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 June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission 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 PP&L, Inc. 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, Inc. 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,
168,266,320 shares outstanding at
July 31, 1998
PP&L, Inc. Common stock, no par value,
157,300,382, shares outstanding and
all held by PP&L Resources, Inc. at
July 31, 1998
PP&L RESOURCES, INC.
AND
PP&L, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PP&L Resources, Inc.
Consolidated Statement of Income
Consolidated Statement of Cash Flows
Consolidated Balance Sheet
PP&L, Inc.
Consolidated Statement of Income
Consolidated Statement of Cash Flows
Consolidated Balance Sheet
Notes to Financial Statements
PP&L Resources, Inc. and PP&L, Inc.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PP&L Resources, Inc. and PP&L, Inc.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of
Security Holders
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, the unaudited financial statements included herein
reflect all adjustments necessary to present fairly the Consolidated Balance Sheet as of
June 30, 1998 and December 31, 1997, and the Consolidated Statement of Income and
Consolidated Statement of Cash Flows for the periods ended June 30, 1998 and 1997. PP&L
Resources is the parent holding company of PP&L, PP&L Global, PP&L Spectrum, PP&L Capital
Funding and H. T. Lyons. PP&L constitutes substantially all of PP&L Resources' assets,
revenues and earnings.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(Millions of Dollars, except per share data)
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
Operating Revenues
Electric operations.............................. $558 $550 $1,175 $1,204
Wholesale energy and trading activities.......... 259 136 504 267
Energy related businesses........................ 21 7 40 17
Total Operating Revenues......................... 838 693 1,719 1,488
Operating Expenses
Operation
Electric fuel.................................. 118 105 231 216
Energy purchases............................... 218 104 432 220
Other operating................................ 143 121 260 238
Maintenance...................................... 53 49 91 84
Depreciation and amortization.................... 94 93 189 185
Taxes, other than income ........................ 49 50 102 106
Energy related businesses........................ 15 5 29 9
Total Operating Expenses......................... 690 527 1,334 1,058
Operating Income................................... 148 166 385 430
Other Income and (Deductions)...................... 4 3 11 5
Income Before Interest and Income Taxes............ 152 169 396 435
Interest Expense................................... 54 55 106 110
Income Before Income Taxes and
Extraordinary Items ............................. 98 114 290 325
Income Taxes....................................... 38 45 122 133
Income Before Extraordinary Items.................. 60 69 168 192
Extraordinary Items (net of $666 income taxes)
(Note 4) ........................................ (948) (948)
Income(Loss) Before Dividends on Preferred Stock... (888) 69 (780) 192
Preferred Stock Dividend Requirements.............. 6 4 13 11
Net Income(Loss)................................... ($894) $65 ($793) $181
Earnings Per Share of Common Stock
Basic and Diluted (a):
Income Before Extraordinary Items.............. $0.32 $0.39 $0.92 $1.11
Extraordinary Items (net of tax)............... (5.66) (5.67)
Net Income(Loss)................................... $(5.34) $0.39 $(4.75) $1.11
Dividends Declared per Share of Common Stock....... $0.4175 $0.4175 $0.835 $0.835
(a) Based on average number of shares
outstanding (thousands)........................ 167,436 164,068 167,106 163,660
See accompanying Notes to Financial Statements.
PP&L RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Millions of Dollars)
Six Months
Ended June 30,
1998 1997
Net Cash Provided by Operating Activities.................... $281 $307
Cash Flows From Investing Activities
Property, plant and equipment expenditures.................. (149) (143)
Proceeds from sale of nuclear fuel to trust................. 15 23
Purchases of available-for-sale securities.................. (12) (52)
Sales and maturities of available-for-sale securities....... 14 91
Investment in electric energy projects...................... (276) (19)
Purchases and sales of other financial investments - net.... 4 76
Other investing activities - net............................ 2
Net cash used in investing activities................. (402) (24)
Cash Flows From Financing Activities
Issuance of long-term debt.................................. 260 10
Issuance of common stock.................................... 33 36
Issuance of company-obligated mandatorily redeemable
preferred securities of subsidiary trusts holding
solely company debentures................................. 250
Retirement of long-term debt................................ (267) (210)
Purchase of subsidiary's preferred stock (net of premium
and associated costs)..................................... (369)
Payments on capital lease obligations....................... (26) (33)
Common and preferred dividends paid......................... (152) (150)
Net increase in short-term debt............................. 260 147
Other financing activities - net ........................... (1) (20)
Net cash provided by (used in) financing activities... 107 (339)
Net Decrease In Cash and Cash Equivalents ................... (14) (56)
Cash and Cash Equivalents at Beginning of Period ............ 50 101
Cash and Cash Equivalents at End of Period .................. $36 $45
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest (net of amount capitalized)....................... $111 $106
Income taxes............................................... $98 $131
See accompanying Notes to Financial Statements.
PP&L RESOURCES,INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
June 30, December 31,
1998 1997
(Unaudited) (Audited)
ASSETS
Property, Plant and Equipment
Electric utility plant in service - net (Notes 2 and 4)
Transmission and distribution .......................... $2,171 $2,160
Generation ............................................. 1,632 4,022
General and intangible ................................. 216 232
4,019 6,414
Construction work in progress - at cost................... 97 185
Nuclear fuel owned and leased - net....................... 156 167
Electric utility plant - net............................ 4,272 6,766
Other property - net...................................... 53 54
4,325 6,820
Investments
Electric energy projects - at equity ..................... 638 360
Nuclear plant decommissioning trust fund ................. 186 163
Financial investments..................................... 50 52
Affiliated companies - at equity ......................... 17 17
Other..................................................... 13 13
904 605
Current Assets
Cash and cash equivalents ................................ 36 50
Accounts receivable (less reserve: 1998, $18; 1997, $16)
Customers .............................................. 160 190
Other................................................... 79 48
Unbilled revenues
Customers............................................... 84 90
Other................................................... 91 37
Fuel, materials and supplies - at average cost............ 175 200
Prepayments............................................... 89 28
Deferred income taxes .................................... 32 22
Other..................................................... 26 30
772 695
Regulatory Assets and Other Noncurrent Assets (Note 4)
Recoverable transition costs.............................. 2,819
Other..................................................... 379 1,365
3,198 1,365
$9,199 $9,485
See accompanying Notes to Financial Statements.
PP&L RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
June 30, December 31,
1998 1997
(Unaudited) (Audited)
LIABILITIES
Capitalization
Common equity
Common stock ........................................... $2 $2
Capital in excess of par value ........................ 1,702 1,669
Earnings reinvested (Note 4) ........................... 231 1,164
Capital stock expense and other ........................ (28) (26)
1,907 2,809
Preferred stock
With sinking fund requirements ......................... 47 47
Without sinking fund requirements ...................... 50 50
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely
company debentures...................................... 250 250
Long-term debt ........................................... 2,730 2,585
4,984 5,741
Current Liabilities
Short-term debt........................................... 397 135
Long-term debt due within one year ....................... 150
Capital lease obligations due within one year ............ 58 58
Liability for above market NUG purchases due
within one year (Note 4) ............................... 105
Accounts payable ......................................... 182 140
Taxes accrued ............................................ 59 40
Interest accrued ......................................... 62 62
Dividends payable ........................................ 76 76
Other .................................................... 99 108
1,038 769
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes and ITC ............................ 1,556 2,221
Liability for above market NUG purchases (Note 4) ........ 775
Capital lease obligations ................................ 103 113
Other .................................................... 743 641
3,177 2,975
Commitments and Contingent Liabilities ....................
$9,199 $9,485
See accompanying Notes to Financial Statements.
PP&L, INC. AND SUBSIDIARIES
In the opinion of PP&L, the unaudited financial statements included herein
reflect all adjustments necessary to present fairly the Consolidated Balance Sheet
as of June 30, 1998 and December 31, 1997, and the Consolidated Statement of
Income and Consolidated Statement of Cash Flows for the periods ended
June 30, 1998 and 1997. All nonutility operating transactions are included
in "Other Income and (Deductions)" in PP&L's Consolidated Statement of Income.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(Millions of Dollars)
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
Operating Revenues
Electric operations............................. $558 $550 $1,175 $1,204
Wholesale energy and trading activities......... 259 136 504 267
Energy related businesses....................... 1 1
Total Operating Revenues 818 686 1,679 1,472
Operating Expenses
Operation
Electric fuel................................. 118 105 231 216
Energy purchases.............................. 218 104 432 220
Other operating............................... 143 121 260 238
Maintenance..................................... 53 49 91 84
Depreciation and amortization................... 94 93 189 185
Taxes, other than income ....................... 49 50 102 106
Energy related businesses....................... 1 1
Total Operating Expenses........................ 675 523 1,305 1,050
Operating Income ................................. 143 163 374 422
Other Income and (Deductions)..................... 9 8 21 8
Income Before Interest and Income Taxes........... 152 171 395 430
Interest Expense.................................. 49 54 98 106
Income Before Income Taxes and
Extraordinary Items ............................ 103 117 297 324
Income Taxes...................................... 40 47 124 134
Income Before Extraordinary Items ................ 63 70 173 190
Extraordinary Items (net of $666 income taxes)
(Note 4) ....................................... (948) (948)
Net Income(Loss) Before Dividends on
Preferred Stock................................. (885) 70 (775) 190
Dividends on Preferred Stock...................... 12 9 24 16
Earnings Available to PP&L Resources, Inc. ...... $(897) $61 $(799) $174
See accompanying Notes to Financial Statements.
PP&L, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Millions of Dollars)
Six Months
Ended June 30,
1998 1997
Net Cash Provided by Operating Activities....................... $307 $308
Cash Flows From Investing Activities
Property, plant and equipment expenditures.................... (149) (143)
Proceeds from sales of nuclear fuel to trust.................. 15 23
Purchases of available-for-sale securities ................... (12) (52)
Sales and maturities of available-for-sale securities ........ 14 69
Purchases and sales of other financial investments - net...... 4 76
Loan to parent................................................ (1) (375)
Other investing activities - net.............................. 1
Net cash used in investing activities................... (128) (402)
Cash Flows From Financing Activities
Issuance of long-term debt.................................... 200 10
Issuance of Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts holding solely
company debentures.......................................... 250
Retirement of long-term debt.................................. (266) (210)
Payments on capital lease obligations......................... (26) (33)
Common and preferred dividends paid........................... (163) (185)
Net increase in short-term debt............................... 82 182
Other financing activities - net ............................. (1) (9)
Net cash provided by (used in) financing activities..... (174) 5
Net Increase (Decrease) in Cash and Cash Equivalents 5 (89)
Cash and Cash Equivalents at Beginning of Period................ 15 95
Cash and Cash Equivalents at End of Period...................... $20 $6
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest (net of amount capitalized)........................ $105 $102
Income taxes................................................ $102 $133
<FN>
See accompanying Notes to Financial Statements.
PP&L, INC. COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
June 30, December 31,
1998 1997
(Unaudited) (Audited)
ASSETS
Property, Plant and Equipment
Electric utility plant in service - net (Notes 2 and 4)
Transmission and distribution .......................... $2,171 $2,160
Generation ............................................. 1,632 4,022
General and intangible ................................. 216 232
4,019 6,414
Construction work in progress - at cost .................. 97 185
Nuclear fuel owned and leased - net ...................... 156 167
Electric utility plant - net ............................ 4,272 6,766
Other property - net ..................................... 51 54
4,323 6,820
Investments
Loan to parent............................................ 376 375
Nuclear plant decommissioning trust fund ................. 186 163
Financial investments .................................... 49 52
Affiliated companies - at equity ......................... 17 17
Other .................................................... 13 13
641 620
Current Assets
Cash and cash equivalents ................................ 20 15
Accounts receivable (less reserve: 1998, $18; 1997, $16)
Customers .............................................. 158 188
Other .................................................. 81 64
Unbilled revenues
Customers............................................... 81 90
Other................................................... 91 36
Fuel, materials and supplies - at average cost ........... 175 200
Prepayments............................................... 88 26
Deferred income taxes .................................... 32 22
Other .................................................... 23 29
749 670
Regulatory Assets and Other Noncurrent Assets (Note 4)
Recoverable transition costs ............................. 2,819
Other..................................................... 364 1,362
3,183 1,362
$8,896 $9,472
See accompanying Notes to Financial Statements.
PP&L, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
June 30, December 31,
1998 1997
(Unaudited) (Audited)
LIABILITIES
Capitalization
Common equity
Common stock ........................................... $1,476 $1,476
Additional paid-in capital ............................. 64 64
Earnings reinvested (Note 4) ........................... 153 1,092
Capital stock expense and other ....................... (20) (20)
1,673 2,612
Preferred stock
With sinking fund requirements ......................... 295 295
Without sinking fund requirements ...................... 171 171
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely
company debentures...................................... 250 250
Long-term debt ........................................... 2,568 2,483
4,957 5,811
Current Liabilities
Short-term debt........................................... 127 45
Long-term debt due within one year ....................... 150
Capital lease obligations due within one year ............ 58 58
Liability for above market NUG purchases due
within one year (Note 4) ............................... 105
Accounts payable ......................................... 181 148
Taxes accrued ............................................ 58 40
Interest accrued ......................................... 58 59
Dividends payable ........................................ 82 81
Other .................................................... 97 107
766 688
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes and ITC ............................ 1,555 2,221
Liability for above market NUG purchases (Note 4) ........ 775
Capital lease obligations ............................... 103 113
Other .................................................... 740 639
3,173 2,973
Commitments and Contingent Liabilities ....................
$8,896 $9,472
See accompanying Notes to Financial Statements.
PP&L Resources, Inc. and PP&L, Inc.
Notes to Financial Statements
Terms and abbreviations appearing in Notes to Financial Statements are
explained in the glossary.
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 PP&L Resources' and PP&L's Annual Reports to the SEC on
Form 10-K for the year ended December 31, 1997.
Certain amounts in the June 30, 1997 and December 31, 1997 financial
statements have been reclassified to conform to the presentation in the
June 30, 1998 financial statements. The most significant reclassifications
have been made in the Consolidated Statement of Income. This Statement has
been modified to better reflect the changing nature of the business from a
regulated electric utility to a full-service provider of retail and
wholesale energy and related products and services. The revenues and
expenses of PP&L Global, PP&L Spectrum and H.T. Lyons are now reflected in
"Operating Income." Previously, the results of these non-regulated
affiliates were included in "Other Income and (Deductions)" in PP&L
Resources' Statement of Income. In addition, the revenues generated by
PP&L's wholesale energy and trading activities are now separately
disclosed. Finally, income taxes are no longer reflected as "Operating
Expense," which was the traditional disclosure used by utilities. On the
Consolidated Balance Sheet, "Electric utility plant in service - net" at
December 31, 1997 has been reclassified to separately disclose generation
plant, which is no longer subject to the regulatory accounting provisions
of SFAS 71, "Accounting for the Effects of Certain Types of Regulation."
See Notes 2 and 4 for further information.
2. Summary of Significant Accounting Policies
The PUC's order dated June 15, 1998 (see Note 3) impacted certain
accounting policies of PP&L. Following are updates to the "Summary of
Significant Accounting Policies" as detailed in PP&L Resources' and PP&L's
Annual Reports to the SEC on Form 10-K for the year ended December 31,
1997. Refer to Note 4 for more information on the PUC restructuring
charge.
Management's Estimates
These financial statements have been prepared using information which
represents management's best estimates of existing conditions. Actual
results could differ from these estimates.
Significant estimates were required in recording the effect of the
PUC's order. The impairment write-down of certain generation plant was
dependent on projections of future cash flows and capacity factors. Cash
flow projections and the resulting impact on the fair value determination
of these generating facilities are subject to future re-evaluation. In
addition, the liabilities recorded for above-market purchases from NUGs
were based on estimated generation by the NUG facilities and estimated
future market prices for this generation. Again, these recorded amounts
are subject to revision if the underlying estimates change.
Regulation
Historically, PP&L accounted for its operations in accordance with the
provisions of SFAS 71, which requires rate-regulated entities to reflect
the effects of regulatory decisions in their financial statements. PP&L
discontinued application of SFAS 71 for the generation portion of its
business effective June 30, 1998.
Utility Plant
Following are the classes of Electric Utility Plant in Service, with
associated accumulated depreciation reserves, at June 30, 1998 and December
31, 1997.
Transmission General Electric Utility
& & Plant In
Distribution Generation Intangible Service
June 30, 1998:
Original Cost $3,353 $6,339 $372 $10,064
Accumulated Depreciation
Reserve (1,182) (4,707) (156) (6,045)
$2,171 $1,632 $216 $ 4,019
December 31, 1997:
Original Cost $3,309 $6,306 $369 $ 9,984
Accumulated Depreciation
Reserve (1,149) (2,284) (137) (3,570)
$2,160 $4,022 $232 $ 6,414
Generation plant is reflected at the lower of cost or market value at
June 30, 1998. As noted in the "Regulation" section of this note, PP&L
discontinued application of SFAS 71 for the generation portion of its
business effective June 30, 1998. In accordance with SFAS 101, "Regulated
Enterprises-Accounting for the Discontinuation of Application of FASB
Statement No. 71", impairment tests were performed on the individual
generating facilities. These impairment tests used the provisions of SFAS
121, "Accounting For the Impairment of Long-Lived Assets and For Long-Lived
Assets to Be Disposed Of". As a result, generation plant assets were
written down by $2.357 billion.
The other classes of Electric Utility Plant in Service continue to be
carried at historical cost.
Capitalized Interest
Effective June 30, 1998, PP&L stopped capitalizing AFUDC on
generation-related construction projects, since these assets are no longer
subject to the provisions of SFAS 71. Instead, interest is being
capitalized on generation-related projects in accordance with SFAS 34,
"Capitalizing Interest Costs."
Premium on Reacquired Long Term Debt
In accordance with SFAS 71, PP&L deferred the premiums and expenses to
redeem long-term debt and amortized these costs over the life of the new
debt. If no new debt was issued to refinance the retired debt, these costs
were amortized over the remaining life of the retired debt. Effective June
30, 1998, losses on reacquired debt attributable to the generation portion
of PP&L's business will be recorded in accordance with SFAS 4, "Reporting
Gains and Losses from Extinguishment of Debt."
Comprehensive Income
During 1997, the FASB issued SFAS 130, "Reporting Comprehensive
Income." This statement required disclosure of "comprehensive income,"
defined as changes in equity other than from transactions with shareowners.
Comprehensive income consists of net income, as well as holding gains and
losses of certain assets (such as available-for-sale securities), foreign
currency translation adjustments and the effects of certain accounting
adjustments to earlier periods recognized during the current periods. The
comprehensive income of PP&L Resources and PP&L is not materially different
than net income for the three and six months ended June 30, 1998 or the
corresponding periods in 1997.
3. PUC Restructuring Proceeding
Reference is made to PP&L Resources' and PP&L's Annual Reports to the
SEC on Form 10-K for the year ended December 31, 1997, regarding PP&L's
April 1, 1997 filing of its restructuring plan with the PUC pursuant to the
Customer Choice Act.
Under the Customer Choice Act, the PUC is authorized to determine the
amount of PP&L's stranded costs to be recovered through a Competitive
Transition Charge (CTC) to be paid by all PUC-jurisdictional customers who
receive transmission and distribution service from PP&L. Stranded (or
transition) costs are defined in the Customer Choice Act as "generation-
related costs which would have been recoverable under a regulated
environment but which may not be recoverable in a competitive generation
market and which the PUC determines will remain following mitigation by the
electric utility."
The Customer Choice Act also permits the issuance of "transition
bonds" securitized by customer revenues from an Intangible Transition
Charge (ITC) to finance the payment of transition costs. Proceeds of the
transition bonds are required to be used "principally to reduce qualified
stranded costs and related capitalization." The ITC is intended to recover
the principal, interest and issuance, refinance and servicing costs and
fees related to the transition bonds.
In accordance with the Customer Choice Act, PP&L filed its
restructuring plan with the PUC on April 1, 1997. PP&L's restructuring
plan included a claim of $4.5 billion (on a net present value basis as of
January 1, 1999) for transition costs.
On June 15, 1998, the PUC entered an order in the restructuring
proceeding. Under that order, PP&L estimated that it could recover about
$2.5 billion in transition costs over the 8-1/2 year transition period
prescribed by the order--i.e., through June 30, 2007.
Numerous parties filed legal challenges to the PUC's June 15 order in
state and federal court. PP&L filed an appeal of the order in the
Pennsylvania Commonwealth Court, an action for Declaratory Judgment against
the order in the Commonwealth Court, and a civil complaint action against
the order in the U.S. District Court for the Eastern District of
Pennsylvania.
In July 1998, the PUC offered all parties to the restructuring
proceeding the opportunity for substantive settlement discussions. On
August 13, 1998, the PUC entered a Tentative Order approving a "Joint
Petition for Full Settlement of PP&L, Inc.'s Restructuring Plan and Related
Court Proceedings" (Joint Settlement Petition). The Tentative Order is
subject to a public comment period, and final PUC action is expected on
August 27, 1998.
The terms and conditions of the Joint Settlement Petition represent a
comprehensive resolution of all issues before the Pennsylvania Commonwealth
Court and the U. S. District Court arising from challenges by certain
parties, including PP&L, to the PUC's June 15 order. In the Joint
Settlement Petition, the parties request that the PUC (i) approve the
proposed settlement set forth in the Joint Settlement Petition; (ii) amend
the June 15 order consistent with the proposed settlement; (iii) approve
the supplements to PP&L's tariff necessary to implement the proposed
settlement; (iv) issue a Qualified Rate Order authorizing PP&L to
securitize up to $2.85 billion of transition and related costs; and (v)
preapprove future transfers of PP&L generation assets at PP&L's discretion.
The following are the major elements of the settlement:
1. PP&L is permitted to recover $2.97 billion (on a net present value
basis) in transition costs over 11 years -- i.e., from January 1, 1999
through December 31, 2009. PP&L is permitted a return of 10.86% on the
unamortized balance of these transition costs.
2. PP&L will reduce rates to all retail customers by 4% effective
January 1, 1999 through December 31, 1999.
3. One-third of PP&L customers will be able to choose their electric
supplier on January 1, 1999, one-third on January 2, 1999, and the
remainder on January 2, 2000. Beginning on January 1, 1999, PP&L will
unbundle its retail electric rates to reflect separate prices for the
transmission and distribution charges, the CTC (and, if applicable, the
ITC), and a "shopping credit" for customers choosing an alternate electric
supplier. These shopping credits vary among customer classes and will
increase over the transition period to reflect decreases in the CTC. The
proposed settlement provides for the following unbundled rates over the
transition period:
SCHEDULE OF SYSTEM AVERAGE RATES
CENTS/KWH
Effective Transmission Shopping Generation Total
Date & Distribution CTC(a) Credit(b) Rate Cap(c) Rate(d)
Jan. 1, 1999 1.74 1.57 3.81 5.38 7.12
Jan. 1, 2000 1.74 1.55 4.13 5.68 7.42
Jan. 1, 2001 1.74 1.52 4.16 5.68 7.42
Jan. 1, 2002 1.74 1.45 4.23 5.68 7.42
Jan. 1, 2003 1.74 1.41 4.27 5.68 7.42
Jan. 1, 2004 1.74 1.35 4.33 5.68 7.42
Jan. 1, 2005 (e) 1.27 4.41 5.68 (e)
Jan. 1, 2006 (e) 1.27 4.78 6.05 (e)
Jan. 1, 2007 (e) 1.21 4.84 6.05 (e)
Jan. 1, 2008 (e) 1.14 4.91 6.05 (e)
Jan. 1, 2009(f) (e) 1.03 5.02 6.05 (e)
(a) Average CTC rates are fixed, subject to reconciliation for actual sales
and CTC collection.
(b) The CTC and, as a result, the shopping credit figures will be adjusted
to reflect changes due to the CTC reconciliation.
(c) The Generation Rate Cap equals the sum of the CTC and Shopping Credit.
The generation portion of bills for customers who continue to be supplied
by PP&L as the supplier of last resort will not, on average, exceed the
figures in this column.
(d) The bundled rate equals the sum of Transmission & Distribution plus
Generation Rate Cap. Customers who continue to be supplied by PP&L as the
supplier of last resort will, on average, pay the total rate shown in the
last column. The 1999 rate represents a 4% reduction from the existing
rate cap of 7.42 cents/kWh.
(e) The cap on PP&L's transmission and distribution rates under the
Customer Choice Act is extended through 2004. Under the Customer Choice
Act, T&D rates were capped until June 30, 2001.
(f) Effective until December 31, 2009.
In addition, the proposed settlement results in the following schedule
for amortization of the transition costs over the transition period:
ANNUAL STRANDED COST
AMORTIZATION AND RETURN (a)
Revenue Excluding GRT
Annual CTC Amorti-
Sales Cents/ Total Return zation
Year mWh kWh ($000) ($000) ($000)
1999 33,108,701 1.57 $497,938 $310,396 $187,542
2000 33,605,332 1.55 498,027 290,796 207,231
2001 34,109,412 1.52 496,671 269,138 227,532
2002 34,621,053 1.45 481,095 245,359 235,736
2003 35,140,369 1.41 473,995 220,722 253,273
2004 35,667,474 1.35 461,682 194,252 267,430
2005 36,202,486 1.27 438,637 166,303 272,334
2006 36,745,524 1.27 447,326 137,841 309,485
2007 37,296,707 1.21 433,106 105,497 327,610
2008 37,856,157 1.14 411,419 71,258 340,161
2009(b) 38,424,000 1.03 377,373 35,708 341,665
(a) Subject to reconciliation of actual sales and collections.
(b) Through December 31, 2009.
4. The cap on the generation component of rates is extended from
December 31, 2005 until December 31, 2009. The cap on the transmission and
distribution component of rates is extended from June 30, 2001 until
December 31, 2004.
5. PP&L will recover its nuclear plant decommissioning costs through
the CTC. PP&L may seek an exception to the rate cap for increases in these
decommissioning costs, but agrees not to recover more than 96% of such
increased amount.
6. PP&L will seek to securitize up to $2.85 billion in transition and
related costs, and a proposed PUC Qualified Rate Order authorizing this
securitization is included in the proposed settlement. The proposed
settlement would require 75% of the savings from securitization to be
passed back to customers, while 25% would be retained by PP&L. The costs
of issuing the transition bonds and refinancing outstanding debt and equity
will be reflected in the ITC to be charged to all customers. As with the
CTC, the ITC must terminate by the end of the transition period; also, the
ITC will offset the CTC on customer bills.
7. On January 1, 2002, 20% of all PP&L's residential customers will
be assigned to a provider of last resort other than PP&L or an affiliate of
PP&L. These customers will be selected at random, and the supplier will be
selected on the basis of a PUC-approved bidding process.
8. Effective on January 1, 1999, alternate electric generation
suppliers can provide metering and billing service to PP&L's commercial and
industrial customers; effective on January 1, 1999, such alternate
suppliers can provide certain metering service to PP&L's residential
customers; and effective on January 1, 2000, PP&L's residential customers
can choose their billing service as well from such alternate suppliers.
9. PP&L will transfer its retail marketing function to a separate,
affiliated corporation by September 15, 1998.
10. PP&L is permitted, but not required, to transfer ownership and
operation of its generating facilities to a separate corporate entity at
book value.
11. PP&L will spend approximately $16 million annually on assistance
and energy conservation for low-income customers.
4. Accounting for the Effects of Certain Types of Regulation
PP&L prepares its financial statements for its regulated operations in
accordance with SFAS 71, which requires rate-regulated companies to reflect
the effects of regulatory decisions in their financial statements. PP&L
has deferred certain costs pursuant to rate actions of the PUC and FERC and
is recovering, or expects to recover, such costs in electric rates charged
to customers.
The FASB's EITF has addressed the appropriateness of the continued
application of SFAS 71 by entities in states that have enacted
restructuring legislation similar to Pennsylvania's Customer Choice Act.
The EITF issued its statement No. 97-4, "Deregulation of the Pricing of
Electricity - Issues Related to the Application of FASB Statements 71 and
101", which concluded that an entity should cease to apply SFAS 71, when a
deregulation plan is in place and its terms are known. For PP&L, with
respect to the generation portion of its business, this occurred on June
15, 1998 when the PUC entered its order on PP&L's restructuring filing.
Effective June 30, 1998, PP&L adopted SFAS 101 for the generation side of
its business. SFAS 101 requires a determination of impairment of plant
assets under SFAS 121, and the elimination of all effects of rate
regulation that have been recognized as assets and liabilities under SFAS
71.
PP&L performed impairment tests of its electric generation assets on a
plant specific basis and determined that $2.388 billion of its generation
plant was impaired as of June 30, 1998. Impaired plant is the excess of
the plant investment at June 30, 1998 over the present value of the net
cash flows during the remaining lives of the plants. Annual net cash flows
were determined by comparing estimated generation sustenance costs to
estimated regulated revenues for the remainder of 1998, market revenues for
1999 and beyond, and revenues from bulk power contracts. The net cash
flows were then discounted to present value.
In addition to impaired generation plant, PP&L estimates that there
will be other stranded costs totaling $1.989 billion at June 30, 1998.
This primarily includes generation-related regulatory assets and
liabilities and an estimated liability for above-market purchases under NUG
contracts. The total estimated impairment to these assets is $4.377
billion. The PUC Tentative Order, approved on August 13, 1998, permits the
recovery of $2.819 billion through the CTC on a present value basis,
excluding amounts for nuclear decommissioning and consumer education,
resulting in a net under-recovery of $1.558 billion. PP&L recorded an
extraordinary charge at June 30, 1998 for this underrecovery of $1.558
billion.
Under FERC Order 888, 16 small utilities which have power supply
agreements with PP&L signed before July 11, 1994, requested and were
provided with PP&L's current estimate of its stranded costs applicable to
these customers if they were to terminate their agreements in 1999.
Subject to certain conditions, these settlement agreements provide for
continued power supply by PP&L to 15 of these small utilities through
January 2004. These agreements were approved by FERC in May 1998. As a
result, PP&L, in the second quarter of 1998, recorded an extraordinary
charge in the amount of $56 million.
The extraordinary items related to the PUC restructuring proceeding
and the FERC settlement were reported on the Statement of Income, net of
income taxes.
Details of amounts written-off at June 30, 1998, in connection with
the PUC Tentative Order, are as follows (millions of dollars):
Impaired generation-related assets $2,388
Above-market NUG contracts 854
Generation-related regulatory assets and other 1,135
Total 4,377
Recoverable transition costs (2,819)
Extraordinary item pre-tax - PUC 1,558
- FERC 56
1,614
Tax effects (666)
Extraordinary items $ 948
PP&L believes that the electric transmission and distribution operations
continue to meet the requirements of SFAS 71 and that regulatory assets
associated with these operations will continue to be recovered through
rates from customers. At June 30, 1998, $356 million of regulatory assets,
other than the recoverable transition costs, remain on the books. The
majority of these regulatory assets will continue to be recovered through
regulated transmission and distribution rates over periods ranging from 2
to 31 years.
5. Sales to Other Electric Utilities
PP&L provided Atlantic with 125,000 kilowatts of capacity (summer
rating) and related energy from its wholly-owned coal-fired stations.
Sales to Atlantic under that agreement expired in March 1998. PP&L will
provide JCP&L with 378,000 kilowatts of capacity and related energy from
all of its generating units during 1998. This amount will decline to
189,000 kilowatts in 1999. The agreement with JCP&L will terminate on
December 31, 1999. PP&L expects to be able to resell the returning
capacity and energy through the Energy Marketing Center.
Under a separate agreement, PP&L is providing additional capacity and
energy to JCP&L. This capacity and energy increased from 150,000 kilowatts
to 200,000 kilowatts in June 1998, and will increase to 300,000 kilowatts
in June 1999 through the end of the agreement in May 2004. Prices for this
capacity and energy are market-based.
6. Credit Arrangements and Financing Activity
From January through July 1998, PP&L Resources issued $47 million of
common stock through the DRIP.
In March 1998, the 364-day revolving credit agreement for PP&L and
PP&L Capital Funding was increased from $150 million to $350 million. This
increase, when added to the $300 million five-year revolving credit
agreement of PP&L and PP&L Capital Funding, brings to $650 million the
total amount of revolving credit available to PP&L and PP&L Capital Funding
under these joint agreements. Additionally, in July 1998, PP&L Capital
Funding entered into five separate $80 million, 364-day credit facilities
with five banks. These additional credit facilities will initially be used
to provide funding for PP&L Resources' Tender Offer (see discussion below).
As of June 30, 1998, no borrowings were outstanding under any revolving
credit agreements.
In March 1998, PP&L Capital Funding sold $60 million of medium-term
notes having a five-year term. The proceeds from this sale were used to
repay $60 million of short-term borrowings which had provided interim
financing for investments made by PP&L Global. As of June 30, 1998, $162
million of medium-term notes were outstanding.
PP&L Capital Funding also established a commercial paper program in
March 1998. As with all PP&L Capital Funding debt, this commercial paper
is guaranteed by PP&L Resources. As of June 30, 1998, PP&L Capital Funding
had $270 million of commercial paper outstanding. Of this amount, $170
million was issued to provide interim funding for PP&L Global's June
acquisition of an additional 26% ownership share of SWEB. It is expected
that this interim funding will be replaced by long-term debt during the
second half of 1998.
In April 1998, PP&L retired $150 million principal amount of First
Mortgage Bonds, 5-1/2% series that matured on that date.
In May 1998, PP&L issued $200 million First Mortgage Bonds, 6-1/8%
Reset Put Securities Series due 2006. In connection with this issuance,
PP&L assigned to a third party the option to call the bonds from the
holders on May 1, 2001. These bonds will mature on May 1, 2006, but will
be required to be surrendered by the existing holders on May 1, 2001 either
through the exercise of the call option by the callholder or, if such
option is not exercised, through the automatic exercise of a mandatory put
by the trustee on behalf of the bondholders. If the call option is
exercised, the bonds will be remarketed and the interest rate will be reset
for the remainder of their term to the maturity date. If the call option
is not exercised, the mandatory put will be exercised and PP&L will be
required to repurchase the bonds at 100% of their principal amount on May
1, 2001. Proceeds from the sale of the bonds were used by PP&L to retire
$116 million of its unsecured term loans and to reduce its outstanding
commercial paper balances.
On August 14, 1998, PP&L Resources announced a Tender Offer to
purchase up to 17,000,000 shares of its common stock, or approximately 10%
of the currently outstanding shares, from existing shareowners. The price
paid for the shares will not be in excess of $27 nor less than $24.50 per
share.
PP&L Resources made this Tender Offer through the use of a procedure
commonly referred to as a "Dutch Auction." This procedure allows the
shareowners to select a specific price within the price range at which they
are willing to sell their shares and submit (Tender) these Shares to PP&L
Resources for possible sale at their designated price.
At midnight on September 11, 1998 (unless the Tender Offer is extended
to a later date), PP&L Resources will evaluate all Tenders received up
until that date and determine the lowest price within the price range that
will enable PP&L Resources to purchase up to 17,000,000 shares (the
Purchase Price). This Purchase Price will then be paid for all Shares
purchased pursuant to this Tender Offer, even for those shares that were
Tendered at a lower designated price. Shares that have been Tendered a
designated price that is above the Purchase Price will not be purchased and
will be returned to the shareowners.
PP&L Resources has developed a financial strategy that is intended to
position PP&L Resources for the anticipated future competitive environment
after giving effect to the PUC's Tentative Order, the related restructuring
charge on PP&L's books and the collection of CTC revenues during the
Transition Period. PP&L Resources' financial strategy and goals include:
(a) a reduction in PP&L Resources' permanent capitalization to a level
that is consistent with PP&L's restated asset values and the earning power
of those assets;
(b) a Common Stock dividend level based on a targeted payout ratio of
45%-55% designed to increase PP&L Resources' future financing flexibility;
(c) the temporary use of a higher degree of leverage in PP&L
Resources' capital structure during the Transition Period; and
(d) maintenance of investment grade ratings on the senior debt
securities of PP&L Resources and PP&L.
As the electric utility industry transitions to a competitive
environment, PP&L Resources anticipates the potential to achieve long-term
returns on shareowner capital that exceed the returns that have been
historically permitted in a fully regulated business environment. At the
same time, PP&L Resources' business risks are expected to increase,
resulting in an increase in the potential volatility in revenue and income
streams. As such, PP&L Resources believes that a dividend payout ratio
that is significantly lower than the 80%-90% payout ratio previously
experienced by PP&L Resources and the electric utility industry in general
is required to better position PP&L Resources to more effectively compete
in the energy markets by increasing PP&L Resources' future financing
flexibility. Accordingly, effective with the dividend payable October 1,
1998 to owners of record on September 10, 1998, PP&L Resources' quarterly
Common Stock dividend will be reduced to $.25 per share ($1.00 annualized
rate) from the previous level of $.4175 per share ($1.67 annualized rate).
In addition to providing an increase in PP&L Resources' future financing
flexibility, this dividend action positions PP&L Resources' Common Stock
for potential increased growth in market value by retaining a
proportionately higher level of earnings in the business for reinvestment.
The Shares purchased pursuant to the Tender Offer will receive the October
1 dividend.
The reduction in PP&L Resources' permanent capitalization, as well as
the temporary increase in leverage, is being effected through this Tender
Offer, which will be financed by PP&L Resources through the use of short-
term debt. It is anticipated that the short-term debt used by PP&L
Resources will be made available through the issuance of commercial paper
by PP&L Capital Funding.
Declaration of dividends on common stock are made at the discretion of
the Boards of Directors of PP&L Resources and PP&L. PP&L Resources and
PP&L will continue to consider the appropriateness of these dividend
levels, taking into account the respective financial positions, results of
operations, conditions in the industry and other factors which the
respective Boards deem relevant.
PP&L Resources and PP&L believe that, following completion of the
Tender Offer, their anticipated cash flow from operations, access to credit
facilities, cash and short-term investments will, taken together, be
adequate for their capital needs for the foreseeable future.
7. Commitments and Contingent Liabilities
There have been no material changes related to PP&L Resources' or
PP&L's commitments and contingent liabilities since the companies filed
their joint 1997 Form 10-K.
For discussion pertaining to PP&L Resources' and PP&L's credit
arrangements and financing activities, see Note 6.
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 retroactive premiums in the event of the insurers'
adverse loss experience. At April 1, 1998, the maximum amount PP&L could
be assessed under these programs was about $29 million.
PP&L's public liability for claims resulting from a nuclear incident
at the Susquehanna station is limited to about $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 1995 Phase I acid rain provisions by installing continuous
emission monitors on all units, burning lower sulfur coal and installing
low nitrogen oxide burners on most units. To comply with the year 2000
Phase II 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.
PP&L has met the 1995 ambient ozone requirements of the Clean Air Act
by reducing nitrogen oxide emissions by nearly 50% through the use of low
nitrogen oxide burners. Further seasonal (i.e., 5 month) nitrogen oxide
reductions to 55% and 75% of 1990 levels for 1999 and 2003, respectively,
are specified under the Northeast Ozone Transport Region's Memorandum of
Understanding. The PA DEP has finalized regulations which require PP&L to
reduce its ozone seasonal NOx by 57% beginning in 1999. PP&L plans to
comply with this reduction with operational initiatives that rely, to a
large extent, on the existing low nitrogen oxide burners.
The EPA has finalized new national standards for ambient levels of
ground-level ozone and fine particulates. Based in part on the new ozone
standard, the EPA has proposed NOx emission limits for 22 states, including
Pennsylvania, which in effect require approximately an 80% reduction from
the 1990 level in Pennsylvania in the 2002-2004 timeframe. The new
particulates standard may require further reductions in SO2 and may expand
the planned seasonal NOx reductions to year round in the 2010-2012
timeframe.
Under the Clean Air Act, the EPA has been studying the health effects
of hazardous air emissions from power plants and other sources, in order to
determine whether those emissions should be regulated. Recently, the EPA
released a technical report of its findings to-date. The EPA concluded
that mercury is the utility air toxic of greatest concern but that more
evaluation is needed before it can determine whether regulation of air
toxics from fossil fuel plants is necessary. In addition, the EPA has
announced a new enforcement initiative against older coal-fired plants.
Several of PP&L's coal-fired plants could fall into this category. These
EPA initiatives could result in compliance costs for PP&L in amounts which
are not now determinable but which could be material.
Expenditures to meet the 2000 acid rain and 1999 NOx reduction
requirements are included in the table of projected construction
expenditures in the section entitled "Financial Condition - Capital
Expenditure Requirements" in the Review of the Financial Condition and
Results of Operations in the 1997 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 2002 in amounts
which are not now determinable but which could be material.
Water and Residual Waste
PP&L has installed dry fly ash handling systems at most of its power
stations, which reduces waste water discharge. In other cases, PP&L has
modified the existing facilities to allow continued operation of the ash
basins under a DEP permit. Any groundwater contamination caused by the
basins must also be addressed.
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 related to oil leakage is substantially completed at two generating
stations. At this time, the only other remedial work being planned is to
abate a localized groundwater degradation problem associated with a waste
disposal impoundment at the Montour plant.
The final NPDES permit for the Montour plant contains stringent limits
for iron and chlorine discharges. Depending on the results of a toxic
reduction study, additional water treatment facilities or operational
changes may be needed at this plant.
Capital expenditures through the year 2002 to correct groundwater
degradation at fossil-fueled generating stations, and to address waste
water control at PP&L facilities are included in the table of construction
expenditures in the section entitled "Financial Condition - Capital
Expenditure Requirements" in the Review of the Financial Condition and
Results of Operations in the 1997 Form 10-K. In this regard, PP&L
currently estimates that $5.5 million of additional capital expenditures
may be required in the next four years to close some of the ash basins and
address other ash basin issues at various generating plants. Additional
capital expenditures could be required beyond the year 2002 in amounts
which are not now determinable but which could be material. 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 which could
be material.
Superfund and Other Remediation
In 1995, PP&L entered into 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 PP&L 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 of June 30, 1998, PP&L has completed work on slightly more
than half of the sites included in the consent order.
At June 30, 1998, PP&L had accrued approximately $8 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.
General
Due to the environmental issues discussed above or other environmental
matters, PP&L may be required to modify, replace or cease operating certain
facilities to comply with statutes, regulations and actions by regulatory
bodies or courts. In this regard, PP&L also may incur capital
expenditures, operating expenses and other costs in amounts which are not
now determinable but which could be material.
Loan Guarantees of Affiliated Companies
In the second quarter of 1998, PP&L guaranteed a portion of a
subsidiary's borrowings. As of June 30, 1998, $12 million of such
borrowings were guaranteed by PP&L.
Source of Labor Supply
On June 29, 1998, IBEW members ratified a new labor agreement with
PP&L. This new agreement expires on May 12, 2002. Among other things, the
agreement provides for wage increases for IBEW members of 3.25% in 1998
(effective as of May 18) and 3% in each of the three remaining years. In
addition, IBEW members received a lump-sum ratification bonus equal to 2%
of base pay, or approximately $4 million.
8. New Accounting Standards
In February 1998, the FASB issued SFAS 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which is effective for
fiscal years beginning after December 15, 1997. The adoption of this
statement is not expected to have a material impact on the financial
statements of PP&L Resources or PP&L.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15, 1999. This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for changes in the fair value of
a derivative depends on the intended use of the derivative and the
resulting designation. PP&L Resources and PP&L intend to adopt this
statement as of January 1, 2000. The impact of the adoption of this
statement on the net income of PP&L Resources and PP&L is not yet
determinable.
9. Acquisitions
In July 1998, the PUC approved the acquisition of Penn Fuel Gas by
PP&L Resources. In addition, in August 1998, the SEC approved the
acquisition under the PUHCA. As a result, this acquisition is currently
expected to close by August 31, 1998.
In July 1998, PP&L Resources acquired McClure, a heating, ventilating
and air-conditioning firm, in a cash transaction for an amount that is not
material.
PP&L Resources, Inc. and PP&L, Inc.
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 PP&L Resources. Unless specifically noted,
fluctuations are primarily due to activities of PP&L. 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
PP&L, Inc." in PP&L Resources' and PP&L's Annual Report to the SEC on Form
10-K for the year ended December 31, 1997.
Terms and abbreviations appearing in Management's Discussion and
Analysis of Financial Condition and Results of Operations are explained in
the glossary.
Forward-looking Information
Certain statements contained in this Form 10-Q concerning
expectations, beliefs, plans, objectives, goals, strategies, future events
or performance and underlying assumptions and other statements which are
other than statements of historical facts, are "forward-looking statements"
within the meaning of the federal securities laws. Although PP&L Resources
and PP&L believe that the expectations reflected in these statements are
reasonable, there can be no assurance that these expectations will prove to
have been correct. These forward-looking statements involve a number of
risks and uncertainties, and actual results may differ materially from the
results discussed in the forward-looking statements. The following are
among the important factors that could cause actual results to differ
materially from the forward-looking statements: state and federal
regulatory developments; new state or federal legislation; national or
regional economic conditions; weather variations affecting customer energy
usage; competition in retail and wholesale power markets; the need for and
effect of any business or industry restructuring; PP&L Resources' and
PP&L's profitability and liquidity; new accounting requirements or new
interpretations or applications of existing requirements; system conditions
and operating costs; performance of new ventures; political, regulatory or
economic conditions in foreign countries; foreign exchange rates; and PP&L
Resources' and PP&L's commitments and liabilities. Any such forward-
looking statements should be considered in light of such important factors
and in conjunction with PP&L Resources' and PP&L's other documents on file
with the SEC.
Results of Operations
The following discussion explains material changes in principal items
on the Consolidated Statement of Income comparing the three months and six
months ended June 30, 1998, to the comparable periods ended June 30, 1997.
The Consolidated Statement of Income reflects the results of past
operations and is not intended as any indication of the results of future
operations. Future results of operations will necessarily be affected by
various and diverse factors and developments. Furthermore, 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
Comparison of Earnings - June 30
Three Months Ended Six Months Ended
1998 1997 1998 1997
Earnings per share - excluding
weather variances and one-time
adjustments $0.35 $0.39 $1.06 $1.15
Weather variances on billed sales (0.03) (0.14) (0.04)
One-time adjustments
PUC Restructuring Charge (5.47) (5.48)
FERC Municipalities Settlement (0.19) (0.19)
Earnings per share - reported $(5.34) $0.39 $(4.75) $1.11
PP&L had two extraordinary items in June 1998 related to the PUC
restructuring proceeding and a settlement with municipalities under FERC
jurisdiction. Refer to Financial Note 4 for further information.
Earnings per share, excluding weather variances and extraordinary
items, were $.04 lower for the three months ended June 30, 1998, and $.09
lower for the first six months of 1998, when compared with the same periods
in 1997. Earnings changes for these periods, excluding weather variances
and extraordinary items, were primarily the net effect of the following:
June 30, 1998 vs. June 30, 1997
Three Months Ended Six Months Ended
(per share)
o Higher revenues from electric operations,
due to unbilled revenues and moderate
growth in adjusted weather-normalized sales; $0.03 $0.01
o Higher other operating revenues, primarily
due to increased sales of reservation of
electrical output to other utilities; 0.02 0.08
o Net reduction in earnings due to the phase-
down of the contract with JCP&L and the end
of the contract with Atlantic; (0.02) (0.05)
o Higher wages and benefits costs primarily due
to the bargaining unit contract ratification
bonus and higher overtime costs; (0.03) (0.03)
o Higher other operating costs primarily due
to the write-off of excess and obsolete
inventory, additional provisions for
uncollectable accounts, costs associated
with meeting retail competition requirements
and increased costs associated with computer
information systems; and (0.06) (0.09)
o Other 0.02 (0.01)
Earnings Change $(0.04) $(0.09)
The reduction in contractual bulk power sales to JCP&L and other major
utilities will continue to adversely impact earnings over the next few
years. However, the efforts of the Energy Marketing Center to resell the
returning electric energy and capacity on the open market, along with its
other energy trading activities, is expected to continue to offset the loss
in revenues from declining contractual sales. Finally, the Customer Choice
Act and the regulatory and business developments related thereto could have
a major impact on the future financial performance of PP&L.
PUC Restructuring Proceeding
Refer to Financial Notes 3 and 4 for information regarding the PUC
restructuring proceeding.
Electric Energy Sales
The increase (decrease) in PP&L's electric energy sales were
attributable to the following:
June 30, 1998 vs. June 30, 1997
Three Months Ended Six Months Ended
Change % Change Change % Change
(Millions of kWh)
Electricity Delivered to
Retail Customers(a) (146) (2.0)% (532) (3.3)%
Electricity Supplied to
Retail Customers(a) (189) (2.5)% (835) (5.1)%
Wholesale Energy Sales 3,850 88.2% 8,808 106.9%
(a) KWh for customers residing in PP&L's service territory who are
receiving energy from PP&L will be reflected in both of these categories.
Under Pennsylvania's competition pilot program, customers are allowed
to choose the supplier of their electricity. Pilot customers will continue
to have the utility that serves their territory deliver electricity from
the supplier of choice. "Electricity Delivered to Retail Customers" is the
amount of electricity delivered by PP&L to customers in its service
territory. "Electricity Supplied to Retail Customers" represents the
amount of electricity supplied to PP&L service territory customers who are
not participating in the pilot program, and electricity supplied to
customers within and outside PP&L service territory who are participating
in the pilot program and have chosen PP&L as their energy supplier.
Electricity delivered to retail customers decreased for the three and
six months ended June 30, 1998 from the comparable periods in 1997. Due to
the timing of certain large customer bills in June, approximately 100
million kWh were included in unbilled sales rather than billed sales.
Excluding the effects of these timing differences in 1998 and weather
variances in 1998 and 1997, electricity delivered to retail customers would
have increased by 85 million kWh and 41 million kWh, respectively, for the
three and six months ended June 30, 1998. Electricity delivered to
industrial customers decreased from 1997 for both the three and six months
ended June 30, 1998. This decrease was mainly due to a steel plant closing
and the reduction of energy supplied to a paper mill.
Electricity supplied to retail customers decreased for the three and
six months ended June 30, 1998 from the comparable periods in 1997. This
decrease was due to the mild weather experienced during the first half of
the year and the impact of the competition pilot program.
Electricity Trading Activities
During June 1998, a number of unexpected events in the midwestern
United States, including unplanned outages at generating units, higher
summer temperatures and transmission constraints, caused extreme price
volatility in the wholesale energy markets, particularly in the ECAR
region. As a result of these events, several participants in wholesale
energy markets requested the FERC to initiate an investigation into alleged
market abuses during this period and consider the imposition of price caps
during emergency conditions. The FERC has begun an informal investigation
to determine whether any measures are needed in response to these events.
PP&L, through its Energy Marketing Center, purchases and sells
electric capacity and energy at the wholesale level under its FERC market-
based tariff. PP&L's tariff was recently amended to permit the resale of
transmission capacity at market-based rates. PP&L has entered into
agreements to sell firm capacity or energy under its market-based tariff to
certain entities located inside and outside of the PJM power pool,
including entities located in the ECAR region. By being a net seller of
electricity in the second quarter of 1998, PP&L profited from the
unprecedented price spikes. Some of the profitability was offset, however,
due to the transmission constraints that developed in the PJM and ECAR
regions, which required PP&L to meet certain of its obligations by
purchasing electricity in the ECAR spot market and selling into the PJM
spot market electricity intended for sale in the ECAR region.
If PP&L were unable to meet its obligations under these agreements to sell
capacity and energy, under certain circumstances it would be required to
pay damages equal to the difference between the market price to acquire
replacement capacity or energy and the contract price of the undelivered
capacity or energy. Depending on price volatility in the wholesale energy
markets, such damages could be material in amount. Events that could
affect PP&L's ability to meet its firm capacity or energy obligations or
cause significant increases in the market price of replacement capacity and
energy include the occurrence of extremely warm weather conditions,
unplanned generating plant outages, transmission disruptions, non-
performance by counterparties with which it has power contracts and other
factors affecting the wholesale energy markets. Although PP&L attempts to
mitigate these risks as described below, there can be no assurance that it
will be able to fully meet its firm obligations, that it will not be
required to pay damages for failure to perform, or that it will not
experience counterparty non-performance in the future.
PP&L's efforts to mitigate risks associated with open contract
positions include maintaining generation capability to deliver electricity
to satisfy its net firm sales contracts. To further mitigate supply and
transmission risk, the Energy Marketing Center has assigned PP&L generating
capacity to satisfy its commitments in ECAR for July and August and has
purchased firm transmission service. In addition, the Energy Marketing
Center adheres to established credit policies, and PP&L has not experienced
non-performance by counterparties to date.
Operating Revenues: Electric Operations
The increase (decrease) in revenues from electric operations was
attributable to the following:
June 30, 1998 vs. June 30, 1997
Three Months Ended Six Months Ended
(Millions of Dollars)
Retail Electric Revenues
Weather effect $(9) $(35)
Sales volume and sales mix effect 5 (2)
Unbilled revenues 11 5
Pilot shopping credit above market price (4) (8)
Other, net 1 5
Other Electric Revenues 4 6
$ 8 $(29)
Revenues from electric operations increased by $8 million, or 1.5%,
for the three months ended June 30, 1998 when compared to the same period
in 1997. Increased revenues from billed and unbilled sales were partially
offset by the effects of milder than normal weather.
For the six months ended June 30, 1998, revenues from electric
operations decreased by $29 million, or 2.4%, when compared to the same
period in 1997. Most of the decrease can be attributed to the milder-than-
normal weather experienced during the first quarter of 1998. This period
saw the largest weather impact on earnings in the 27 years PP&L has tracked
weather effects. This decrease also reflects the mandatory "shopping
credit" (see Financial Note 3) under the competition pilot program being
higher than the market clearing price of generation. PP&L is deferring
these losses for future recovery. These future recoveries are recorded as
an offset to "Other Operating Expenses."
Operating Revenues: Wholesale Energy and Trading Activities
The increase (decrease) in revenues from wholesale energy and trading
activities was attributable to the following:
June 30, 1998 vs. June 30, 1997
Three Months Ended Six Months Ended
(Millions of Dollars)
Market-based transactions $ 95 $181
PJM 18 35
Cost-based contracts (11) (17)
Reservation/capacity credits 9 23
Oil & gas sales 13 17
Other (1) (2)
$123 $237
Revenues from wholesale energy and trading activities increased by
$123 million and $237 million for the three and six months ended June 30,
1998, respectively, when compared to the same periods in 1997. Revenues in
both periods increased despite the phase-down of the capacity and energy
agreement with JCP&L and the end of the capacity and energy agreement with
Atlantic. This increase reflects PP&L's continued emphasis on competing in
wholesale markets.
In recent months, the national energy trading market has experienced
high prices and increased volatility. PP&L is actively managing its
portfolio to attempt to capture the opportunities and limit its exposure to
these volatile prices. Reference is made to "Electricity Trading
Activities" for more information.
Energy-Related Businesses
Energy-related businesses contributed $6 million and $2 million to the
operating income of PP&L Resources for the three months ended June 30, 1998
and 1997, respectively. For the six-month periods ended June 30, 1998 and
1997, these businesses contributed a total of $11 million and $8 million to
operating income, respectively. These results are primarily from PP&L
Global's investments in world-wide energy projects. Energy-related
businesses -- i.e., PP&L Global, PP&L Spectrum, H.T. Lyons and McClure --
are expected to provide an increasing share of PP&L Resources' future
earnings.
Fuel Expense
Fuel expense increased by $13 million and $15 million for the three
and six months ended June 30, 1998, respectively, when compared to the same
periods in 1997. This reflects increased generation at the coal and
oil/gas-fired stations. These units were needed due to the extension of
the Susquehanna Unit 1 refueling outage and the unplanned maintenance
outage of Susquehanna Unit 2. Also, higher generation was necessary to
meet the increased trading activities of the Energy Marketing Center.
Energy Purchases
Energy purchases increased by $114 million and $212 million for the
three and six months ended June 30, 1998, respectively, when compared to
the same periods in 1997. This increase was primarily due to greater
quantities of energy purchased from others to meet the increased trading
activities of the Energy Marketing Center and to offset the planned and
unplanned outages at the Susquehanna station.
Other Operating Expenses
Other operating expenses increased by $22 million for both the three
and six months ended June 30, 1998 when compared to the same periods in
1997. The increase reflects additional costs associated with computer
information systems, and additional payroll, consultant services and other
expenses to meet the requirements of retail competition. The increase also
reflects higher overtime costs, a bonus paid to bargaining unit employees
in ratifying the recent labor agreement, and additional provisions for
uncollectible accounts. These increases were partially offset by credits
recorded in connection with the competition pilot program. The PUC has
authorized PP&L to seek future recovery of the revenue lost on the pilot
program. PP&L has established a regulatory asset for the excess of the
shopping credits provided to pilot customers over the market price of this
generation. These credits totaled $4 million and $8 million for the three
months and six months ended June 30, 1998, respectively, and were recorded
as offsets to "Other Operating Expenses."
Power Plant Operations
In an effort to reduce operating costs and position itself for the
competitive marketplace, PP&L, in August 1998, announced the closing of its
Holtwood coal-fired generating station, effective May 1, 1999. The
adjacent hydroelectric plant will continue to operate. At the same time,
PP&L announced that it would attempt to sell its Sunbury coal-fired
generating station. As a result of these plant closings and other
previously announced staffing reductions, PP&L expects the size of its
workforce to decrease by approximately 250 over the next year.
Financial Condition
Refer to Financial Notes 3, 4 and 6 for information concerning the PUC
restructuring charge, PP&L's financial goals and strategies, the reduction
of PP&L Resources' dividend and the Tender Offer for PP&L Resources' common
stock.
Financing Activities
The following financing activities have occurred to date in 1998:
o From January through July 1998, PP&L Resources issued $47 million
of common stock through the DRIP.
o In March 1998, the 364-day revolving credit agreement for PP&L and
PP&L Capital Funding was increased from $150 million to $350
million. This increase, when added to the $300 million five-year
revolving credit agreement of PP&L and PP&L Capital Funding,
brings to $650 million the total amount of revolving credit
available to PP&L and PP&L Capital Funding under these joint
agreements. Additionally, in July 1998, PP&L Capital Funding
entered into five separate $80 million, 364-day credit facilities
with five banks. As of June 30, 1998, no borrowings were
outstanding under any revolving credit agreements.
o In March 1998, PP&L Capital Funding sold $60 million of medium-
term notes having a five-year term.
o In March 1998, PP&L Capital Funding established a commercial paper
program. At June 30, 1998, $270 million of commercial paper was
outstanding.
o In April 1998, PP&L retired $150 million principal amount of First
Mortgage Bonds, 5-1/2% series that matured on that date.
o In May 1998 PP&L issued $200 million First Mortgage Bonds, 6-1/8%
Reset Put Securities Series due 2006. In connection with this
issuance, PP&L assigned to a third party the option to call the
bonds from the holders on May 1, 2001. These bonds will mature on
May 1, 2006, but will be required to be surrendered by the
existing holders on May 1, 2001 either through the exercise of the
call option by the callholder or, if such option is not exercised,
through the automatic exercise of a mandatory put by the trustee
on behalf of the bondholders. If the call option is exercised,
the bonds will be remarketed and the interest rate will be reset
for the remainder of their term to the maturity date. If the call
option is not exercised, the mandatory put will be exercised and
PP&L will be required to repurchase the bonds at 100% of their
principal amount on May 1, 2001.
Refer to Financial Note 6 for additional information on credit
arrangements, financing activities and the Tender Offer for PP&L Resources'
common stock.
Financing and Liquidity
The change in cash and cash equivalents for PP&L Resources for the six
months ended June 30, 1998 increased $42 million from the comparable period
in 1997. The reasons for this change were:
o A $26 million decrease in cash provided by operating activities,
partially due to a revenue loss associated with the energy
credits mandated for competition pilot program customers, higher
operating and maintenance expenses and payments for a buyout of a
contract with a NUG.
o A $378 million increase in cash used in investing activities,
primarily due to an increase in the amount of investment in
electric energy projects by PP&L Global. In addition, there were
fewer sales and maturities of available-for-sale securities, as
well as other financial investments in 1998 compared with 1997.
o A $446 million increase in cash provided by financing activities,
primarily due to PP&L Resources' purchase of PP&L preferred stock
in 1997. In addition, the increase in short-term debt was $113
million greater for the six months ended June 30, 1998 than in
the comparable period in 1997.
PP&L's projected internally generated funds are expected to be
sufficient to permit PP&L to retire about $275 million of its long-term
debt during 1999-2002.
Outside financing, in amounts not currently determinable, may be
required over the next five years to finance investments in world-wide
energy projects by PP&L Global.
Financial Indicators
The ratio of PP&L Resources pre-tax income to interest charges was 3.5
and 3.8 for the six months ended June 30, 1998 and 1997, respectively,
excluding extraordinary items. The annual per share dividend rate on
common stock remained unchanged during the first six months of 1998 at
$1.67 per share. Refer to Financial Note 6 for information regarding the
reduction of PP&L Resources' dividend and the Tender Offer for PP&L
Resources' common stock. The ratio of the market price to book value of
common stock was 199% at June 30, 1998, compared with 116% at June 30,
1997. Excluding extraordinary items, the ratio of market price to book
value of common stock at June 30, 1998 was 133%.
Unregulated Investments
PP&L Global continues to pursue opportunities to develop and acquire
electric generation, transmission and distribution facilities in the United
States and abroad.
As of June 30, 1998, PP&L Global had investments and commitments of
approximately $638 million in distribution, transmission and generation
facilities in the United Kingdom, Bolivia, Peru, Argentina, Spain,
Portugal, Chile and El Salvador. PP&L Global's major investments to date
are SWEB, Emel and DelSur.
During the first six months of 1998, PP&L Global acquired an
additional 561,000 shares of Emel at a cost of approximately $10 million,
increasing its ownership interest to 28.9%. In February 1998, PP&L Global
and Emel acquired a 75% interest in DelSur, an electric distribution
company serving 193,000 customers in El Salvador, for approximately $180
million. Under the purchase agreement, PP&L Global directly acquired 37.5%
of DelSur and Emel acquired the other 37.5%. DelSur is one of five
electricity distribution companies in El Salvador that are being privatized
by the government. During the second quarter of 1998, PP&L Global also
acquired an additional 26% interest in SWEB for $170 million, increasing
its equity interest to 51% and its voting interest to 49%.
Acquisitions
In July 1998, the PUC approved the acquisition of Penn Fuel Gas by
PP&L Resources. In addition, in August 1998, the SEC approved the
acquisition under the PUHCA. As a result, this acquisition is currently
expected to close by August 31, 1998.
In July 1998, PP&L Resources acquired McClure, a heating, ventilating
and air-conditioning firm, in a cash transaction for an amount that is not
material.
Commitments and Contingent Liabilities
There have been no material changes related to PP&L Resources' or
PP&L's commitments and contingent liabilities since the companies filed
their joint 1997 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 electricity suppliers for all customer classes. PP&L is actively
involved in efforts at both the state and federal levels to encourage a
smooth transition to full competition.
Pennsylvania Activities
Reference is made to "PUC Restructuring Proceeding" for a discussion
of the disposition of PP&L's restructuring plan under the Customer Choice
Act.
In February 1997, PP&L filed a proposed retail access pilot program
with the PUC in accordance with the applicable provisions of the Customer
Choice Act and PUC guidelines. A number of the major parties, including
PP&L, entered into a joint settlement agreement resolving all of the issues
in the Pennsylvania utilities' pilot proceedings. In August 1997, the PUC
issued an order modifying this settlement and modifying and approving
PP&L's pilot program. In October 1997, PP&L submitted its pilot program
compliance filing to the PUC. Retail customers participating in the PP&L
and other pilot programs began to receive power from their supplier of
choice in November 1997. Under its pilot program, approximately 60,000
PP&L residential, commercial and industrial customers have chosen their
electric supplier. PP&L will continue to provide all transmission and
distribution, customer service and back-up energy supply services to
participating customers in its service area.
Only those alternative suppliers licensed by the PUC and in compliance
with the state tax obligations set forth in the Customer Choice Act may
participate in the pilot programs. To date, approximately 60 suppliers have
obtained such licenses to participate in the pilot programs.
In June 1997, the PUC approved PP&L's application for a license to act
as an electric generation supplier. This license permits PP&L to
participate in the various retail access pilot programs of PP&L and of the
other Pennsylvania utilities, and PP&L currently is offering electric
supply to the participating customers of those utilities throughout the
state. At this time, PP&L has determined not to pursue additional
residential customers in the competitive marketplace based on economic
considerations.
Federal Activities
Reference is made to Financial Note 4 for a discussion of PP&L's
settlement with 15 small utilities.
Legislation has been introduced in the U.S. Congress that would give
all retail customers the right to choose among competitive suppliers of
electricity as early as 2000.
In addition, in April 1996 the FERC adopted rules on competition in
the wholesale electricity market primarily dealing with open access to
transmission lines, recovery of stranded costs, and information systems for
displaying available transmission capability (FERC Orders 888 and 889).
These rules required all electric utilities to file open access
transmission tariffs by July 9, 1996. The rules also provided that
utilities are entitled to recover from certain wholesale requirements
customers all "legitimate, verifiable, prudently incurred stranded costs."
The FERC has provided recovery mechanisms for wholesale stranded costs,
including stranded costs resulting from municipalization. Wholesale
contracts signed after July 11, 1994 must contain explicit provisions
addressing recovery of stranded costs if the utility wishes to seek such
recovery. For requirements contracts signed before that 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. Finally, the
rules required that power pools file pool-wide open access transmission
tariffs and modified bilateral coordination agreements reflecting the
removal of discriminatory provisions by December 31, 1996.
In March 1997, the FERC issued Orders 888-A and 889-A. Among other
things, these orders required utilities to make certain changes to the non-
rate terms and conditions of their open access transmission tariffs. In
compliance with Order 888-A, in July 1997 PP&L filed a revised open access
transmission tariff.
In December 1996, the PJM companies submitted a compliance filing with
the FERC, which proposed a pool-wide pro forma transmission tariff and a
revised interconnection agreement and transmission owners agreement
designed to accommodate open, non-discriminatory participation in the pool.
The FERC accepted the PJM tariff and proposed rates, subject to refund, and
they went into effect on March 1, 1997. In June 1997, all of the PJM
companies except PECO (the PJM Supporting Companies) filed proposals with
the FERC to amend the PJM tariff and restructure the PJM pool. PECO filed
a separate request with the FERC to amend the PJM tariff. Furthermore,
PECO and certain electric marketers submitted significantly different
proposals to restructure the PJM pool.
In November 1997, the FERC approved, with certain modifications, the
PJM Supporting Companies' proposals for transforming the PJM into an ISO.
In summary, the FERC order: (i) approved the PJM's open access
transmission rates based on geographic zones, but required PJM to file a
single PJM system-wide rate proposal by 2002; (ii) accepted the PJM
Supporting Companies' methodology to price transmission when the system is
congested and to charge these congestion costs to system users in addition
to the open access transmission rates, but ordered PJM to file an
additional proposal to address concerns raised over price certainty for
buyers and sellers during periods of congestion; (iii) determined that the
ISO is to operate both the transmission system and the power exchange which
provides for the purchase and sale of spot energy within the PJM market;
and (iv) accepted the PJM Supporting Companies' proposal regarding
mandatory installed capacity obligations for all entities serving firm
retail and wholesale load within PJM, but rejected their proposal for
allocating the capacity benefits which result from PJM's ability to import
power from other regional power pools.
The PJM Supporting Companies and numerous other parties have filed
requests for amendment and/or rehearing of virtually every portion of the
FERC's PJM ISO order. PP&L also has filed its own request for amendment
and/or rehearing. The FERC has not yet taken action on these filings.
PP&L's primary issue with the FERC's order relates to a requirement that
existing wholesale contracts for sales service and transmission service be
modified to have the new PJM transmission tariff applied to service under
these existing contracts and the requirement that PP&L modify these
contracts to ensure that customers are not assessed multiple transmission
charges. If PP&L were required to modify these existing contracts, PP&L
could lose as much as $3-4 million in transmission revenues in 1998 -- but
a lesser amount in the following years -- from several wholesale sales and
transmission service contracts that were negotiated prior to the
establishment of the PJM ISO. In an order issued in May 1998, the FERC
allowed PP&L to request an increase in the revenue requirement applicable
to transmission service over PP&L's transmission facilities to the extent
that PP&L has otherwise unrecovered transmission costs as a result of the
contract modifications. PP&L filed the proposed increase to its
transmission revenue requirement in July 1998. Settlement discussions are
currently underway with the FERC.
In July 1997, the FERC accepted a new wholesale power tariff that
permits PP&L to sell capacity and energy at market-based rates, both inside
and outside the PJM area, subject to certain conditions. This tariff
allows PP&L to become more active in the wholesale market with utilities
and other entities, and removes pricing restrictions which in the past had
limited PP&L to charging at or below cost-based rates.
In September 1997, PP&L filed a request with the FERC to lower the
applicable PP&L revenue requirement currently set forth in the PJM open
access transmission tariff. The new revenue requirement results from
PP&L's use of the same test year and cost support data used in the PUC
restructuring proceeding. PP&L requested that the new revenue requirement
take effect on November 1, 1997. In February 1998, the FERC accepted the
proposed rates, subject to refund, and set the amount of the decrease in
the revenue requirement for hearing. Settlement discussions are currently
underway with the FERC.
In September 1997, PP&L also filed a request with the FERC to approve
new revenue requirements and rates for the PP&L open access transmission
tariff under FERC Order 888. No customers currently take service under
that tariff. As with the PJM tariff filing, the new revenue requirements
and rates requested by PP&L are based on the same test year and cost
support data used by PP&L in its PUC restructuring proceeding. In February
1998, the FERC rejected PP&L's tariff as unnecessary, in light of the PJM
open access transmission tariff.
In January 1998, the United States Department of Energy approved
PP&L's application for an export license to sell capacity and/or energy to
electric utilities in Canada. This export license allows PP&L to sell
either its own capacity and energy not required to serve domestic
obligations or power purchased from other utilities.
Year 2000 Computer Issue
PP&L Resources and its subsidiaries utilize computer-based systems
throughout their businesses. In the year 2000, these systems will face a
potentially serious problem with recognizing calendar dates. Without
corrective action, this problem could result in computer shutdown or
erroneous calculations causing less than optimal operation of the
generating stations; diminished ability to monitor, control and coordinate
generation with the transmission and distribution systems; and impact the
operation of various monitoring and metering equipment utilized throughout
PP&L. A company-wide Year 2000 coordination committee was formed to raise
the awareness of the Year 2000 issue, share information and review the
progress. A seven-step approach was developed to achieve Year 2000
compliance by assessing and remediating the problem in application
software, hardware, plant control systems and devices containing embedded
microprocessors. The seven steps in the plan include awareness, inventory,
assessment, remediation, testing, implementation, and contingency planning.
Efforts are also underway with respect to compliance by critical suppliers
and business partners.
As of June 30, 1998, approximately 50% of the critical mainframe
applications and approximately 60% of the non-critical mainframe
applications that will remain in production have been determined as being
Year 2000 compliant. It is anticipated that this project will be completed
on a timely basis, with all mission-critical mainframe computer
applications to be compliant by March 31, 1999 and all mainframe computer
systems to be fully Year 2000 compliant by mid-1999.
PP&L has contingency plans to address issues such as blackouts on the
electrical grid, cold starts of generating facilities and disaster recovery
procedures for the computing environment. PP&L recognizes that additional
contingency plans are necessary and, as part of the seven-step remediation
process, is currently working on identifying additional contingency plans
that may be needed.
In May 1998, the NRC issued a notification requirement under which
nuclear utilities are required to inform the commission, in writing, that
they are working to solve the Year 2000 computer problem. In addition,
nuclear utilities have until July 1, 1999 to inform the NRC that their
computers are Year 2000 compliant or to submit a status report summarizing
the on-going work. PP&L filed its written response to the NRC in August
1998.
In July 1998, the PUC ordered an investigation to be conducted by the
Office of Administrative Law Judge "to accurately assess any and all steps
taken and proposed to be taken to resolve the Year 2000 compliance issue by
all jurisdictional fixed utilities and mission-critical service providers
such as the PJM Interconnection." The PUC is requiring all jurisdictional
utilities to file a written response to a list of questions concerning Year
2000 compliance; and that, if mission-critical systems cannot be made Year
2000 compliant on or before March 31, 1999, to file a detailed contingency
plan. PP&L filed its written response to these questions in August 1998.
Based upon present assessments, PP&L Resources estimates that it will
incur approximately $15 million in Year 2000 remediation costs. These
costs are being expensed as incurred.
PP&L RESOURCES, INC. AND
PP&L, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Notes to Financial Statements for information
concerning PP&L's restructuring proceeding before the PUC under the
Customer Choice Act.
Reference is made to "Increasing Competition" in the Review of the
Financial Condition and Results of Operation for information concerning
proceedings before the FERC.
In December 1995, PP&L filed a petition with the PUC for a declaratory
order that it had acted properly in curtailing purchases from SER and other
NUGs during minimum generation emergencies on the PJM system. The PUC has
stayed a determination in this case pending a FERC decision regarding
PP&L's request to decertify SER as a "qualifying cogeneration facility"
(see discussion below).
In November 1995, PP&L initiated a civil action against SER in the
Lehigh County Court of Common Pleas. The principal issue is whether SER
and an affiliate of SER properly used the steam generated by the plant in
accordance with the terms of the contract. Under the contract, if the
steam was used properly, SER is entitled to a rate of 6.6 cents/kWh; if
not, it is entitled to a rate of only 5.0 cents/kWh. The total annual
difference in PP&L's payment under the two rates is about $9 million. In
April 1996, the Court concluded that PP&L must seek a determination by the
FERC prior to reducing the rate paid to SER.
Accordingly, in July 1996 PP&L filed a motion with the FERC to revoke
SER's status as a "qualifying cogeneration facility". PP&L's motion
alleges that SER has engaged in a conscious and continuing scheme to
mislead PP&L and the FERC and that SER has never complied with the FERC's
requirements for a qualifying cogeneration facility under PURPA.
In May 1998, the FERC granted PP&L's motion to revoke SER's status as
a qualified cogeneration facility for the years 1990-1995. Accordingly, in
May 1998 the Lehigh County Court of Common Pleas permitted PP&L to reduce
the rate paid to SER to 5.0 cents/kWh from 6.6 cents/kWh. SER is seeking
rehearing and a stay of the FERC order. The total amount in dispute for
past payments to SER (i.e., from 1990-1998) at the higher rate, including
interest, equals approximately $97 million.
SER also intervened in PP&L's restructuring proceeding before the PUC
under the Customer Choice Act (see Financial Note 3). In conjunction with
the settlement of that proceeding, PP&L, in August 1998, executed an
agreement with SER providing that, effective January 1, 1999, the PP&L/SER
power purchase agreement will be amended to provide that SER will receive
6.6 cents/kWh for generation up to 79.5 mW, as long as SER operates a
"qualifying facility" under FERC rules. Generation in excess of 79.5 mW
will continue to be sold at rates in the existing power purchase agreement.
Subject to regulatory requirements, SER will be permitted, but not
required, to sell generation above 80.5 mW to third parties.
In a related matter, in June 1996 SER filed a lawsuit against PP&L in
the Court of Common Pleas of Lehigh County, Pennsylvania. In this lawsuit,
SER restates its allegations concerning PP&L's procedures for curtailing
power deliveries from SER during periods of minimum generation emergencies
declared by the PJM. SER's claims include breach of contract, fraud,
negligent misrepresentation and breach of duty of good faith and fair
dealing. In addition, SER claims that public statements by PP&L were
libelous. In January 1997, the Court stayed SER's state law claims against
PP&L pending consideration by the PUC of PP&L's minimum generation petition
and dismissed SER's libel claims.
The EPA has issued an order to PP&L and 12 other parites (mainly
utilities) under Section 106 of Superfund requiring clean-up of PCBs at the
Metal Bank Superfund site near Philadelphia. PP&L is complying with the
order by joining the owner/operator of the site in performing the remedial
design. A group of utilities has also offered to conduct the remedial
design, but PP&L has not yet joined that group.
PP&L challenged the DEP's right to collect air emission fees for
hazardous air pollutants (HAPs) from PP&L's coal-fired units and air
emission fees for emissions from PP&L's Phase I affected units from 1995
through 1999. (Phase I affected units are those units designated by the
Clean Air Act, or which voluntarily opt into the requirement, to make
certain reductions in SO2 and NOx emissions by 1995; all others must make
these reductions by 2000.) The HAPs emissions fees are approximately
$200,000 per year. The emission fees for Phase I affected units from 1995
through 1999 are estimated at $1.6 million. PP&L and the DEP have
negotiated a settlement in principle of this litigation. PP&L expects the
settlement to be finalized by year end.
Item 4. Submission of Matters to a Vote of Security Holders
At PP&L Resources' Annual Meeting of Shareowners held on April 24,
1998, the shareowners:
(1) Elected all three nominees for the office of director. The vote
for all nominees was 125,932,145. The votes for individual nominees
were as follows:
Number of Votes
For Withhold Authority
William F. Hecht 125,932,145 5,937,190
Stuart Heydt 126,961,339 4,907,996
Marilyn Ware Lewis 126,863,001 5,006,334
The vote to withhold authority for all nominees was 4,796,496.
(2) Ratified the appointment of Price Waterhouse LLP as independent
auditors for year ended December 31, 1998. The vote was 129,570,102
in favor and 1,062,482 against, with 1,236,751 abstaining.
At PP&L's Annual Meeting of Shareowners held on April 24, 1998 the
shareowners:
(1) Elected all three nominees for the office of director. The vote
for all nominees was 161,618,532. The votes for individual nominees
were as follows:
Number of Votes
For Withhold Authority
William F. Hecht 161,618,532 3,533
Stuart Heydt 161,618,644 3,421
Marilyn Ware Lewis 161,618,606 3,459
The vote to withhold authority for all nominees was 3,421.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10 - Form of severance agreement entered into between PP&L
Resources and officers.
27 - Financial Data Schedule
(b) Reports on Form 8-K
Report dated April 7, 1998
Item 5. Other Events
Information regarding the recommended decision of the
Administrative Law Judge on PP&L's restructuring plan.
Report dated April 28, 1998
Item 5. Other Events
Information regarding the issuance of PP&L's First Mortgage
Bonds, 6-1/8% Reset Put Securities Series Due 2006.
Report dated May 14, 1998
Item 5. Other Events
Information regarding the PUC's nonbinding motion approving a
restructuring plan for PP&L.
Report dated June 15, 1998
Item 5. Other Events
Information regarding the PUC's June 15, 1998 order in PP&L's
restructuring proceeding. Also, information regarding PP&L Global's
acquisition of an additional ownership stake in SWEB.
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
CERCLA - Comprehensive Environmental Response, Compensation and Liability
Act
Clean Air Act (Federal Clean Air Act Amendments of 1990) - legislation
enacted to address environmental issues including acid rain, ozone and
toxic air emissions.
CTC - Competitive transition charge
Customer Choice Act - (Pennsylvania Electricity Generation Customer Choice
and Competition Act) - legislation enacted to restructure the state's
electric utility industry to create retail access to a competitive market
for generation of electricity
DelSur - Distributidora de Electricidad del Sur, an electric distribution
company in El Salvador
DEP - Pennsylvania Department of Environmental Protection
District Court - United States District Court for the Eastern District of
Pennsylvania
DRIP (Dividend Reinvestment Plan) - program available to shareowners of
PP&L Resources' common stock and PP&L preferred stock to reinvest dividends
in PP&L Resources' common stock instead of receiving dividend checks.
ECAR - East Central Area Reliability Council
EITF - Emerging Issues Task Force
Emel - Empresas Emel, S.A., a Chilean electric distribution holding company
Energy Marketing Center - organization within PP&L responsible for
marketing and trading wholesale energy
EPA - Environmental Protection Agency
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) - federal agency that regulates
interstate transmission and sale of electricity and related matters.
H.T. Lyons - H.T. Lyons, Inc., a PP&L Resources unregulated subsidiary
specializing in heating, ventilating and air-conditioning.
IBEW - International Brotherhood of Electrical Workers
ISO - Independent System Operator
ITC - Investment tax credits
JCP&L - Jersey Central Power & Light Company
McClure - McClure Company, a PP&L Resources unregulated subsidiary
specializing in heating, ventilating and air-conditioning.
NOx - Nitrogen oxide
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
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
Penn Fuel Gas - Penn Fuel Gas, Inc., a PP&L Resources regulated subsidiary,
specializing in natural gas distribution, transmission and storage
services, and the sale of propane.
PJM (PJM Interconnection, L.L.C.) - operates the electric transmission
network and electric energy market in the mid-Atlantic region of U.S.
PP&L - PP&L, Inc.
PP&L Capital Funding - PP&L Capital Funding, Inc., PP&L Resources'
financing subsidiary
PP&L Global - PP&L Global, Inc., a PP&L Resources unregulated subsidiary
which invests in and develops world-wide power projects.
PP&L Resources - PP&L Resources, Inc., the parent holding company of PP&L,
PP&L Global, PP&L Spectrum and other subsidiaries
PP&L Spectrum - PP&L Spectrum, Inc., a PP&L Resources unregulated
subsidiary which offers energy-related products and services.
PUC (Pennsylvania Public Utility Commission) - state agency that regulates
certain ratemaking, services, accounting, and operations of Pennsylvania
utilities
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.
SEC - Securities and Exchange Commission
SER - Schuylkill Energy Resources, Inc.
SFAS (Statement of Financial Accounting Standards) - accounting and
financial reporting rules issued by the FASB.
SO2 - Sulfur dioxide
Superfund - Federal and state legislation that addresses remediation of
contaminated sites.
SWEB - South Western Electricity plc, a British regional electric utility
company.
Year 2000 - A set of date-related problems that may be experienced by a
software system or application.
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)
PP&L, Inc.
(Registrant)
Date: August 14, 1998 /s/ John R. Biggar
John R. Biggar
Senior Vice President - Financial
(PP&L Resources, Inc. and PP&L, Inc.)
/s/ Joseph J. McCabe
Joseph J. McCabe
Vice President & Controller
(PP&L Resources, Inc. and PP&L, Inc.)