances
instead of installing FGD on its wholly-owned units. The decision not to
install FGD reduces estimated capital spending by $413 million over the
period 1996 through 2000.
PP&L has met the initial ambient ozone requirements identified in
Title I of the Clean Air Act by reducing nitrogen oxide emissions by 40%
with low nitrogen oxide burners. Further nitrogen oxide reductions to 55%
and 75% of pre-Clean Air Act levels are proposed under the Northeast Ozone
Transport Region's Memorandum of Understanding for 1999 and 2003,
respectively.
The Clean Air Act requires EPA to study the health effects of
hazardous air emission and fine particulates from power plants and other
sources. Adverse findings could cause the EPA to mandate further emission
reductions from PP&L's power plants.
Expenditures to meet the 1999 requirements are included in the table
of projected construction expenditures in "Financial Condition - Reduction
in Capital Expenditure Requirements" on page 35 of the 1995 Form 10-K.
PP&L currently estimates that additional capital expenditures and operating
costs for environmental compliance under the Clean Air Act will be incurred
beyond 2000 in amounts which are not now determinable but could be
material.
Water and Residual Waste
DEP regulations require PP&L to upgrade and repermit existing ash
basins at all of its coal-fired generating stations. 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 siting and design standards set forth
in the regulations.
To address the DEP regulations, PP&L is moving forward with its plan
to install dry fly ash handling systems at its power stations.
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. Remedial
work is substantially completed at two generating stations. At this time,
there is no indication that remedial work will be required at other PP&L
generating stations.
The current Montour station NPDES permit contains stringent limits for
certain toxic metals and increased monitoring requirements. Depending on
the results of toxic reduction studies in progress, additional water
treatment facilities may be needed at the Montour station. PP&L is
reviewing with the DEP the need for and design of waste water treatment
systems at the Sunbury, Brunner Island and Holtwood stations.
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 included
in the table of construction expenditures in "Financial Condition -
Reduction in Capital Expenditure Requirements" on page 35 of the 1995 Form
10-K. PP&L currently estimates that about $68 million of additional
capital expenditures could be required in 2000 and beyond. 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.
Superfund and Other Remediation
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 PCB 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.
At March 31, 1996, PP&L had accrued $11 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. Future cleanup or
remediation work at sites currently under review, or at sites not currently
identified, 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.
Other Environmental Matters
In addition to the issues discussed above, PP&L may be required to
modify, replace or cease operating certain of its facilities to comply with
other statutes, regulations and actions by regulatory bodies or courts
involving environmental matters, including the areas of water and air
quality, hazardous and solid waste handling and disposal, toxic substances
and electric and magnetic fields. In this regard, PP&L also may incur
material capital expenditures, operating expenses and other costs in
amounts which are not now determinable.
For additinal information relating to Environmental Matters, see Note
15 in Resources' and PP&L's Annual Report to the SEC on Form 10-K for the
year ended December 31, 1995.
PP&L Resources, Inc. and Pennsylvania Power & Light Company
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The financial condition and results of operations of PP&L are
currently the principal factors affecting the financial condition and
results of operations of Resources. All nonutility operating transactions
are included in "Other Income and Deductions -- Other-net" on the
Consolidated Statement of Income. This discussion should be read in
conjunction with the section entitled "Review of the Financial Condition
and Results of Operations of PP&L Resources, Inc. and Pennsylvania Power &
Light Company" in Resources' and PP&L's Annual Report to the SEC on Form
10-K for the year ended December 31, 1995.
Terms and abbreviations appearing in the Management's Discussion and
Analysis of the Financial Condition and Results of Operations are explained
in the glossary on page 22.
Results of Operations
The following explains material changes in principal items on the
Consolidated Statements of Income comparing the three months ended March
31, 1996 to the comparable period ended March 31, 1995.
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
Earnings per share of common stock were $.73 for the first quarter of
1996, compared to $.65 per share during the first quarter of 1995. The
following table shows the impact of weather and a one-time adjustment on
earnings for both of these periods:
Comparison of Earnings
Three Months Ended March 31,
1996 1995
Earnings per share - excluding weather
variances and a one-time adjustment $.69 $.66
Weather variances .04 (.05)
One-time adjustment - recovery of
replacement power costs .04
Earnings per share - reported $.73 $.65
The $.03 per share improvement in earnings (excluding weather
variances and the one-time adjustment) was primarily the net effect of:
o Higher PUC and FERC base rate revenues, $.07 per share. This was
primarily due to the impact of the PUC Decision and a 2.1% increase in
system sales;
o Higher employee benefit costs, $.03 per share. First quarter 1996
earnings were impacted by the higher costs of medical and pension
benefits, as well as the amortization of post retirement benefits and
costs of the 1994 VERP, which were included in the recent rate case;
and the
o Reduction in earnings due to the phaseout of the JCP&L contract, $.02
per share.
Electric Energy Sales - PP&L
The increase in PP&L's electric energy sales was attributable to the
following:
March 31, 1996 vs March 31, 1995
Three Months Ended
(Millions of KWH)
Electric energy sales
Residential 460
Commercial 196
Industrial (25)
Other (including UGI) 34
System sales 665
Sales to other utilities 728
PJM energy sales (277)
1,116
System, or service area, sales were 9.6 billion kwh for the three
months ended March 31, 1996, an increase of 7.4% over the three months
ended March 31, 1995. The increase was primarily due to colder weather in
1996 as compared to the same period in 1995. If normal weather had been
experienced in both periods, system sales for the first three months of
1996 would have increased by 2.1% over the first three months of 1995.
Sales to other utilities increased by 37.4% over the first quarter of
1995. For the same period, PJM energy sales decreased by 43.8%. The
increase in sales to other utilities was primarily the result of PP&L's
one-year contract to supply energy to PSE&G and increased emphasis on
bilateral direct sales to other utilities. The decrease in PJM energy
sales was primarily the result of the increased emphasis on bilateral
direct sales to other utilities.
See "Operating Revenues" for more information.
Rate Matters - PP&L
PUC Rate Matters
Reference is made to Resources' and PP&L's Annual Report to the SEC on
Form 10-K for the year ended December 31, 1995 regarding the PUC Decision.
The OCA has appealed certain aspects of the PUC Decision to the
Commonwealth Court. PP&L cannot predict the final outcome of this matter.
In March 1996, the PUC approved PP&L's 1996-97 ECR, effective April 1,
1996. That ECR, which is about $42 million lower than the previous ECR,
reflects lower projected energy costs largely due to lower coal prices,
only one nuclear refueling outage, the start of gas and oil dual fuel
capability at Martins Creek Units 3 and 4, and the end of a settlement
adjustment charge for replacement power costs associated with the 1993
Susquehanna Unit 1 refueling outage.
Operating Revenues - PP&L
The increase in total operating revenues was attributable to the
following:
March 31, 1996 vs. March 31, 1995
(Millions of Dollars)
Three Months
Ended
Sales volume & sales mix $6
Weather 25
Energy revenues 2
Rate increase 30
Sales to other utilities & PJM 5
Other (6)
$62
Colder weather in the first quarter of 1996 increased revenues by $25
million as compared to the first quarter of 1995. The increase in energy
revenues is the net effect of higher energy revenues of $12 million in the
first quarter of 1996 and regulatory action regarding recovery of certain
replacement power costs in the first quarter of 1995.
The increase in sales to other utilities and PJM is mainly the result
of a one year contract to supply energy to PSE&G.
Other revenues for the three months ended March 31, 1996 were lower
than the three months ended March 31, 1995, primarily due to the expiration
of a long-term contract for capacity credit sales.
Purchased Power - PP&L
For the three months ended March 31, 1996 power purchases increased
$17 million, or 23.6%, over the comparable period in 1995. Greater
quantities of power purchased from PJM and other utilities resulted from
increased system sales due to colder-than-normal weather and forced outages
at various coal-fired stations.
Other Operation, Maintenance and Depreciation Expenses - PP&L
Other operating expenses increased for the three months ended March
31, 1996 by $6 million over the comparable period in 1995. This increase
was primarily due to the amortization of VERP costs and post retirement
benefit costs currently being recovered in rates and a $1 million increase
in pension costs.
Maintenance expense increased for the three months ended March 31,
1996 by $5 million over the comparable period in 1995. The increase is
primarily due to the expiration of a credit to income for a change in
inventory practices.
Depreciation expense, including amortized depreciation, increased for
the three months ended March 31, 1996 by $3 million over the comparable
period in 1995. Amortized depreciation increased $7 million as a result of
the PUC Decision providing for Susquehanna depreciation applicable to
property placed in service prior to January 1, 1989, to be recorded at an
annual level of $173 million through 1998. Offsetting this increase was a
$4 million decrease primarily due to the extended depreciable lives of
distribution property provided for in the PUC Decision.
Financial Condition
Financing Programs - Resources/PP&L
From January through April 1996, Resources obtained $32 million from
sales of common equity through the DRIP.
Resources has a commitment from certain banks to provide loans under
an unsecured revolving credit facility up to an aggregate $300 million from
time to time. The proceeds of the facility will be used for working
capital and general corporate purposes, including investments in, or loans
to, Resources' subsidiaries.
In March 1996, PP&L issued $116 million principal amount of unsecured
promissory notes which mature in March 2001. At the option of PP&L,
interest rates can be based on Eurodollar deposit rates or the prime rate.
The proceeds from the issuance of the notes were used for the
redemption in March 1996 of $115 million principal amount of First Mortgage
Bonds ($40 million principal amount of the 8-1/8 Series due 1999 and $75
million principal amount of the 7-5/8% Series due 2002) pursuant to the
maintenance and replacement fund provisions of PP&L's Mortgage.
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. In addition, $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 of its
subsidiaries. No borrowings were outstanding at March 31, 1996 under these
arrangements.
Financial Indicators - Resources
The ratio of pre-tax income to interest charges was 4.6 and 4.1,
respectively, for the three months ended March 31, 1996 and 1995. 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
146% at March 31, 1996 compared with 122% at March 31, 1995.
Commitments and Contingent Liabilities - PP&L
There have been no material changes related to Resources' or PP&L's
commitments and contingent liabilities since the companies filed their
joint 1995 Form 10-K.
Increasing Competition
Background
The electric utility industry has experienced and will continue to
experience a significant increase in the level of competition in the energy
supply market. PP&L has publicly expressed its support for full customer
choice of their energy supplier for all customer classes. PP&L will be
involved in efforts to encourage a smooth transition to full competition.
PP&L believes that this transition to full competition should allow for the
recovery of a utility's stranded investments, which are those costs
incurred by a utility because of federal or state regulatory requirements
and, also, any portion of prudent investments made in generating facilities
which would not be recoverable in a competitive market.
Pennsylvania
In March 1996, legislation was introduced in both the Pennsylvania
House and Senate aimed at ensuring that all customers enjoy the benefits of
more competition in the electricity generation market. In general, the
bills would open up the generation side of the electric utility business to
full competition while maintaining FERC regulation of the transmission
portion of the business and PUC regulation of distribution. In addition,
in mid-1996 the PUC is expected to issue to the Pennsylvania Governor and
General Assembly the report of its investigation on competition in the
state's electric utility industry.
FERC
In April 1996, the FERC adopted rules on competition in the wholesale
electricity market primarily dealing with open access to transmission lines
and recovery of stranded costs. The rules, which are effective 60 days
after publication in the Federal Register, 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 must offer these services to all
eligible wholesale 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
rules do not abrogate existing transmission agreements.
The rules also provide that utilities are entitled to recover all
"legitimate, verifiable, prudently incurred stranded costs" 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 rules
contain 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 18 small utilities were
signed before July 11, 1994. The new rules give these parties the ability
to ask the FERC to modify their contracts on a case-by-case basis. If they
do, under the rules PP&L can ask for recovery of stranded costs.
The rules also require restructuring of transactions within power
pools and bilateral coordination agreements by December 31, 1996 to conform
with the rules. In addition, utilities must separate their transmission
and power marketing functions, and they must implement an electronic
bulletin board for transmission capacity by November 6, 1996.
The states have responsibility for adopting policies concerning
recovery of stranded costs resulting from retail wheeling transactions.
The rules call on utilities to initially seek recovery of such retail
stranded costs from the states.
PP&L filed an open access transmission service tariff with the FERC in
March 1996. The tariff would apply to all new requests for wholesale
transmission service through or within PP&L's system. The tariff would not
supersede PP&L's existing transmission agreements. PP&L's proposed tariff
is similar to the FERC's pro forma tariff in the new rules. The FERC could
approve PP&L's tariff or hold hearings on any part of the tariff.
On a related matter, the PJM companies have been evaluating changes to
the PJM Power Pool to accommodate greater competition and broader
participation. The PJM companies currently plan to submit in mid-1996 a
comprehensive filing for FERC approval with implementation of the new
structure by the end of 1996.
Unregulated Subsidiaries
PMDC is continuing to pursue opportunities to invest in electric
generation, transmission and distribution businesses in the U.S. and in
foreign countries. For a description of specific investments to date, see
Resources' and PP&L's Annual Report to the SEC on Form 10-K for the year
ended December 31, 1995. At the same time, Spectrum continues to evaluate
energy-related products and services which can be offered to PP&L's
existing customers and to others beyond PP&L's service territory.
PP&L RESOURCES, INC. AND
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 2 to Financial Statements for information
concerning rate matters.
In March 1996, PP&L paid a $100,000 civil penalty to the NRC in
connection with an incident in which a security officer at the Susquehanna
nuclear plant claimed to have been subjected to adverse action after he
reported personnel concerns to the NRC. The NRC proposed the civil penalty
for violation of a Commission regulation forbidding adverse employment
action against an employee who raises such concerns.
In August 1991, PP&L and 35 other unrelated parties received an EPA
order under Section 106 of Superfund, requiring that certain remedial
actions be taken at a former oil recovery site in Berks County,
Pennsylvania, which has been included on the federal Superfund list. PP&L
had been identified by the EPA as a potentially responsible party, along
with over 100 other parties. The EPA order required remediation by the 36
named parties of four specific areas of the site.
The EPA at the same time filed a complaint under Section 107 of
Superfund in the United States District Court for the Eastern District of
Pennsylvania (District Court) against PP&L and the same 35 unrelated
parties. The complaint asks the District Court to hold the parties jointly
and severally liable for all EPA's past costs at the site and future costs
of remediating some of the remaining areas of the site.
In July 1993, PP&L and 33 of the 35 unrelated parties received an EPA
order under Section 106 of Superfund requiring remediation of the remaining
areas of the site identified by the EPA. In March 1996, PP&L signed
settlement agreements with the federal government and other potentially
responsible parties to settle the Section 107 and Section 106 actions, as
well as various past cost claims by potentially responsible parties.
PP&L's total payment in these settlements is under $850,000. PP&L expects
these settlements to be approved by and entered in the District Court
within the next several months.
In October 1993, the DEP moved to intervene in the EPA suit, seeking
to hold 16 of the original named parties, including PP&L, liable for all
past and future DEP costs of remediating the site and for any natural
resource damages at the site. The DEP has recently informed PP&L that it
does not presently intend to pursue the natural resource damage claim.
PP&L's share of DEP's past-cost claim is not expected to be material.
In June 1995, the DEP ordered a PP&L subsidiary to abate seepage
allegedly discharged from a mine formerly operated by that subsidiary.
Extensive investigations have revealed that the seeps are not from the
subsidiary's mine. The subsidiary has appealed the order to DEP's EHB,
which has scheduled evidentiary hearings on the matter. If the subsidiary
loses the EHB proceeding, and abatement ultimately is required, the PP&L
subsidiary may be responsible for an extensive and protracted program to
pump water from the mine at a cost which could exceed $4 million.
In August 1991, a group of fuel oil dealers in PP&L's service area
filed a complaint against PP&L in District Court alleging that PP&L's
promotion of electric heat pumps and off-peak thermal storage systems had
violated, and continues 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 over the past four years. The
complaint also requested a permanent injunction against all activities
found to be illegal. All counts against PP&L in this matter have been
dismissed, except for those related to PP&L's payment of cash grants to
developers based upon all-electric builder agreements. The district court
has set a trial date on these counts for January 1997. PP&L cannot predict
the outcome of this litigation.
As a result of its ongoing re-engineering and cost reduction efforts,
PP&L expects further reductions in the number of full-time employees. In
this regard, PP&L and Local Union No. 1600 -- which represents
approximately 4,000 PP&L employees -- agreed to submit to arbitration under
their collective bargaining agreement the issue of whether PP&L can
eliminate bargaining unit positions while utilizing outside contractors for
certain functions. In April 1996, the arbitrator in the first phase of
this proceeding ruled that PP&L's use of outside contractors does not, in
itself, prohibit the elimination of bargaining unit positions under the
agreement. However, the arbitrator concluded that if the bargaining unit
can prove an individual layoff would have been avoided "but for" the hiring
of a contract worker, the collective bargaining agreement language would
prohibit such a layoff. A number of issues, including definitions of
bargaining unit versus contractor work and the application of the "but for"
test to specific job functions, remain to be resolved in the next phase of
the proceeding. PP&L cannot predict the outcome of this matter or the
effect it may have on the continuing workforce reduction effort.
Reference is made to Resources' and PP&L's Annual Report to the SEC on
Form 10-K for the year ended December 31, 1995 regarding citations issued
by the U.S. Department of Labor against one of PP&L's coal mining
subsidiaries for alleged coal-dust sample tampering at one of the
subsidiary's mines. The subsidiary has been informed that the Secretary of
Labor has decided to vacate the citations against the subsidiary and all of
the other mine operators in this matter. This action will terminate this
proceeding.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10 - $116,000,000 Term Credit Agreement among PP&L and the
Lenders (Credit Suisse, Mellon Bank, The Bank of New York, Sanwa Bank,
Toronto Dominion (Texas), Inc., Union Bank of Switzerland and Chemical
Bank) and The First National Bank of Chicago, dated March 14, 1996.
27 - Financial Data Schedule
(b) Reports on Form 8-K
None.
Glossary of Terms and Abbreviations
AFUDC (Allowance for Funds Used During Construction) - the cost of equity
and debt funds used to finance construction projects that is capitalized
as part of construction cost.
Atlantic - Atlantic City Electric Company
Bankruptcy Court - United States Bankruptcy Court for the Middle District
of Pennsylvania
BG&E - Baltimore Gas & Electric Company
Clean Air Act (Federal Clean Air Act Amendments of 1990) - legislation
passed by Congress to address environmental issues including acid rain,
ozone and toxic air emissions.
Continental - Continental Energy Associates
D&D Fund - a fund established by the Energy Act for the decontamination
and decommissioning of DOE's uranium enrichment facilities.
DEP - Pennsylvania Department of Environmental Protection
DOE - Department of Energy
DRIP (Dividend Reinvestment Plan) - program available to shareowners of
Resources' common stock and PP&L preferred stock to reinvest dividends in
Resources' common stock instead of receiving dividend checks.
ECR (Energy Cost Rate) - a tariff applied to PUC-jurisdictional customers
to recover fuel and other energy costs. Differences between actual and
estimated amounts are collected or refunded to customers.
EHB - Environmental Hearing Board
EMF - Electric and Magnetic Fields
Energy Act (Energy Policy Act of 1992) - legislation passed by Congress
to promote competition in the electric energy market for bulk power.
EPA - Environmental Protection Agency
ESOP - Employee Stock Ownership Plan
FASB (Financial Accounting Standards Board) - a rulemaking organization
that establishes financial accounting and reporting standards.
FGD - Flue gas desulfurization equipment installed at coal-fired power
plants to reduce sulfur dioxide emissions.
FERC (Federal Energy Regulatory Commission) - government agency that
regulates interstate transmission and sale of electricity and related
matters.
IBEW - International Brotherhood of Electrical Workers
JCP&L - Jersey Central Power & Light Company
NOPR (Notice of Proposed Rulemaking) - proposed rules and regulations
issued by FERC for comment by interested parties.
NPDES - National Pollutant Discharge Elimination System
NRC - Nuclear Regulatory Commission
NUG (Non-Utility Generator) - generating plants not owned by regulated
utilities. If the NUG meets certain criteria, its electrical output must
be purchased by public utilities as required by PURPA.
OCA - Pennsylvania Office of Consumer Advocate
OTS - PUC Office of Trial Staff
Pa. CNI - Pennsylvania Corporate Net Income Tax
PCB (Polychlorinated Biphenyl) - additive to oil used in certain
electrical equipment up to the late 1970s. Now classified as a hazardous
chemical.
PECO - PECO Energy Company (the former Philadelphia Electric Company)
PJM (Pennsylvania - New Jersey - Maryland Interconnection Association) -
Mid-Atlantic power pool consisting of 11 operating electric utilities,
including PP&L.
Plan - PP&L's noncontributory defined benefit pension plan.
PMDC (Power Markets Development Company) - Resources' unregulated
subsidiary formed to invest in and develop world-wide power markets.
PP&L - Pennsylvania Power & Light Company
PP&L's Mortage - Pennsylvania Power & Light Company's Mortgage and Deed
of Trust dated October 1, 1945
PSE&G - Public Service Electric & Gas Company
PUC (Pennsylvania Public Utility Commission) - agency that regulates
certain ratemaking, accounting, and operations of Pennsylvania utilities.
PUC Decision - final order issued by the PUC on September 27, 1995
pertaining to PP&L's base rate case filed in December 1994.
PUHCA - Public Utility Holding Company Act of 1935
PURPA (Public Utility Regulatory Policies Act of 1978) - legislation
passed by Congress to encourage energy conservation, efficient use of
resources, and equitable rates.
Resources (PP&L Resources, Inc.) - parent holding company of PP&L, PMDC
and Spectrum.
SBRCA - Special Base Rate Credit Adjustment
SEC - Securities and Exchange Commission
SFAS (Statement of Financial Accounting Standards) - accounting and
financial reporting rules issued by the FASB.
Small utilities - utilities subject to FERC jurisdiction whose billings
include base rate charges and a supplemental charge or credit for fuel
costs over or under the levels included in base rates.
Spectrum (Spectrum Energy Services Corporation) - Resources' unregulated
subsidiary formed to offer energy related products and services.
STAS (State Tax Adjustment Surcharge) - rate adjustment mechanism to
customer bills for changes in certain state taxes.
Superfund - Federal and state legislation that addresses remediation of
contaminated sites.
UGI - UGI Corporation
VEBA (Voluntary Employee Benefit Association Trust) - trust accounts for
health and welfare plans for future payments to employees, retirees or
their beneficiaries.
VERP - Voluntary Early Retirement Program
Wheeling - transmitting power from one system to another over the
transmission facilities of a system not party to the transaction.
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: May 15, 1996 /s/ R. E. Hill
R. E. Hill
Senior Vice President-Financial and
Treasurer (PP&L Resources, Inc.)
Senior Vice President-Financial
(Pennsylvania Power & Light Company)
/s/ J. J. McCabe
J. J. McCabe
Vice President & Controller (PP&L
Resources, Inc. and Pennsylvania
Power & Light Company)