United States
Securities and Exchange Commission
Washington, DC 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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,
157,164,916 shares outstanding at
October 31, 1998, excluding
17,001,100 shares held as treasury
stock
PP&L, Inc. Common stock, no par value,
157,300,382, shares outstanding and
all held by PP&L Resources, Inc. at
October 31, 1998
PP&L RESOURCES, INC.
AND
PP&L, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 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 6. Exhibits and Reports on Form 8-K
GLOSSARY OF TERMS AND ABBREVIATIONS
SIGNATURES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
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
September 30, 1998 and December 31, 1997, and the Consolidated Statement of Income and
Consolidated Statement of Cash Flows for the periods ended September 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, H. T. Lyons, Penn Fuel Gas and McClure. 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 Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
Operating Revenues
Electric operations.............................. $647 $586 $1,822 $1,790
Gas operations................................... 6 6
Wholesale energy and trading activities.......... 483 192 987 459
Energy related businesses........................ 30 14 69 31
Total Operating Revenues......................... 1,166 792 2,884 2,280
Operating Expenses
Operation
Cost of electric fuel.......................... 147 133 378 349
Cost of natural gas and propane................ 2 2
Energy purchases............................... 415 138 846 358
Other operating................................ 174 125 434 363
Maintenance...................................... 39 46 130 130
Depreciation and amortization.................... 68 94 257 279
Taxes, other than income ........................ 34 50 136 156
Energy related businesses........................ 25 5 54 14
Total Operating Expenses......................... 904 591 2,237 1,649
Operating Income................................... 262 201 647 631
Other Income and (Deductions)...................... 16 (36) 26 (31)
Income Before Interest and Income Taxes............ 278 165 673 600
Interest Expense................................... 58 53 164 163
Income Before Income Taxes and
Extraordinary Items ............................. 220 112 509 437
Income Taxes....................................... 78 64 200 197
Income Before Extraordinary Items.................. 142 48 309 240
Extraordinary Items (net of $666 income taxes)
(Note 4) ........................................ (948)
Income(Loss) Before Dividends on Preferred Stock... 142 48 (639) 240
Preferred Stock Dividend Requirements.............. 6 6 19 17
Net Income(Loss)................................... $136 $42 ($658) $223
Earnings Per Share of Common Stock
Basic and Diluted (a):
Income Before Extraordinary Items.............. $0.81 $0.25 $1.74 $1.36
Extraordinary Items (net of tax)............... (5.68)
Net Income(Loss)................................... $0.81 $0.25 $(3.94) $1.36
Dividends Declared per Share of Common Stock....... $0.2500 $0.4175 $1.085 $1.2525
(a) Based on average number of shares
outstanding (thousands)........................ 166,652 164,961 166,871 164,110
See accompanying Notes to Financial Statements.
PP&L RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Millions of Dollars)
Nine Months
Ended September 30,
1998 1997
Net Cash Provided by Operating Activities.................... $435 $579
Cash Flows From Investing Activities
Property, plant and equipment expenditures.................. (204) (200)
Proceeds from sale of nuclear fuel to trust................. 16 24
Purchases of available-for-sale securities.................. (14) (61)
Sales and maturities of available-for-sale securities....... 16 100
Investment in electric energy projects ..................... (279) (149)
Purchases and sales of other financial investments - net.... 4 76
Other investing activities - net............................ (19) (1)
Net cash used in investing activities................. (480) (211)
Cash Flows From Financing Activities
Issuance of long-term debt.................................. 320 10
Issuance of common stock.................................... 48 53
Purchase of treasury stock ................................. (419)
Issuance of Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts holding
solely parent debentures.................................. 250
Retirement of long-term debt................................ (268) (210)
Purchase of subsidiary's preferred stock (net of premium
and associated costs)..................................... (369)
Payments on capital lease obligations....................... (42) (50)
Common and preferred dividends paid......................... (228) (223)
Net increase in short-term debt............................. 629 139
Other financing activities - net ........................... (2) (20)
Net cash provided by (used in) financing activities... 38 (420)
Net Decrease In Cash and Cash Equivalents ................... (7) (52)
Cash and Cash Equivalents at Beginning of Period ............ 50 101
Cash and Cash Equivalents at End of Period .................. $43 $49
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest (net of amount capitalized)....................... $169 $152
Income taxes............................................... $185 $194
See accompanying Notes to Financial Statements.
PP&L RESOURCES,INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
September 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 .......................... $2,175 $2,160
Generation ............................................. 1,613 4,022
General and intangible ................................. 216 232
4,004 6,414
Construction work in progress - at cost................... 108 185
Nuclear fuel owned and leased - net....................... 140 167
Electric utility plant - net............................ 4,252 6,766
Gas utility plant - net .................................. 150
Other property - net...................................... 53 54
4,455 6,820
Investments
Electric energy projects - at equity ..................... 664 360
Nuclear plant decommissioning trust fund ................. 183 163
Financial investments..................................... 51 52
Affiliated companies - at equity ......................... 17 17
Other..................................................... 12 13
927 605
Current Assets
Cash and cash equivalents ................................ 43 50
Accounts receivable (less reserve: 1998, $17; 1997, $16)
Customers .............................................. 172 190
Other................................................... 162 48
Unbilled revenues
Customers............................................... 103 90
Other................................................... 83 37
Fuel, materials and supplies ............................. 192 200
Prepayments............................................... 50 28
Other..................................................... 72 52
877 695
Regulatory Assets and Other Noncurrent Assets (Note 4)
Recoverable transition costs.............................. 2,819
Other..................................................... 453 1,365
3,272 1,365
$9,531 $9,485
See accompanying Notes to Financial Statements.
PP&L RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
September 30, December 31,
1998 1997
(Unaudited) (Audited)
LIABILITIES
Capitalization
Common equity
Common stock ........................................... $2 $2
Capital in excess of par value ........................ 1,852 1,669
Treasury stock.......................................... (419)
Earnings reinvested (Note 4) ........................... 323 1,164
Capital stock expense and other ........................ (21) (26)
1,737 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 ........................................... 2,835 2,585
4,919 5,741
Current Liabilities
Short-term debt........................................... 777 135
Long-term debt due within one year ....................... 1 150
Capital lease obligations due within one year ............ 57 58
Liability for above market NUG purchases due
within one year (Note 4) ............................... 105
Accounts payable ......................................... 200 140
Taxes and interest accrued ............................... 109 102
Dividends payable ........................................ 50 76
Other .................................................... 124 108
1,423 769
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes and investment tax credits ......... 1,579 2,221
Liability for above market NUG purchases (Note 4) ........ 775
Capital lease obligations ................................ 89 113
Other .................................................... 746 641
3,189 2,975
Commitments and Contingent Liabilities ....................
$9,531 $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 September 30, 1998 and December 31, 1997, and the Consolidated Statement of
Income and Consolidated Statement of Cash Flows for the periods ended
September 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 Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
Operating Revenues
Electric operations............................. $647 $586 $1,822 $1,790
Wholesale energy and trading activities......... 483 192 987 459
Energy related businesses....................... 1 2 1
Total Operating Revenues 1,131 778 2,811 2,250
Operating Expenses
Operation
Cost of electric fuel......................... 147 133 378 349
Energy purchases.............................. 415 138 846 358
Other operating............................... 170 125 431 363
Maintenance..................................... 39 46 130 130
Depreciation and amortization................... 67 94 256 279
Taxes, other than income ....................... 33 50 135 156
Energy related businesses....................... 1 1 2 2
Total Operating Expenses........................ 872 587 2,178 1,637
Operating Income ................................. 259 191 633 613
Other Income and (Deductions)..................... 11 (1) 32 7
Income Before Interest and Income Taxes........... 270 190 665 620
Interest Expense.................................. 49 51 147 157
Income Before Income Taxes and
Extraordinary Items ............................ 221 139 518 463
Income Taxes...................................... 84 58 208 192
Income Before Extraordinary Items ................ 137 81 310 271
Extraordinary Items (net of $666 income taxes)
(Note 4) ....................................... (948)
Net Income(Loss) Before Dividends on
Preferred Stock................................. 137 81 (638) 271
Dividends on Preferred Stock...................... 12 12 36 28
Earnings Available to PP&L Resources, Inc. ...... $125 $69 $(674) $243
See accompanying Notes to Financial Statements.
PP&L, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Millions of Dollars)
Nine Months
Ended September 30,
1998 1997
Net Cash Provided by Operating Activities.............. $483 $576
Cash Flows From Investing Activities
Property, plant and equipment expenditures........... (202) (200)
Proceeds from sales of nuclear fuel to trust......... 16 24
Purchases of available-for-sale securities .......... (14) (61)
Sales and maturities of available-for-sale
securities......................................... 15 78
Purchases and sales of other financial
investments - net.................................. 4 76
Loan to parent....................................... (375)
Other investing activities - net .................... 2 (2)
Net cash used in investing activities.......... (179) (460)
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................ (42) (50)
Common and preferred dividends paid.................. (245) (264)
Net increase in short-term debt...................... 69 84
Other financing activities - net .................... (1) (9)
Net cash used in financing activities.......... (285) (189)
Net Increase (Decrease) in Cash and Cash Equivalents... 19 (73)
Cash and Cash Equivalents at Beginning of Period....... 15 95
Cash and Cash Equivalents at End of Period............. $34 $22
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest (net of amount capitalized)............... $152 $145
Income taxes....................................... $189 $197
<FN>
See accompanying Notes to Financial Statements.
PP&L, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
September 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 .......................... $2,175 $2,160
Generation ............................................. 1,613 4,022
General and intangible ................................. 216 232
4,004 6,414
Construction work in progress - at cost .................. 108 185
Nuclear fuel owned and leased - net ...................... 140 167
Electric utility plant - net ............................ 4,252 6,766
Other property - net ..................................... 50 54
4,302 6,820
Investments
Loan to parent............................................ 375 375
Nuclear plant decommissioning trust fund ................. 183 163
Financial investments .................................... 51 52
Affiliated companies - at equity ......................... 17 17
Other .................................................... 12 13
638 620
Current Assets
Cash and cash equivalents ................................ 34 15
Accounts receivable (less reserve: 1998, $16; 1997, $16)
Customers .............................................. 167 188
Other .................................................. 159 64
Unbilled revenues
Customers............................................... 102 90
Other................................................... 79 36
Fuel, materials and supplies ............................. 180 200
Prepayments............................................... 44 26
Other .................................................... 61 51
826 670
Regulatory Assets and Other Noncurrent Assets (Note 4)
Recoverable transition costs ............................. 2,819
Other..................................................... 345 1,362
3,164 1,362
$8,930 $9,472
See accompanying Notes to Financial Statements.
PP&L, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
September 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) ........................... 231 1,092
Capital stock expense and other ....................... (20) (20)
1,751 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 ........................................... 2,569 2,483
5,036 5,811
Current Liabilities
Short-term debt........................................... 114 45
Long-term debt due within one year ....................... 150
Capital lease obligations due within one year ............ 57 58
Liability for above market NUG purchases due
within one year (Note 4) ............................... 105
Accounts payable ......................................... 190 148
Taxes and interest accrued ............................... 108 99
Dividends payable ........................................ 59 81
Other .................................................... 108 107
741 688
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes and investment tax credits.......... 1,566 2,221
Liability for above market NUG purchases (Note 4) ........ 775
Capital lease obligations ............................... 89 113
Other .................................................... 723 639
3,153 2,973
Commitments and Contingent Liabilities ....................
$8,930 $9,472
See accompanying Notes to Financial Statements.
PP&L Resources, Inc. and PP&L, Inc.
Notes to Consolidated 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 September 30, 1997 and December 31, 1997
financial statements have been reclassified to conform to the presentation
in the September 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, Penn Fuel Gas,
McClure, and H.T. Lyons are now reflected in "Operating Income."
Previously, the results of 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
As a result of the outcome of PP&L's PUC restructuring proceeding (see
Notes 3 and 4), as well as changes in accounting standards and business
conditions, certain accounting policies of PP&L Resources and PP&L have
been changed. 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.
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
restructuring outcome. 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 September 30, 1998 and
December 31, 1997:
Transmission General Electric Utility
& & Plant In
Distribution Generation Intangible Service
September 30, 1998:
Original Cost $3,374 $6,342 $375 $10,091
Accumulated Depreciation
Reserve (1,199) (4,729) (159) (6,087)
$2,175 $1,613 $216 $ 4,004
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
September 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 in June 1998.
The other classes of Electric Utility Plant in Service continue to be
subject to SFAS 71 and are 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 in the past 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 are being 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) and
foreign currency translation adjustments. The comprehensive income of PP&L
Resources and PP&L is not materially different from net income for the
three and nine months ended September 30, 1998 or the corresponding periods
in 1997.
Stock Repurchase Program
In September 1998, PP&L Resources purchased approximately 17 million
shares of its common stock in a self-tender offer (refer to Note 6.) These
treasury shares are reflected on the September 30, 1998 Consolidated
Balance Sheet of PP&L Resources as an offset to common equity. The cost of
the treasury shares was $419 million ($24.50 per share plus transaction
costs.) Management has no definitive plans for the future use of these
shares. These treasury shares are not considered outstanding in
calculating earnings per share on the Consolidated Statement of Income of
PP&L Resources for the three and nine months ended September 30, 1998.
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, and the Quarterly
Reports on Form 10-Q for the quarter ended June 30, 1998, regarding PP&L's
restructuring proceeding before the PUC pursuant to the Customer Choice
Act.
In August 1998, the PUC entered a Final Order approving a "Joint
Petition for Full Settlement of PP&L, Inc.'s Restructuring Plan and Related
Court Proceedings" (Joint Settlement Petition). The following are the
major elements of this 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.
4. Beginning on January 1, 1999, PP&L will unbundle its retail elec-
tric 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 settlement provided 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 Rate Cap(b) Rate(c)
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 (d) 1.27 4.41 5.68 (d)
Jan. 1, 2006 (d) 1.27 4.78 6.05 (d)
Jan. 1, 2007 (d) 1.21 4.84 6.05 (d)
Jan. 1, 2008 (d) 1.14 4.91 6.05 (d)
Jan. 1, 2009(e) (d) 1.03 5.02 6.05 (d)
(a) Average CTC rates are fixed, subject to reconciliation for actual CTC
collection. Reconciliation of the CTC will be reflected in a rider, which
will be a separate credit or a separate charge to the CTC (up to the
Generation Rate Cap which is the sum of the CTC and the Shopping Credit
contained in the tariff).
(b) 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.
(c) The bundled rate equals the sum of Transmission & Distribution plus
Generation Rate Cap. Customers who continue to be supplied by PP&L as the
provider 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.
(d) The cap on PP&L's transmission and distribution rates under the
Customer Choice Act is extended from June 30, 2001 through 2004.
(e) Effective until December 31, 2009.
In addition, the settlement resulted in the following schedule for
amortization of the transition costs over the transition period:
ANNUAL STRANDED COST
AMORTIZATION AND RETURN (a)
Revenue Excluding Gross Receipts Tax
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 for actual CTC collections.
(b) Through December 31, 2009.
5. 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.
6. PP&L will recover its nuclear plant decommissioning costs through
the CTC. PP&L may seek an exception to the rate cap from customers for
increases in these decommissioning costs, but agrees not to recover more
than 96% of such increased amount.
7. PP&L is authorized to securitize up to $2.85 billion in transition
and related costs, and a PUC Qualified Rate Order authorizing this
securitization is included in the settlement. The settlement requires 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
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.
8. 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.
9. Subject to a review by the PUC Bureau of Audits, effective on
January 1, 1999, alternate electric generation suppliers can provide
advanced metering and billing service to PP&L's commercial and industrial
customers. Effective on January 1, 1999, such alternate suppliers can
provide certain advanced metering service to PP&L's residential customers.
Effective on January 1, 2000, PP&L's residential customers can choose their
billing service as well from such alternate suppliers.
10. PP&L will transfer its retail marketing function to a separate,
affiliated corporation by September 15, 1998.
11. PP&L is permitted, but not required, to transfer ownership and
operation of its generating facilities to a separate corporate entity at
book value; all applicable PUC approvals for such transfer are granted in
the settlement.
12. PP&L will spend approximately $16 million annually on assistance
and energy conservation for low-income customers.
Pursuant to the Joint Settlement Petition, PP&L transferred its retail
marketing function to a new subsidiary, PP&L EnergyPlus, on September 14,
1998. In September 1998, the PUC approved PP&L EnergyPlus's application to
act as a Pennsylvania electric generation supplier (EGS). This license
permits PP&L EnergyPlus to offer retail electric supply to participating
customers in PP&L's service territory and in the service territories of
other Pennsylvania utilities. In 1999, PP&L EnergyPlus will offer such
supply to industrial and commercial customers throughout the state. At
this time, PP&L EnergyPlus has determined not to pursue residential
customers in the competitive marketplace based on economic considerations.
In September 1998, the PUC issued an Order which, in part, directed
Pennsylvania utilities which are members of PJM, including PP&L, to offer
their installed capacity at a price of $19.72 per kilowatt-year (Capacity
Order). PP&L brought an action in the District Court seeking an injunction
against the Capacity Order on the basis, among other things, that it
attempted to regulate matters within exclusive federal jurisdiction. In
October 1998, PP&L entered into a settlement agreement with the PUC under
which (i) PP&L will offer to sell capacity credits to EGS's licensed by the
PUC at the equivalent of $19.72 per kilowatt-year in 1999 for service to
PP&L residential customers; (ii) all PP&L residential customers will be
permitted to select an EGS in January 1999; (iii) the PUC will withdraw the
Capacity Order as to PP&L; and (iv) PP&L will withdraw its federal court
action against the Capacity Order.
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 effective
June 30, 1998 based upon the outcome of the PUC restructuring proceeding.
PP&L has 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 net 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 the impaired generation plant, PP&L estimated that
there were other stranded costs totaling $1.989 billion at June 30, 1998.
This primarily included generation-related regulatory assets and
liabilities and an estimated liability for above-market purchases under NUG
contracts. The total estimated impairment to these assets was $4.377
billion. The PUC's Final Order in the restructuring proceeding, entered on
August 27, 1998, permitted 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 for this under-recovery in June 1998.
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, FERC-approved settlement agreements executed
with 15 of these customers provide for continued power supply by PP&L
through January 2004. As a result of these settlements, 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 are reflected on the Statement of Income, net of
income taxes.
Details of amounts written-off in June 1998 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 (a) (2,819)
Extraordinary item pre-tax - PUC 1,558
- FERC 56
1,614
Tax effects (666)
Extraordinary items $ 948
(a) Excluding recoveries for nuclear decommissioning and consumer
education expenditures.
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 September 30, 1998, $335 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 one 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 its 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 October 1998, PP&L Resources issued $55 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. As of September 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.
PP&L Capital Funding 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 September 30, 1998, PP&L Capital
Funding had $656 million of commercial paper outstanding. Proceeds were
primarily used to fund PP&L Resources' Tender Offer and provide interim
financing for PP&L Global's investment activities.
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.
From August through October 1998, PP&L Capital Funding issued a total
of $235 million of medium-term notes with maturities varying from two to
seven years. The proceeds of these notes were generally used to reduce
commercial paper balances. As of October 31, 1998, $397 million of medium-
term notes were outstanding.
In August 1998, PP&L Resources announced a Tender Offer to purchase up
to 17 million shares of its common stock, or approximately 10% of the
outstanding shares at that time, from existing shareowners. The price paid
for the shares was not to 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
allowed the shareowners to select a specific price within the price range
at which they were willing to sell their shares and submit (Tender) these
shares to PP&L Resources for possible sale at their designated price. On
September 11, 1998, PP&L Resources evaluated all Tenders received up until
that date and determined that $24.50 was the lowest price within the price
range that would enable PP&L Resources to purchase approximately 17 million
shares (the Purchase Price). This Purchase Price was then paid for all
shares purchased pursuant to this Tender Offer.
Effective with the dividend payable October 1, 1998 to owners of
record on September 10, 1998, PP&L Resources' quarterly Common Stock
dividend was reduced to $.25 per share ($1.00 annualized rate) from the
previous level of $.4175 per share ($1.67 annualized rate).
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.
7. Financial Instruments
The fair market value of PP&L Resources' long-term debt, excluding
changes from issuances and redemptions, increased by $83 million from
December 31, 1997 to September 30, 1998. The increase is due to much lower
interest rates in 1998 when compared to 1997.
8. 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, other than the environmental remediation
contingencies of Penn Fuel Gas, which was acquired in August 1998.
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 October 1, 1998, the maximum amount PP&L could
be assessed under these programs was about $25 million.
PP&L's public liability for claims resulting from a nuclear incident
at the Susquehanna station is limited to about $9.9 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 $168 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 NOx 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 NOx emissions by nearly 50% through the use of low NOx burners.
Further seasonal (i.e., 5 month) NOx 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 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
NOx 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 finalized NOx emission limits for 22 states,
including Pennsylvania, which in effect require approximately an 80%
reduction from the 1990 level in Pennsylvania by May 2003; the state is
required by September 1999 to develop plans for implementing this
reduction. Pursuant to Section 126 of the Clean Air Act, several Northeast
states have petitioned the EPA to find that major sources of NOx emissions,
including PP&L's power plants, are significantly contributing to non-
attainment in those states. The EPA has proposed to find such contribution
and require emissions reductions at those sources if the states in which
those sources are located fail to develop plans by September 1999 to
implement the proposed 2003 limits. PP&L estimates that compliance with
these emissions reduction requirements could require installation of Nox
emissions removal systems on PP&L's three largest coal-fired units, at a
capital cost of approximately $35 million per unit. 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 power plant 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 September 30, 1998, PP&L has completed work on slightly
more than half of the sites included in the consent order.
In 1996, Penn Fuel Gas entered into a similar consent order with the
DEP to address a number of its sites where Penn Fuel Gas may be liable for
remediation of contamination. The sites primarily include former coal gas
manufacturing facilities. Prior to PP&L Resources acquiring Penn Fuel Gas
on August 21, 1998, Penn Fuel Gas had obtained a "no further action"
determination from the DEP for two of the 20 sites covered by the order.
At September 30, 1998, PP&L had accrued approximately $7 million and
Penn Fuel Gas had accrued $19 million, representing the respective amounts
PP&L and Penn Fuel Gas can reasonably estimate they will have to spend to
remediate sites involving the removal of hazardous or toxic substances,
including those covered by each company's consent orders 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 for PP&L or Penn Fuel Gas, which neither company can 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 or Penn Fuel Gas, held responsible for cleanup
of such sites. Such natural resource damage claims against PP&L or Penn
Fuel Gas 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 September 30, 1998, $12 million of such
borrowings were guaranteed by PP&L.
PP&L Resources has guaranteed up to $10 million for energy purchases
to PJM to certify PP&L EnergyPlus's creditworthiness.
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.
9. 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 does not 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 but may be material. The EITF is currently evaluating Issue
98-10 "Accounting for Energy Trading and Risk Management Activities" and is
expected to reach a consensus prior to year-end.
10. Acquisitions
In 1998, PP&L Resources acquired H.T. Lyons and McClure, heating,
ventilating and air-conditioning firms, in cash transactions for amounts
that were not material.
In August 1998, PP&L Resources acquired Penn Fuel Gas. The
transaction was treated as a purchase for accounting and financial
reporting purposes. PP&L Resources issued approximately 5.6 million shares
of common stock with a value of approximately $135 million, to acquire all
Penn Fuel Gas common and preferred stock. Under the terms of the merger
agreement, shareowners of Penn Fuel Gas received 6.968 common shares of
PP&L Resources for each common share of Penn Fuel Gas that they owned and
0.682 common shares of PP&L Resources for each preferred share of Penn Fuel
Gas that they owned.
11. Subsequent Event
In November 1998, PP&L Global signed definitive agreements with
Montana Power Company, Portland General Electric Company and Puget Sound
Energy, Inc. to acquire 13 Montana power plants, with 2,614 MW of
generating capacity, for a purchase price of $1.586 billion. The
acquisition is subject to several conditions, including the receipt of
required state and federal regulatory approvals and third-party consents.
PP&L Global expects to complete the acquisition by the end of 1999. About
65% of the acquisition cost is expected to be financed on a project credit
basis, non-recourse to PP&L Global and PP&L Resources. The balance of the
acquisition cost is expected to be financed through a combination of debt
and equity issued by PP&L Resources, or with funds that PP&L Resources
derives from PP&L's securitization of transition costs. The agreements
also provide for PP&L Global's acquisition of related transmission assets
for $182 million, subject to certain conditions, including federal
regulatory approval.
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; market demand and prices for energy and
capacity; 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; operating
performance of plants and other facilities; environmental conditions and
requirements; system conditions (including actual results in achieving Year
2000 compliance by PP&L Resources, its subsidiaries and others) and
operating costs; performance of new ventures; political, regulatory or
economic conditions in foreign countries where PP&L Global makes
investments; 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.
New factors that could cause actual results to differ materially from
those described in forward-looking statements emerge from time to time, and
it is not possible for PP&L Resources nor PP&L to predict all of such
factors, or the extent to which any such factor or combination of factors
may cause actual results to differ from those contained in any forward-
looking statement. Any forward-looking statement speaks only as of the
date on which such statement is made, and neither PP&L Resources nor PP&L
undertakes any obligation to update the information contained in such
statement to reflect subsequent developments or information.
Results of Operations
The following discussion explains material changes in principal items
on the Consolidated Statement of Income comparing the three months and nine
months ended September 30, 1998, to the comparable periods ended September
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 - September 30
Three Months Ended Nine Months Ended
1998 1997 1998 1997
Earnings per share - excluding
weather variances, one-time
adjustments and other impacts
of restructuring $0.54 $0.48 $1.60 $1.63
Weather variances (0.02) (0.13) (0.06)
One-time adjustments:
PUC restructuring charge (see
Note 4) (5.49)
FERC municipalities settlement
(see Note 4) (0.19)
Penn Fuel Gas acquisition
costs (see "Other Income and
(Deductions)") 0.03 (0.03) 0.03 (0.03)
Windfall profits tax (0.24) (0.24)
U.K. tax rate reduction 0.06 0.06 0.06 0.06
Other impacts of restructuring 0.18 0.18
Earnings(loss) per share as
reported $0.81 $0.25 $(3.94) $1.36
The reported earnings of PP&L Resources and PP&L were impacted by
milder-than-normal weather and several one-time adjustments.
In the third quarter of 1998, PP&L Global recorded a $9.5 million, or
6 cents per share, one-time benefit from a reduction in the U.K. corporate
income tax rate from 31% to 30%. This was related to PP&L Global's
investment in SWEB. PP&L Global recorded a windfall profits tax in the
third quarter of 1997, which was partially offset by the benefits of
another U.K. tax cut. These one-time adjustments were discussed in PP&L
Resources' Annual Report to the SEC on Form 10-K for the year ended
December 31, 1997. The other one-time adjustments are discussed in the
Financial Notes as referenced.
The PUC restructuring adjustments provided a favorable impact of about
$.18 per share on the third quarter earnings of 1998. This reflects lower
depreciation on generation assets, reduced accruals for taxes other than
income and a regulatory adjustment to the accounting for unbilled revenues.
These favorable earnings impacts were partially offset by the expensing of
computer software costs.
Excluding the effects of weather, one-time adjustments and the other
impacts of restructuring, earnings were $.06 per share higher for the three
months ended September 30, 1998 when compared with the same period in 1997.
The adjusted earnings for the nine months ended September 30, 1998 were
$.03 lower than the comparable period in 1997. These earnings changes were
primarily the net effect of the following:
September 30, 1998 vs. September 30, 1997
Three Months Ended Nine Months Ended
(Earnings per share)
o Higher revenues from electric
sales to retail customers,
reflecting higher weather-
normalized sales in all customer
classes, particularly in the
third quarter; $0.09 $0.11
o Higher revenues from other
electric operations and the
change in regulatory treatment
of energy costs; 0.02 0.09
o Net reduction in earnings due to
the phase-down of the contract with
JCP&L and the end of the contract
with Atlantic; (0.05)
o Higher operating expenses, primarily
due to costs associated with meeting
retail competition requirements, higher
transmission costs, and expenses related
to computer information systems. The
increase in operating expenses for the
nine-month ended period is also reflects
write-offs of excess or obsolete
inventory, and additional provisions
for uncollectible accounts; and (0.05) (0.20)
o Other 0.02
Earnings Change $ 0.06 $(0.03)
Refer to the Report to the SEC on Form 8-K filed October 19, 1998 for
information regarding PP&L Resources' projected earnings for 1998 through
2000.
PUC Restructuring Proceeding
Refer to Financial Notes 3 and 4 for information regarding the PUC
restructuring proceeding.
Electric Energy Sales
Electricity sales for the three months and nine months periods ending
September 30, 1997 and 1998 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
(Millions of kWh)
Electricity delivered
to retail customers by
PP&L, Inc. (a) 8,429 7,806 24,204 24,113
Less: Electricity
supplied during
pilot by others 520 - 1,494 -
Electricity supplied to
retail customers by
PP&L, Inc. 7,909 7,806 22,710 24,113
Electricity supplied
to retail customers
by PP&L EnergyPlus
during the pilot 469 - 1,139 -
Total electricity
supplied to retail
customers (a) 8,378 7,806 23,849 24,113
Wholesale Energy Sales 12,258 6,516 29,302 14,752
(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 by
PP&L, Inc." is the amount of electricity delivered by PP&L to customers in
its service territory. "Electricity supplied to retail customers by PP&L,
Inc." represents the amount of electricity supplied to PP&L service
territory customers who are not participating in the pilot program.
"Electricity supplied to retail customers by PP&L EnergyPlus" is
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 increased for both the three
and nine months ended September 30, 1998 from the comparable periods in
1997. For the three months ended September 30, 1998, electricity delivered
to retail customers was up 8% over the prior year. Weather-normalized
sales for this same period were 6.9% higher than 1997. This increase is
attributable to strong third quarter sales to all customer classes.
For the nine months ended September 30, 1998, electricity delivered to
retail customers increased 0.4%. If normal weather had been experienced in
both periods, year-to-date electricity delivered to retail customers would
have been 2.0% higher than 1997.
Electricity supplied to retail customers increased 7.3% for the three
months ended September 30, 1998. This increase reflects the stronger sales
experienced in the third quarter but is partially offset by the impact of
the competition pilot program. For the nine months ended September 30,
1998, electricity supplied to retail customers decreased 1.1% from the
prior year. This decrease was due to the mild weather experienced during
the first half of the year and the impact of the competition pilot program.
The increase in wholesale energy sales, which includes sales to other
utilities and energy marketers through contracts, spot market transactions
or power pool arrangements, was primarily the result of increased activity
of the Energy Marketing Center.
Electricity Trading Activities
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 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. If PP&L were unable to meet its obligations
under these agreements to sell firm 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.
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 extreme 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, 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 capacity to deliver electricity to
satisfy its net firm sales contracts and purchasing firm transmission
service. In addition, the Energy Marketing Center adheres to established
credit policies in evaluating counterparty credit risk. PP&L has not
experienced any material non-performance by counterparties to date.
The EITF is evaluating Issue 98-10, "Accounting for Energy Trading and
Risk Management Activities," which addresses the increased use, by utility
and other energy companies, of contracts for the purchase and sale of
energy, not necessarily as hedges or inventory management, but to generate
profits. The EITF agreed that much of this activity appeared to be trading
and should be accounted for as such. The EITF also agreed that settlement
accounting would not be appropriate for these activities. The EITF
commissioned a working group to further study this issue and develop an
operational definition of "trading." The working group's recommendations
included a group of indicators designed to assist in determining what
constitutes "trading activities." The indicators could be applied not only
to separate legal entities or subsidiaries but also to divisions or pieces
thereof. The EITF reached tentative consensuses that mark-to-market (fair
value) accounting should apply to activities meeting the trading definition
and that any final consensus that may occur should be applied for fiscal
years beginning after December 15, 1998. The EITF agreed that this
consensus would not change the accounting for those contracts that qualify
for hedge accounting and are designated as hedges. A final consensus is
expected at the November meeting. The consensus was labeled as "tentative"
in order to allow for additional input from the industry. PP&L enters into
contracts for the sale and purchase of energy commodities and practices
accrual accounting. Should any of these sales and purchases ultimately
meet the EITF's definition of trading activities, it appears likely that a
change in those entities' accounting practices will be required. The
ultimate impact of this change in accounting cannot immediately be
determined, but such impact may be significant.
Operating Revenues: Electric Operations
The increase (decrease) in revenues from electric operations was
attributable to the following:
September 30, 1998 vs. September 30, 1997
Three Months Ended Nine Months Ended
(Millions of Dollars)
Retail Electric Revenues
Weather effect $ 6 $(29)
Sales volume and sales mix effect 34 32
Unbilled revenues 23 28
Pilot shopping credit above market price (4) (12)
Other, net 4
Other Electric Revenues 2 9
$61 $ 32
During the third quarter of 1998, PP&L recognized increased revenues
of $23 million due to the impact on unbilled revenue resulting from a
change in the regulatory treatment of energy costs. Excluding this
benefit, revenues from electric operations would have increased $38 million
and $9 million, respectively, for the three and nine months ended September
30, 1998.
The revenue increase for both periods can be attributed to strong
retail electric sales in the third quarter of 1998. Electricity delivered
and electricity supplied to residential, commercial and industrial
customers increased from the prior year. Milder than normal weather
experienced during the first quarter of 1998 partially offset the strong
sales experienced during the third quarter of 1998.
Operating Revenues: Wholesale Energy and Trading Activities
The increase (decrease) in revenues from wholesale energy and trading
activities was attributable to the following:
September 30, 1998 vs. September 30, 1997
Three Months Ended Nine Months Ended
(Millions of Dollars)
Market-based transactions $243 $423
PJM 22 58
Cost-based contracts (9) (26)
Reservation/capacity credits 12 35
Oil & gas sales 22 38
Other 1
$291 $528
Revenues from wholesale energy and trading activities increased by
$291 million and $528 million for the three and nine months ended September
30, 1998, respectively, when compared to the same periods in 1997.
Revenues have continued to increase 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. Energy purchases have also increased to
meet these increased sales. Refer to "Energy Purchases" for more
information.
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. Refer to "Electricity Trading Activities" for more
information.
Energy-Related Businesses
Energy-related businesses contributed $5 million and $9 million to the
operating income of PP&L Resources for the three months ended September 30,
1998 and 1997, respectively. For the nine-month periods ended September
30, 1998 and 1997, these businesses contributed a total of $15 million and
$17 million to operating income, respectively. These results are primarily
from PP&L Global's investments in SWEB and other 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.
Cost of Electric Fuel
Electric fuel expense increased by $14 million and $29 million for the
three and nine months ended September 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, particularly Martins Creek,
were needed as a result of increased trading activities of the Energy
Marketing Center and to meet greater demand for electricity during the
summer. This increase was partially offset by lower fuel prices for all
units, especially oil/gas-fired stations.
Energy Purchases
Energy purchases increased by $277 million and $488 million for the
three and nine months ended September 30, 1998, respectively, when compared
to the same periods in 1997. These increases were primarily due to greater
quantities of energy purchased from others to meet the increased trading
activities of the Energy Marketing Center, which include increased
purchases of gas for resale. The related sales are included in wholesale
energy sales. The overall market price of purchased power has also been
higher during 1998 compared to 1997 due to the market volatility.
Other Operation Expenses
Other operation expenses increased by $49 million and $71 million,
respectively, for the three and nine months ended September 30, 1998
compared with the same periods in 1997. These increases reflect additional
costs associated with computer information systems, and additional payroll,
consultant services and other expenses to meet the requirements of retail
competition. These increases also reflect additional software expenses and
increased firm transmission costs related to the Energy Marketing Center
activities.
The increase for the nine months ended September 30, 1998 also
reflects a bonus paid to bargaining unit employees in ratifying the recent
labor agreement, and higher uncollectible account expenses. 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 energy. These credits totaled $4
million and $12 million for the three and nine months ended September 30,
1998, respectively, and were recorded as offsets to "Other Operation
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. PP&L has also put
its Sunbury coal-fired generating station up for sale.
Depreciation and Amortization Expenses
Depreciation and amortization expenses decreased by $26 million and
$22 million, respectively, for the three and nine months ended September
30, 1998 compared with the same periods in 1997. These decreases were
mainly due to the write-off of impaired generation-related assets in
connection with the restructuring adjustments recorded in June 1998. See
Note 4 for additional information.
Other Income and (Deductions)
Other income of PP&L Resources increased by $52 and $57 million for
the three and nine months ended September 30, 1998, respectively, from the
comparable periods in 1997. PP&L Global's earnings for 1997 reflected a
$40 million U.K. windfall profits tax.
In addition, PP&L Resources recorded the acquisition of Penn Fuel Gas
in August 1998. The transaction was originally contemplated as a pooling
of interests, and estimated transaction costs of about $6 million were
charged against earnings in the third quarter of 1997. The transaction was
ultimately recorded under purchase accounting, and the transaction costs
were capitalized as part of the investment. Third quarter 1998 earnings
were credited by $6 million due to this change.
Lastly, the September 30, 1998 year-to-date earnings include interest
income of $6 million from a 1988 Gross Receipts Tax settlement, and a $3
million gain from sales of property.
Income Taxes
For the three months ended September 30, 1998, income tax expense
before extraordinary items increased by $14 million, or 22%, from the
comparable period in 1997. This is primarily due to an increase in PP&L
Resources' pre-tax book income before extraordinary items of $108 million.
During the second quarter of 1998, income tax benefits of $666 million
were recognized by the PUC restructuring and FERC settlement with
municipalities. These benefits relate to the pre-tax book extraordinary
charges of $1.6 billion. See Financial Note 4 which describes the
extraordinary charges.
Financial Condition
Refer to Financial Notes 3, 4 and 6 for information concerning the PUC
restructuring charge 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 October 1998, PP&L Resources issued $55
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 September 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 September 30, 1998, $656 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. 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 balances.
o In September 1998, PP&L Resources repurchased approximately 17
million shares of common stock at $24.50 per share.
o In August through October 1998, PP&L Capital Funding issued a
total of $235 million of medium-term notes with maturities varying
from two to seven years.
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 Final 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 was 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 received the October 1
dividend.
The reduction in PP&L Resources' permanent capitalization, as well as
the temporary increase in leverage, has been effected through this Tender
Offer, which was financed by PP&L Resources through the use of short-term
debt. The short-term debt used by PP&L Resources was 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.
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
nine months ended September 30, 1998 increased $45 million from the
comparable period in 1997. The reasons for this change were:
o A $144 million decrease in cash provided by operating activities,
primarily due to an increase in receivables related to wholesale
trading activities, and a cash revenue loss associated with the
shopping credits from the competition pilot program.
o A $269 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 $458 million increase in cash provided by financing activities,
primarily due to the commercial paper program established by PP&L
Capital Funding in 1998. At September 30, 1998, $656 million of
this short-term debt was outstanding.
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. Refer to "Unregulated Investments" for
additional information.
Financial Indicators
The ratio of PP&L Resources pre-tax income to interest charges was 3.9
and 3.4 for the nine months ended September 30, 1998 and 1997,
respectively, excluding extraordinary items. The annual per share dividend
rate on common stock decreased from $1.67 per share to $1.00 per share in
the third quarter of 1998. 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 234% at September 30, 1998, compared with 130% at
September 30, 1997. Excluding extraordinary items, the ratio of market
price to book value of common stock at September 30, 1998 was 151%.
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 September 30, 1998, PP&L Global had investments and commitments
of approximately $725 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.
In 1998, PP&L Global acquired an additional 1,813,000 shares of Emel
at a cost of approximately $32 million, increasing its ownership interest
to 37.5%. 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. In June 1998, PP&L
Global acquired an additional 26% interest in SWEB for $170 million,
increasing its equity interest to 51% and its voting interest to 49%.
PP&L Global will acquire most of Bangor Hydro-Electric's generating
assets and certain transmission rights under an agreement reached in
September 1998. PP&L Global will purchase 100 percent of Bangor Hydro's
hydroelectric assets, as well as its interest in an oil-fired generation
facility, for $89 million. The closing, which is subject to the approval
of the Maine Public Utilities Commission and the FERC as well as certain
third-party consents, is expected to occur by mid-1999.
PP&L Global plans to build a gas-fired power plant in Arizona which
will have a nominal base load capacity of 520 megawatts and a maximum
output capability of 650 megawatts. An energy marketing company has agreed
to purchase between 240 and 520 megawatts of the electricity produced by
the facility. PP&L Global also plans to build a 500 to 600 megawatt
natural gas-fired power plant adjacent to PP&L's Martins Creek plant with
an estimated investment of $250 million.
PP&L Global has signed definitive agreements with Montana Power
Company, Portland General Electric Company and Puget Sound Energy, Inc. to
acquire 13 Montana power plants, with 2,614 MW of generating capacity, for
a purchase price of $1.586 billion. The acquisition is subject to several
conditions, including the receipt of required state and federal regulatory
approvals and third-party consents. PP&L Global expects to complete the
acquisition by the end of 1999. About 65% of the acquisition cost is
expected to be financed on a project credit basis, non-recourse to PP&L
Global and PP&L Resources. The balance of the acquisition cost is expected
to be financed through a combination of debt and equity issued by PP&L
Resources, or with funds that PP&L Resources derives from PP&L's
securitization of transition costs. The agreements also provide for PP&L
Global's acquisition of related transmission assets for $182 million,
subject to certain conditions, including federal regulatory approval.
Acquisitions
In 1998, PP&L Resources acquired H.T. Lyons and McClure, heating,
ventilating and air-conditioning firms, in cash transactions for amounts
that were not material.
In August 1998, PP&L Resources acquired Penn Fuel Gas. The
transaction was treated as a purchase for accounting and financial
reporting purposes. PP&L Resources issued approximately 5.6 million shares
of common stock with a value of approximately $135 million, to acquire all
Penn Fuel Gas common and preferred stock. Under the terms of the merger
agreement, shareowners of Penn Fuel Gas received 6.968 common shares of
PP&L Resources for each common share of Penn Fuel Gas that they owned and
0.682 common shares of PP&L Resources for each preferred share of Penn Fuel
Gas that they owned.
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, other than the environmental remediation
contingencies of Penn Fuel Gas, which was acquired in August 1998.
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 Financial Note 3 "PUC Restructuring Proceeding"
for a discussion of the disposition of PP&L's restructuring plan under the
Customer Choice Act.
In August 1997, the PUC issued an order modifying and approving PP&L's
pilot program under the applicable provisions of the Customer Choice Act
and PUC guidelines. Retail customers participating in the PP&L and other
Pennsylvania utilities' 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 80 suppliers have
obtained such licenses to participate in the pilot programs.
Reference is made to Financial Note 3 "PUC Restructuring Proceeding"
for a discussion of the settlement approved by the PUC which requires,
among other things, that PP&L transfer its retail electric marketing
function to a separate, affiliated corporation. In August 1998, PP&L
formed a new subsidiary, PP&L EnergyPlus, for this purpose. In September
1998, the PUC approved PP&L EnergyPlus's application to act as a
Pennsylvania EGS. This license permits PP&L EnergyPlus to offer retail
electric supply to participating customers in PP&L's service territory and
in the service territories of other Pennsylvania utilities. In 1999, PP&L
EnergyPlus will offer such supply to industrial and commercial customers
throughout the state. At this time, PP&L EnergyPlus has determined not to
pursue residential customers in the competitive marketplace based on
economic considerations.
In September 1998, the PUC issued an Order which, in part, directed
Pennsylvania utilities which are members of PJM, including PP&L, to offer
their installed capacity at a price of $19.72 per kilowatt-year (Capacity
Order). PP&L brought an action in the District Court seeking an injunction
against the Capacity Order on the basis, among other things, that it
attempted to regulate matters within exclusive federal jurisdiction. In
October 1998, PP&L entered into a settlement agreement with the PUC under
which (i) PP&L will offer to sell capacity credits to EGS's licensed by the
PUC at the equivalent of $19.72 per kilowatt-year in 1999 for service to
PP&L residential customers; (ii) all PP&L residential customers will be
permitted to select an EGS in January 1999; (iii) the PUC will withdraw the
Capacity Order as to PP&L; and (iv) PP&L will withdraw its federal court
action against the Capacity Order.
Federal Activities
Reference is made to Financial Note 4 for a discussion of PP&L's
settlement with 15 small utilities.
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. In October 1998, PP&L filed
a settlement agreement among the active parties in that proceeding, which
is currently under consideration by a FERC administrative law judge.
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 July 1998, the FERC accepted amendments to PP&L's market-based rate
tariff that permit PP&L to sell, assign or transfer transmission rights and
associated ancillary services. In October 1998, the FERC accepted a
proposed amendment to PP&L's market-based rate tariff to permit PP&L to
sell electric energy and/or capacity to its affiliates under specified
conditions.
In September 1998, PP&L filed its EGS Coordination Tariff with the
FERC. The EGS Coordination Tariff applies to entities licensed to serve
retail electricity customers under the Commonwealth of Pennsylvania's
retail access program. The purpose of the EGS Coordination Tariff is to
permit PP&L to provide EGS's with certain FERC-jurisdictional services
which will facilitate the ability of EGS's to meet their obligations as
transmission customers and load-serving entities under the PJM Open Access
Transmission Tariff and related agreements of the PJM.
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. In October 1998, PP&L filed a
settlement agreement among the active parties in that proceeding, which is
currently under consideration by a FERC administrative law judge.
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.
Reference is made to "Pennsylvania Activities" above for a discussion
of PP&L's new retail electric marketing subsidiary, PP&L EnergyPlus. PP&L
EnergyPlus filed an application with the FERC in September 1998 for
authority to sell electric energy and capacity at market-based rates, and
for authority to sell, assign or transfer transmission rights and
associated ancillary services. The FERC has not yet ruled on PP&L
EnergyPlus's application. Also, in September 1998, PP&L filed a
notification of change in status with the FERC to report PP&L's affiliation
with PP&L EnergyPlus. Pursuant to FERC requirements, PP&L has filed a code
of conduct to govern its relationship with affiliates that engage in the
sale and/or transmission of electric energy.
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, the most reasonably worst case scenario with respect to
Year 2000 issues 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.
PP&L Resources has also requested assurance from all critical suppliers and
business partners that they are in compliance with Year 2000 issues.
As of September 30, 1998, PP&L Resources estimates that approximately
60% of the critical mainframe applications and approximately 70% 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." 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. Through
September 30, 1998, PP&L Resources spent approximately $6 million in
remediation costs, which included assistance from outside consultants.
These costs are being funded through internally generated funds and 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 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.
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 initially complied with
the order by joining the owner/operator of the site in performing the
remedial design. However, the EPA subsequently rejected the
owner/operator's design contractor, choosing the utility group's design
contractor instead. PP&L is negotiating with the utility group to join
them in complying with the order.
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
finalized a settlement of this litigation, under which PP&L will pay
reduced fees for the Phase I units from 1995-1999 and will pay all HAPs
fees.
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 citations
issued by the U.S. Department of Labor's MSHA to one of PP&L's coal-mining
subsidiaries. In August 1998, the United States Court of Appeals for the
District of Columbia Circuit affirmed the ruling of the Mine Safety and
Health Review Commission in favor of the mine operator in the test case in
this matter. In September 1998, the Secretary of Labor moved to vacate and
dismiss all of the pending cases against mine operators, including the PP&L
subsidiary. MSHA has indicated that it intends to withdraw all of its
citations, which would conclude all of these pending cases against the mine
operators, including PP&L's subsidiary.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3(ii)(a) - Bylaws of PP&L Resources, Inc.
3(ii)(b) - Bylaws of PP&L, Inc. (amended to, among other things,
require shareholders to provide PP&L with at least 75 days advance
notice of an intent to nominate a director or submit a proposal for
consideration at a shareholder's meeting).
10(a) - Asset Purchase Agreement between PP&L Global, Inc. and
The Montana Power Company
10(b) - Equity Contribution Agreement among PP&L Resources, Inc.,
PP&L Global, Inc. and The Montana Power Company
10(c) - Asset Purchase Agreement between PP&L Global, Inc. and
Portland General Electric Company
10(d) - Equity Contribution Agreement among PP&L Resources, Inc.,
PP&L Global, Inc. and Portland General Electric Company
10(e) - Asset Purchase Agreement between PP&L Global, Inc. and
Puget Sound Energy, Inc.
10(f) - Equity Contribution Agreement among PP&L Resources, Inc.,
PP&L Global, Inc. and Puget Sound Energy, Inc.
12 - Computation of Ratio of Earnings to Fixed Charges
27 - Financial Data Schedule
(b) Reports on Form 8-K
Report dated June 29, 1998
Item 5. Other Events
Information regarding the IBEW Local 1600's ratification of a new
four-year bargaining agreement with PP&L.
Report dated August 20, 1998
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits
Computation of Ratio of Earnings to Fixed Charges
Report dated August 21, 1998
Item 5. Other Events
Information regarding the acquisition of Penn Fuel Gas and the
PUC's Final Order approving the Joint Settlement Petition.
Report dated September 28, 1998
Item 5. Other Events
Information regarding PP&L Global's acquisition of generating
assets and transmission resources of Bangor Hydro-Electric Company.
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
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.
EGS - Electric Generation Supplier
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 - Intangible transition charge
JCP&L - Jersey Central Power & Light Company
McClure - McClure Company, a PP&L Resources unregulated subsidiary
specializing in heating, ventilating and air-conditioning.
MSHA - Mine Safety and Health Administration
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.
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 EnergyPlus - PP&L Energy Plus Co., a PP&L Resources subsidiary which
is involved in retail electric marketing.
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
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: November 12, 1998 /s/ John R. Biggar
John R. Biggar
Senior Vice President and
Chief Financial Officer
(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.)