UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c) of the Securities
Exchange Act of 1934 (Amendment No. )
Check the appropriate box:
[_] Preliminary Information Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14c-5(d)(2))
[X] Definitive Information Statement
PP&L, INC.
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(Name of Registrant as Specified In Its Charter)
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Notes:
[Logo of PP&L]
PP&L, Inc.
Notice of Annual Meeting
April 23, 1999
and
Proxy Statement
(including appended 1998 Financial Statements)
Notice of Annual Meeting of Shareowners
The Annual Meeting of Shareowners of PP&L, Inc. ("PP&L" or "the Company")
will be held at Lehigh University's Stabler Arena, at the Goodman Campus
Complex located in Lower Saucon Township, outside Bethlehem, Pennsylvania, on
Friday, April 23, 1999, at 1:30 p.m., preceding the Annual Meeting of
Shareowners of PP&L Resources, Inc. The Annual Meeting will be held for the
purposes stated below and more fully described in the accompanying Proxy
Statement, and to transact such other business as may properly come before the
Meeting or any adjournments thereof:
1.The election of three directors for a term of three years.
2.The approval of amendments to the Company's Articles of
Incorporation.
The Board of Directors is not aware of any other matters to be presented for
action at the Annual Meeting. If any other business should properly come
before the Meeting, it is the intention of the Board of Directors that the
persons named as proxies will vote in accordance with their best judgment.
This year, the Board of Directors is only soliciting Proxies from the
holders of the Company's 4 1/2% Preferred Stock. Holders of 4 1/2% Preferred
Stock should, after reading the Proxy Statement, mark, sign, date and return
their Proxies as soon as possible, to assure representation at the Meeting.
Holders of Series Preferred Stock will not be asked for a Proxy.
Only Shareowners of record at the close of business on Friday, February 26,
1999, will be entitled to vote at the Annual Meeting or any adjournments
thereof. All Shareowners are invited to attend the Meeting in person. If the
Annual Meeting is interrupted or delayed for any reason, the Shareowners
attending the adjourned Meeting shall constitute a quorum and may act upon
such business as may properly come before the Meeting.
By Order of the Board of Directors.
/s/ Robert J. Grey
Robert J. Grey
Secretary
March 12, 1999
Proxy Statement
The Company's principal executive offices are located at Two North Ninth
Street, Allentown, Pennsylvania 18101, telephone number (610) 774-5151. This
Proxy Statement and the accompanying Proxy, solicited on behalf of the Board
of Directors, were first released to Shareowners on or about March 12, 1999.
This year the Board of Directors is only soliciting Proxies from the holders
of the Company's 4 1/2% Preferred Stock. Holders of 4 1/2% Preferred Stock
should, after reading the Proxy Statement, mark, sign, date and return their
Proxies as soon as possible, to assure representation at the meeting. WE ARE
NOT ASKING THE HOLDERS OF SERIES PREFERRED STOCK FOR A PROXY, AND SUCH
SHAREOWNERS ARE REQUESTED NOT TO SEND US A PROXY.
OUTSTANDING STOCK AND VOTING RIGHTS
The Board of Directors has established Friday, February 26, 1999, as the
record date for Shareowners entitled to vote at the Annual Meeting (the
"Record Date"). The transfer books of the Company will not be closed. The
Company's Restated Articles of Incorporation (the "Articles") divide its
voting stock into four classes: 4 1/2% Preferred Stock, Series Preferred
Stock, Preference Stock and Common Stock. There were no shares of Preference
Stock outstanding on the Record Date. Each currently outstanding share of each
class of stock entitles the holder to one vote upon any business properly
presented to the Annual Meeting. A total of 161,964,127 shares was outstanding
on the Record Date, consisting of 157,300,382 shares of Common Stock (all
owned by PP&L Resources, Inc. ("PP&L Resources")), 530,189 shares of 4 1/2%
Preferred Stock and 4,133,556 shares of Series Preferred Stock.
As of February 15, 1999, the following are the only entities known by the
Company to own more than five percent of any class or series of preferred
stock entitled to vote at the Annual Meeting.
Name and Number of Percent of
Address of Shares Class
Title Beneficial Owner Beneficially Owned or Series
----- ------------------------------------ ------------------ ----------
4 1/2% PP&L Resources, Inc. 282,469 53.28%
Preferred Stock Two North Ninth Street
Allentown, PA 18101
3.35% Series PP&L Resources, Inc. 21,178 50.69%
Preferred Stock Two North Ninth Street
Allentown, PA 18101
4.40% Series PP&L Resources, Inc. 111,097 48.56%
Preferred Stock Two North Ninth Street
Allentown, PA 18101
4.60% Series PP&L Resources, Inc. 34,386 54.58%
Preferred Stock Two North Ninth Street
Allentown, PA 18101
5.95% Series PP&L Resources, Inc. 290,000 96.67%
Preferred Stock Two North Ninth Street
Allentown, PA 18101
6.05% Series PP&L Resources, Inc. 250,000 100.00%
Preferred Stock Two North Ninth Street
Allentown, PA 18101
6.125% Series PP&L Resources, Inc. 834,500 72.57%
Preferred Stock Two North Ninth Street
Allentown, PA 18101
6.15% Series PP&L Resources, Inc. 152,500 61.00%
Preferred Stock Two North Ninth Street
Allentown, PA 18101
1
Name and Number of Percent of
Address of Shares Class
Title Beneficial Owner Beneficially Owned or Series
----- ------------------------------------ ------------------ ----------
6.33% Series PP&L Resources, Inc. 954,000 95.40%
Preferred Stock Two North Ninth Street
Allentown, PA 18101
6.75% Series PP&L Resources, Inc. 759,230 89.32%
Preferred Stock Two North Ninth Street
Allentown, PA 18101
6.75% Series Wellington Management Company, LLP 85,000(a) 10%
Preferred Stock 75 State Street
Boston, MA 02109
- -------
(a) Number of shares beneficially owned includes shares for which Wellington
Management Company, LLP exercises investment and/or voting power, but
which are held by one of its wholly owned subsidiaries and/or investment
advisory clients.
Execution of the Proxy will not affect a Shareowner's right to attend the
Annual Meeting and vote in person. Any Shareowner giving a Proxy has the right
to revoke it at any time before it is voted by giving notice in writing to the
Secretary. Shares represented by Proxy will be voted in accordance with the
instructions given. In the absence of instructions to the contrary, the Proxy
solicited hereby will be voted FOR the election of directors, and FOR the
proposed amendment to the Articles of Incorporation. Abstentions and broker
non-votes are not counted as either "yes" or "no" votes for Proposal 1;
abstentions and broker non-votes will have the same effect as votes against
Proposal 2.
To preserve voter confidentiality, the Company voluntarily limits access to
Shareowner voting records to certain designated employees. These employees
sign a confidentiality agreement which prohibits them from disclosing the
manner in which a Shareowner has voted to any Company employee or to any other
person (except to the Judges of Election or the person in whose name the
shares are registered), unless otherwise required by law.
With respect to Proposal 1 (the election of directors), Shareowners have the
unconditional right of cumulative voting. Shareowners may vote in this manner
by multiplying the number of shares registered in their respective names on
the Record Date by the total number of directors to be elected at the Annual
Meeting and casting all of such votes for one nominee or distributing them
among any two or more nominees. The nominees receiving the highest number of
votes, up to the number of directors to be elected, will be elected. Authority
to vote for any individual nominee can be withheld by striking a line through
that person's name in the list of nominees on the accompanying Proxy. Shares
will be voted for the remaining nominees on a pro rata basis.
With respect to Proposal 2 (the proposed amendment to the Articles) (the
"Proposed Amendment"), the following affirmative votes are required: (i) of
the holders of not less than two-thirds of the number of shares of the 4 1/2%
Preferred Stock outstanding; (ii) of the holders of not less than two-thirds
of the number of shares of the Series Preferred Stock outstanding; (iii) of
the holders of not less than two-thirds of the number of shares of 4 1/2%
Preferred Stock and Series Preferred Stock outstanding (voting as a single
class); and (iv) of the holders of a majority of the number of shares of 4
1/2% Preferred Stock, Series Preferred Stock and Common Stock outstanding
(voting as a single class). PP&L Resources has advised the Company that it
intends to vote all of the outstanding shares of Common Stock, 4 1/2%
Preferred Stock and Series Preferred Stock owned by it in favor of Proposal 2.
As a result, the receipt of the votes required to approve Proposal 2 is
assured, except for the requirement for the affirmative vote of the holders of
not less than two-thirds of the number of shares of the 4 1/2% Preferred Stock
outstanding. Accordingly, proxies are only being solicited from the holders of
the 4 1/2% Preferred Stock. The Company is not soliciting proxies from the
holders of Series Preferred Stock. There are no rights of appraisal in
connection with Proposal 2.
SPECIAL CASH PAYMENT
Subject to the terms and conditions set forth in this Proxy Statement, if
(but only if) Proposal 2 (the "Proposed Amendment") is approved and adopted,
the Company will make a cash payment of $1.00 per share
2
(the "Special Cash Payment") to each owner of 4 1/2% Preferred Stock, other
than PP&L Resources ("4 1/2% Preferred Shareowner"), who votes in favor of
Proposal 2 at the Annual Meeting, in person by ballot or by proxy. This
payment will be made for each share of 4 1/2% Preferred Stock held by such
owner as of the Record Date which is so voted. Special Cash Payments will be
made to the 4 1/2% Preferred Shareowners as of the record date only in respect
of each share of 4 1/2% Preferred Stock which is voted for the adoption of the
Proposed Amendment and only if the Proposed Amendment is approved and adopted.
If the Proposed Amendment is approved and adopted, Special Cash Payments will
be paid out of the Company's general funds by check mailed promptly after the
Proposed Amendment has become effective.
As described under "Certain Federal Income Tax Consequences," in order to
prevent federal income tax backup witholding with respect to the Special Cash
Payment, a United States 4 1/2% Preferred Shareowner (as defined) must provide
the Company with the owner's correct Taxpayer Identification Number and
certify that the owner is not subject to backup withholding of federal income
tax by completing the Form W-9 included in the Proxy materials.
Only owners of 4 1/2% Preferred Stock on the Record Date (or their legal
representatives or attorneys-in-fact) are entitled to vote at the Annual
Meeting and to receive the Special Cash Payments. Any beneficial owner of
shares of 4 1/2% Preferred Stock who is not the registered owner of such
shares as of the Record Date (as would be the case for any beneficial owner
whose shares are registered in the name of such owner's broker, dealer,
commercial bank, trust company or other nominee) must arrange with the record
owner of such 4 1/2% Preferred Stock to execute and deliver a proxy form on
such beneficial owner's behalf. If a beneficial owner of shares intends to
attend the Annual Meeting and vote in person, such beneficial owner must
obtain a legal proxy form from his or her broker, dealer, commercial bank,
trust company or other nominee.
IF A 4 1/2% PREFERRED SHAREOWNER VOTES AGAINST THE PROPOSED AMENDMENT OR
ABSTAINS FROM ANY SUCH VOTE, SUCH OWNER SHALL NOT BE ENTITLED TO THE SPECIAL
CASH PAYMENT EVEN IF THE PROPOSED AMENDMENT IS APPROVED AND ADOPTED. THE
SPECIAL CASH PAYMENT WILL NOT BE MADE TO ANY OWNER OF SERIES PREFERRED STOCK,
REGARDLESS OF THE OUTCOME OF THE VOTING ON THE PROPOSED AMENDMENT.
PROPOSAL 1: ELECTION OF DIRECTORS
PP&L has a classified Board of Directors, currently consisting of nine
directors divided into three classes. These classes consist of three directors
whose terms will expire at the 1999 Annual Meeting, three directors whose
terms will expire at the 2000 Annual Meeting, and three directors whose terms
will expire at the 2001 Annual Meeting. The directors of the Company also
serve as the directors of PP&L Resources.
The nominees this year are Frederick M. Bernthal, William J. Flood and Frank
A. Long. All of the nominees are currently serving as directors. Dr. Bernthal
was elected by the Board of Directors effective March 1, 1997, and Messrs.
Flood and Long were elected by the Shareowners at the 1996 Annual Meeting. If
elected by the Shareowners, the above nominees would serve until the 2002
Annual Meeting and until their successors shall be elected and qualified.
Following their election, there would be nine members of the Board of
Directors, consisting of three classes: three directors whose terms would
expire at the 2000 Annual Meeting, three directors whose terms would expire at
the 2001 Annual Meeting, and three directors whose terms would expire at the
2002 Annual Meeting.
The Board of Directors has no reason to believe that any of the nominees
will become unavailable for election, but, if any nominee should become
unavailable prior to the meeting, the accompanying Proxy will be voted for the
election of such other person as the Board of Directors may recommend in place
of that nominee.
3
The Board of Directors
recommends that Shareowners vote FOR Proposal 1
NOMINEES FOR DIRECTORS:
FREDERICK M. BERNTHAL, 56, is President of Universities
Research Association (URA), Washington, D.C., a position he has
held since 1994. URA is a consortium of 87 major research
universities, and is management and operations contractor on
behalf of the U.S. Department of Energy for the Fermi National
Accelerator Laboratory. Dr. Bernthal served from 1990 to 1994
as Deputy Director of the National Science Foundation, from
1988 to 1990 as Assistant Secretary of State for Oceans,
Environment and Science, and from 1983 to 1988 as a member of
the U.S. Nuclear Regulatory Commission. He received a B.S. in
chemistry from Valparaiso University, and a Ph.D. in nuclear
chemistry from the University of California at Berkeley. Dr.
Bernthal, a member of the Audit and Corporate Responsibility
Committee of PP&L Resources and the Nuclear Oversight Committee
of PP&L, has been a director since 1997.
[Photo of Bernthal]
WILLIAM J. FLOOD, 63, is Secretary-Treasurer of Highway
Equipment & Supply Co. (HESCO), Harrisburg, Pa., supplier of
heavy equipment for highway construction, industry and general
contractors. Mr. Flood received a B.A. from Dartmouth College
and joined HESCO in 1960. He is a director of HESCO, Penn State
Geisinger Health System, Hescorp, Inc. and PNC Bank (Northeast
PA). A member of the Audit and Corporate Responsibility
Committee of PP&L Resources and the Nuclear Oversight Committee
of PP&L, Mr. Flood has been a director since 1990.
[Photo of Flood]
FRANK A. LONG, 58, is Executive Vice President of PP&L
Resources and Executive Vice President and Chief Operating
Officer of PP&L. Mr. Long received a B.S. in Electrical
Engineering from Northeastern University, and joined PP&L in
1963. Senior Vice President-System Power & Engineering from
1990 until 1993, he was named to his present PP&L position in
1993 and to his PP&L Resources position in February 1995. Mr.
Long is a member of the Pennsylvania Electric Association
Executive Committee, and a director of the Smart Discovery
Center and the Visiting Nurses Northeast. Mr. Long has been a
director since 1993.
[Photo of Long]
DIRECTORS CONTINUING IN OFFICE:
E. ALLEN DEAVER, 63, retired in January 1998 as Executive Vice
President and a director of Armstrong World Industries, Inc.,
Lancaster, Pa., a manufacturer of interior furnishings and
specialty products. He graduated from the University of
Tennessee with a B.S. in Mechanical Engineering and joined
Armstrong in 1960. He is a director of the Internacional de
Ceramica S.A. (Mexico), Penn State Geisinger Health System and
Donsco, Inc. Mr. Deaver, chair of the Compensation and
Corporate Governance Committees of PP&L Resources and PP&L and
a member of the Executive and Finance Committees of PP&L
Resources and PP&L, has been a director since 1991; his term
ends in 2000.
[Photo of Deaver]
4
ELMER D. GATES, 69, is Vice Chairman of Fuller Company,
Bethlehem, Pa., a company involved in the design and
manufacture of plants, machinery and equipment used in the
cement, paper, power and processing industries. He has a B.S.
in Mechanical Engineering from Clarkson College. Mr. Gates is a
former director of Ambassador Bank, a director of SI Handling
Systems, Inc., a director of the Lehigh Valley Economic
Development Corporation and president of the Lehigh Valley
Partnership. Mr. Gates, chair of the Finance Committees of PP&L
Resources and PP&L and a member of the Compensation and
Corporate Governance and Executive Committees of PP&L Resources
and PP&L, has been a director since 1989; his term ends in
2000.
[Photo of Gates]
WILLIAM F. HECHT, 55, is Chairman, President and Chief
Executive Officer of both PP&L Resources and PP&L. Mr. Hecht
received a B.S. and M.S. in Electrical Engineering from Lehigh
University, and joined PP&L in 1964. He was elected President
and Chief Operating Officer in 1991 and was named to his
present PP&L position in 1993, and to his PP&L Resources
position in February 1995. Mr. Hecht is a director of a number
of civic and charitable organizations. He is chair of the
Executive Committees of PP&L Resources and PP&L and chair of
the Corporate Leadership Council, an internal committee
comprised of the senior officers of PP&L Resources. Mr. Hecht
has been a director since 1990; his term ends in 2001.
[Photo of Hecht]
STUART HEYDT, 59, is Chief Executive Officer of the Penn State
Geisinger Health System, a not-for-profit corporation involved
in health care and related services. Dr. Heydt, who specializes
in maxillofacial surgery, attended Dartmouth College and
received an M.D. from the University of Nebraska. He is past
president of the American College of Physician Executives and a
director of Bucknell University, Wilkes University and PNC Bank
(Northeast PA). He is chair of the Audit and Corporate
Responsibility Committee of PP&L Resources and a member of the
Compensation and Corporate Governance and Executive Committees
of PP&L Resources and PP&L. Dr. Heydt has been a director since
1991; his term ends in 2001.
[Photo of Heydt]
NORMAN ROBERTSON, 71, served as Senior Vice President and Chief
Economist of Mellon Bank N.A., Pittsburgh, Pa., until his
retirement in 1992. Mr. Robertson received a B.S. in Economics
from the University of London, England, and attended the London
School of Economics. Mr. Robertson is an independent economic
advisor to Smithfield Trust Company, a private investment
management firm. He is also an Adjunct Professor of Economics
at Carnegie Mellon University. Mr. Robertson, a member of the
Executive, Finance and Compensation and Corporate Governance
Committees of PP&L Resources and PP&L, has been a director
since 1969; his term ends in 2000.
[Photo of Robertson]
MARILYN WARE, 55, is Chairman of American Water Works Company,
Inc. of Voorhees, New Jersey, a position she has held since
1988. American Water Works is the largest water utility holding
company in the country. In addition, she served as a director
of Penn Fuel Gas, Inc. from 1990 to 1998 and is a director of
CIGNA Corp. She attended American University and the University
of Pennsylvania. Ms. Ware has been a director since January
1998. She is a member of the Finance Committees of PP&L
Resources and PP&L and the Audit and Corporate Responsibility
Committee of PP&L Resources; her term ends in 2001.
[Photo of Ware]
5
FORMER DIRECTOR:
NANCE K. DICCIANI, Senior Vice President, Business Group
Executive and Director, European Region, Rohm and Haas Company,
Philadelphia, Pa., a specialty chemical company, resigned from
the Board effective December 31, 1998, due to her relocation to
an overseas position at Rohm and Haas Company. A director since
1994, Dr. Dicciani provided a business perspective which we
valued highly.
[Photo of Dicciani]
GENERAL INFORMATION REGARDING DIRECTORS AND EXECUTIVE OFFICERS
Director Attendance at Board Meetings
The Board of Directors held eleven meetings during 1998. Each director
attended at least 75% of the meetings held by the Board and its Committees
during the year. The average attendance of directors at Board and Committee
meetings held during 1998 was 97%.
Compensation of Directors
Directors who are Company employees receive no separate compensation for
service on the Board of Directors or Committees of the Board of Directors.
Non-employee directors receive a retainer of $39,000 per year, of which a
minimum of $21,000 is allocated to a deferred stock account under the
Directors Deferred Compensation Plan ("DDCP"); a fee of $1,000 for attending
Board of Directors meetings, Committee meetings and other meetings at the
Company's request; and a fee of $150 for participating in meetings held by
telephone conference call. Only one attendance fee is paid when the Boards of
PP&L Resources and PP&L meet on the same day, and when "dual" committee
meetings are held on the same day. Also, only one retainer is paid for service
on the Boards of both PP&L Resources and PP&L.
Non-employee directors may elect to defer all or any part of the retainer
and fees, pursuant to the DDCP. Under this Plan, these directors can defer
compensation into a cash account or a deferred stock account. Payment of these
amounts and applicable interest or dividends can be deferred until after the
director's retirement from the Board of Directors, at which time they can
receive these funds in one or more annual installments for a period of up to
ten years.
Under the terms of the DDCP, any increase in the annual retainer is
automatically allocated to each director's deferred stock account. As with the
DDCP benefits, this additional deferred stock together with applicable
dividends is available to the directors after retirement from the Board, at
which time they can receive this stock in one or more annual installments for
a period of up to ten years.
Certain Transactions Involving Directors or Executive Officers
The SEC requires disclosure of certain business transactions or
relationships between PP&L Resources or its subsidiaries, and other
organizations with which any of PP&L's directors or executive officers is
affiliated as an owner, partner, director, or executive officer.
From time to time, when it has been appropriate and reasonable, the Company
and its subsidiaries have engaged in transactions with, or have used products
or services of, organizations with which PP&L's directors or executive
officers are affiliated. It is expected that the Company will continue to do
so.
On August 21, 1998, PP&L Resources acquired Penn Fuel Gas, Inc. pursuant to
an Agreement and Plan of Merger, dated as of June 26, 1997. As a result of the
merger, Ms. Ware and certain family members and trusts of which Ms. Ware is
the beneficiary or trustee acquired an aggregate of 5,330,913 shares of Common
Stock of PP&L Resources.
During 1998, PP&L paid Highway Equipment & Supply Co. (HESCO) $246,270 for
certain equipment and materials. Mr. Flood is secretary-treasurer and a
principal owner of HESCO.
Stock Ownership
As noted above, all the Common Stock of PP&L is owned by PP&L Resources. No
directors or executive officers own any PP&L preferred stock.
6
Board Committees
The Board of Directors has four standing committees--the Executive,
Compensation and Corporate Governance, Finance, and Nuclear Oversight
Committees. Each non-employee director usually serves on one or more of these
and PP&L Resources' Board committees. (PP&L Resources' committees include the
Executive, Audit and Corporate Responsibility, Compensation and Corporate
Governance and Finance Committees. PP&L Resources' Audit and Corporate
Responsibility Committee provides audit oversight to PP&L.) All but the
Executive Committee are composed entirely of directors who are not Company
employees.
Executive Committee. The Executive Committee exercises during the periods
between Board meetings all of the powers of the Board of Directors, except
that the Executive Committee may not elect directors, change the membership of
or fill vacancies in the Executive Committee, fix the compensation of the
directors, change the Bylaws, or take any action restricted by the
Pennsylvania Business Corporation Law or the Bylaws (including actions
committed to another Board committee). The Executive Committee of PP&L met
three times in 1998. The members of the Executive Committee for both the
Company and PP&L Resources are Mr. Hecht (chair), Dr. Heydt, and Messrs.
Deaver, Gates and Robertson.
Compensation and Corporate Governance Committee. The principal functions of
the Compensation and Corporate Governance Committee are to review and evaluate
at least annually the performance of the chief executive officer and other
senior officers of the Company, and to set their remuneration, including
incentive awards; to review the fees paid to outside directors for their
services on the Board of Directors and its Committees; and to review
management's succession planning. For those individuals who are senior
officers of both the Company and PP&L Resources, the Compensation and
Corporate Governance Committees of both companies act jointly to set
remuneration for services to both companies. Another principal committee
function is to develop and review criteria for the qualifications of Board
members, to establish and administer programs for evaluating the performance
of Board members and to identify and recommend to the Board of Directors
candidates for election to the Board. This committee met three times in 1998.
The members of the Compensation and Corporate Governance Committee for both
the Company and PP&L Resources are Mr. Deaver (chair), Messrs. Gates and
Robertson and Dr. Heydt.
Nominees for directors may be proposed by Shareowners in accordance with the
procedures set forth in the Bylaws. Recommendations for the 2000 Annual
Meeting must be received by seventy-five days prior to the 2000 Annual
Meeting. Shareowners interested in recommending nominees for directors should
submit their recommendations in writing to the Chair of the Compensation and
Corporate Governance Committee, c/o Secretary, Two North Ninth Street,
Allentown, Pennsylvania 18101.
Finance Committee. The principal functions of the Finance Committee are to
approve specific Company financings and corporate financing policies, to
review the Company's annual capital and operating budgets, financing plans and
overall financial strategy, and to declare dividends when the Board is not
regularly scheduled to meet or does not meet. The Finance Committee met three
times during 1998. The members of the Finance Committee for both the Company
and PP&L Resources are Mr. Gates (chair), Messrs. Deaver and Robertson, and
Ms. Ware.
Nuclear Oversight Committee. The principal functions of the Nuclear
Oversight Committee are to assist the Board of Directors in the fulfillment of
its responsibilities for oversight of the Company's nuclear function, to
advise Company management on nuclear matters, and to provide advice and
recommendations to the Board of Directors concerning the future direction of
the Company and management performance related to the nuclear function. The
Nuclear Oversight Committee met three times in 1998. The members of the
Nuclear Oversight Committee are Dr. Bernthal (chair), and Messrs. Flood and
Gates.
7
Retirement Plans for Executive Officers
PP&L officers upon retirement are eligible for benefits under the PP&L
Retirement Plan and the Supplemental Executive Retirement Plan ("SERP"). The
following table shows the estimated annual retirement benefits for executive
officers payable under these Plans:
Estimated Annual Retirement Benefits
at Normal Retirement Age of 65
Officers Hired Before 1/1/98
Years of Service
Five-Year
Average
Annual
Compensation 15 Years 20 Years 25 Years 30 Years
------------ -------- -------- -------- --------
$250,000 84,774 118,524 131,024 143,524
300,000 105,024 145,524 160,524 175,524
350,000 125,274 172,524 190,024 207,524
400,000 145,524 199,524 219,524 239,524
450,000 165,774 226,524 249,024 271,524
500,000 186,024 253,524 278,524 303,524
550,000 206,274 280,524 308,024 335,524
600,000 226,524 307,524 337,524 367,524
650,000 246,774 334,524 367,024 399,524
700,000 267,024 361,524 396,524 431,524
750,000 287,274 388,524 426,024 463,524
800,000 307,524 415,524 455,524 495,524
850,000 327,774 459,000 485,024 527,524
900,000 348,024 469,524 514,524 559,524
950,000 368,274 496,524 544,024 591,524
1,000,000 405,000 540,000 590,000 640,000
1,050,000 425,250 567,000 619,500 672,000
Benefits under both the Retirement Plan and the SERP benefit formulas are
based on length of service and the average compensation for the highest 60
consecutive months in the final 120 months of employment. For purposes of
calculating benefits under the Retirement Plan, the compensation used is base
salary less amounts deferred pursuant to the Officers Deferred Compensation
Plan. Base salary, including any amounts deferred, is listed in the Summary
Compensation Table which follows. (Of the officers listed in that Table, Mr.
Hecht deferred $52,000 of compensation for each of 1996, 1997 and 1998; Mr.
Long deferred $31,200 for each of 1996, 1997 and 1998; and Mr. Grey deferred
$600 for 1996.) For purposes of calculating benefits under the SERP, the
compensation used is base salary, bonus and the value of any restricted stock
grant for the year in which earned, as listed in the Table, as well as
dividends paid on restricted stock.
Benefits payable under the Retirement Plan are subject to limits set forth
in the Internal Revenue Code and are not subject to any deduction for Social
Security benefits or other offset. They are computed on the basis of the life
annuity form of pension at the normal retirement age of 65. Benefits payable
under the SERP are computed on the same basis; are offset by Retirement Plan
benefits, the maximum Social Security benefit payable at 65, and in some
cases, by pensions received from prior employment; and are reduced for
retirement prior to age 60.
As of January 1, 1999, the years of credited service under the Retirement
Plan for Messrs. Hecht, Long, Byram, Grey and Biggar were 28.8, 31.4, 22.3,
3.7, and 24.2 respectively. The years of credited service under the SERP for
each of these officers are three years less than under the Retirement Plan
(except in the case of Mr. Byram, who is entitled to nine months of additional
credited service under the SERP, and Mr. Grey, who is entitled to 15.4 years
of additional credited service).
For officers hired on or after January 1, 1998, benefits under the SERP are
based on a new formula, as follows: (i) restricted stock grants are not
included in compensation for purposes of calculating benefits under the
8
SERP; (ii) the percentage of pay provided as a retirement benefit is changed
from 2.7% for the first 20 years of service plus 1.0% for the next 10 years,
to 2.0% for the first 20 years and 1.5% for the next 10 years; and (iii)
credit for years of service will commence as of the employee's date of hire
instead of at age 30.
The following table shows the estimated annual retirement benefits for
executive officers payable under the new SERP formula:
Estimated Annual Retirement Benefits
at Normal Retirement Age of 65
Officers Hired On or After 1/1/98
Years of Service
Five-Year
Average
Annual
Compensation 15 Years 20 Years 25 Years 30 Years
------------ -------- -------- -------- --------
$250,000 75,000 100,000 118,750 137,500
300,000 90,000 120,000 142,500 165,000
350,000 105,000 140,000 166,250 192,500
400,000 120,000 160,000 190,000 220,000
450,000 135,000 180,000 213,750 247,500
500,000 150,000 200,000 237,500 275,000
550,000 165,000 220,000 261,250 302,500
600,000 180,000 240,000 285,000 330,000
650,000 195,000 260,000 308,750 357,500
700,000 210,000 280,000 332,500 385,000
750,000 225,000 300,000 356,250 412,500
800,000 240,000 320,000 380,000 440,000
850,000 255,000 340,000 403,750 467,500
900,000 270,000 360,000 427,500 495,000
950,000 285,000 380,000 451,250 522,500
1,000,000 300,000 400,000 475,000 550,000
1,050,000 315,000 420,000 498,750 577,500
For existing officers, effective January 1, 1998, benefits under the SERP
are calculated under the greater of the old formula or the new formula, except
that compensation for purposes of the old formula includes restricted stock
grants only to the extent earned through December 31, 2001 and will be frozen
as of December 31, 2001, and compensation for purposes of the new formula
includes restricted stock grants only to the extent earned through December
31, 1997.
9
SUMMARY COMPENSATION TABLE
The following table summarizes all compensation for the Chief Executive
Officer and the next four most highly compensated executive officers for the
last three fiscal years, for service for both PP&L and PP&L Resources.
Compensation amounts for these officers are the same as those shown in the
PP&L Resources' proxy statement; they are not additive. Messrs. Hecht and Long
also served as directors but received no separate remuneration in that
capacity.
Long-Term
Annual Compensation Compensation
---------------------------------------------------------------
Other Annual Restricted All Other
Name and Salary/1 Bonus/1 Compensation/2 Stock Award/3 Compensation/4
Principal Position Year / ($) / ($) / ($) / ($) / ($)
- ---------------------------------------------------------------------------------------------
William F. Hecht 1998 644,604 267,998 0 193,320 6,001
Chairman, President and 1997 609,550 107,360 0 281,435 4,704
Chief Executive Officer 1996 531,194 138,600 0 138,920 4,418
Frank A. Long 1998 439,735 157,872 0 115,290 6,048
Executive Vice President 1997 414,704 85,698 0 167,599 4,750
and Chief Operating Of-
ficer 1996 367,555 82,688 14,424 82,800 4,462
Robert G. Byram 1998 279,847 81,200 10,770 62,910 5,185
Senior Vice President-- 1997 264,967 50,880 0 91,630 3,916
Generation and Chief 1996 246,944 48,195 0 48,300 3,673
Nuclear Officer
Robert J. Grey 1998 279,674 81,200 0 62,910 3,907
Senior Vice President, 1997 249,900 48,000 0 86,488 2,682
General Counsel and Sec-
retary 1996 231,878 44,415 0 44,620 2,250
John R. Biggar/5/ 1998 196,571 57,515 750 43,470 4,850
Senior Vice President
and 1997 160,528 16,129 0 32,491 3,582
Chief Financial Officer 1996 158,524 16,035 0 17,480 2,250
/1/Salary and bonus data include deferred compensation.
/2/Includes longevity pay (which is compensation for vacation earned, but not
taken) and fees earned by Mr. Biggar for serving as a director of Safe
Harbor, an affiliate of PP&L.
/3/The dollar value of restricted common stock awards was calculated by
multiplying the number of shares awarded by the closing price per share on
the date of the grant. As of December 31, 1998, the officers listed in this
table held the following number of shares of restricted common stock, with
the following values: Mr. Hecht--34,720 shares ($967,820); Mr. Long--20,310
shares ($566,141); Mr. Byram--11,440 shares ($318,890); Mr. Grey--8,090
shares ($225,509), and Mr. Biggar--3,300 shares ($91,988). These year-end
data do not include awards made in January 1999 for 1998 performance, or
awards which had originally been restricted and for which the restriction
periods have lapsed or been lifted. Dividends are paid currently on
restricted stock awards. All outstanding restricted stock awards have a
restriction period of three years.
/4/Includes Company contributions to the Officers' Deferred Savings Plan and
the ESOP accounts.
/5/Mr. Biggar became Senior Vice President and Chief Financial Officer,
effective January 28, 1998.
CHANGE IN CONTROL ARRANGEMENTS
Effective as of January 1, 1998, PP&L Resources entered into agreements with
each of the named executive officers, which agreements provide benefits to the
officers upon certain terminations of employment following a change in control
of PP&L Resources (as such term is defined in the agreements). The benefits
provided under these agreements replace any other severance benefits provided
to these officers by PP&L Resources, including any benefits under the
Executive Retirement Security Plan ("ERSP") (which was terminated effective
January 1, 1998) or any prior severance agreement.
Each of the agreements continues in effect until December 31, 1999, and the
agreements generally are automatically extended for additional one-year
periods. Upon the occurrence of a change in control, the agreements will
expire no earlier than thirty-six months after the month in which the change
in control occurs. Each agreement provides that the officer will be entitled
to the severance benefits described below if PP&L
10
Resources terminates the officer's employment following a change in control
for any reason other than death, disability, retirement or "cause," or if the
officer terminates employment for "good reason" (as such terms are defined in
the agreement).
The benefits consist of a lump sum payment equal to three times the sum of
(a) the officer's base salary in effect immediately prior to date of
termination, or if higher, immediately prior to the first occurrence of an
event or circumstance constituting good reason, and (b) the highest annual
bonus in respect of the last three fiscal years ending immediately prior to
the fiscal year in which the change in control occurs, or if higher, the
fiscal year immediately prior to the fiscal year in which first occurs an
event or circumstance constituting good reason. (This bonus amount would
include the value of restricted stock awards for calendar years prior to
1998.) In addition, under the terms of each agreement, PP&L Resources would
provide the officer and dependents with continuation of welfare benefits
(reduced to the extent the officer receives comparable benefits), and would
pay the officer unpaid incentive compensation that has been allocated or
awarded, a lump sum payment having an actuarial present value equal to the
additional pension benefits the officer would have received had the officer
continued to be employed by PP&L Resources for an additional thirty-six
months, outplacement services for up to three years and a gross-up payment for
any excise tax imposed under the Internal Revenue Code. In addition, under the
agreements, PP&L Resources would provide post-retirement health care and life
insurance benefits to officers who would have become eligible for such
benefits within the thirty-six month period following the change in control.
In addition, in the event of a change in control or certain circumstances
that may lead to a change in control, the Compensation and Corporate
Governance Committee of the Board of Directors may change or eliminate the
restriction period applicable to any outstanding restricted stock awards under
the Incentive Compensation Plan.
JOINT REPORT OF THE COMPENSATION AND CORPORATE
GOVERNANCE COMMITTEES REGARDING EXECUTIVE COMPENSATION
GENERALLY
PP&L Resources, Inc. (the "Company") is the parent holding company of PP&L,
Inc., and PP&L, Inc. is its principal subsidiary. The members of the Company's
Compensation and Corporate Governance Committee--all independent outside
directors--and Board of Directors also serve in the same capacity for PP&L,
Inc. Certain senior officers of the Company are also senior officers of PP&L,
Inc. For those individuals, references below to the Committee and Board of
Directors refer to the Committee and Board of Directors of both the Company
and PP&L, Inc. and discussions of their compensation include compensation
earned for services to both the Company and PP&L, Inc.
During 1998, the Committee reviewed and evaluated the performance and
leadership of the Chief Executive Officer and the other senior officers who
are members of the Company's Corporate Leadership Council ("senior officers"),
which provides strategic direction for the Company and its subsidiaries. The
Committee established the compensation and benefit practices for these
individuals as senior officers of the Company and its subsidiaries, including
PP&L, Inc. and PP&L Global, Inc. (a subsidiary of the Company which invests in
and develops world-wide power projects) ("PP&L Global"). These officers
include: William F. Hecht, Chairman, President and Chief Executive Officer of
the Company; Frank A. Long, Executive Vice President of the Company; John R.
Biggar, Senior Vice President and Chief Financial Officer of the Company/1/;
Robert G. Byram, Senior Vice President--Generation and Chief Nuclear Officer
of PP&L, Inc.; Robert D. Fagan, President of PP&L Global; Robert J. Grey,
Senior Vice President, General Counsel and Secretary of the Company; and Terry
H. Hunt, Senior Vice President--Strategic Planning of the Company. Except for
Mr. Fagan, these individuals are also senior officers of PP&L, Inc./2/
/1/Mr. Biggar became an executive officer of the Company and a member of the
Corporate Leadership Council effective as of January 28, 1998.
/2/Mr. Fagan has no position with PP&L, Inc., but is a member of the Corporate
Leadership Council and a "senior officer" of the Company by virtue of his
position as President of PP&L Global.
11
For 1998, the Company had in place two major components of executive
compensation for the senior officers--base salary and incentive compensation.
Base salaries reflect the value of the various Company positions relative to
similar positions--both within the Company and in other companies--and
individual executive performance. Incentive compensation is based on corporate
performance./3/ For 1998, the incentive program had two separate components.
Under a short-term incentive plan, cash awards were made to the senior
officers based on the achievement of key corporate financial and operational
goals. Under a long-term incentive plan, restricted Company stock was granted
to the senior officers based on the achievement of certain strategic goals
designed to position the Company for success in the new competitive
environment. Incentive goals and performance targets were developed by the
Committee, and all awards were granted by the Committee.
BASE SALARIES
In general, the Committee's objective is to provide salary levels that are
sufficiently competitive with comparable companies to enable the Company to
attract and retain high-quality executive talent. To meet this objective, the
Committee regularly reviews salary information for similar companies. In
addition, the Committee annually reviews the performance of each executive to
determine the appropriate level of base salary adjustment for that individual.
In December 1997, the Committee reviewed salary ranges for the senior
officers by comparing these salary levels with levels within the utility
industry generally, and, more specifically, with executive compensation levels
at 16 comparable utilities./4/ All of the comparison companies were included
in the EEI (Edison Electric Institute) Index of Investor-owned Electric
Utilities. The 16 utilities used for comparison purposes were selected based
on their similarity to PP&L, Inc. in terms of annual revenues, service area
and other measures of size.
After reviewing salary data for executive positions at comparable utilities,
the Committee reviewed the actual salaries and performance appraisals of each
of the senior officers. In the case of the Chief Executive Officer, the
Committee considered directors' individual appraisals of his performance in
determining his salary. The Committee then solicited input and recommendations
from the Chief Executive Officer regarding the performance and individual
salaries of the other senior officers.
Upon completion of this review, the Committee established the 1998 salaries
of the senior officers. As of January 1998, Mr. Hecht's total compensation was
about 24% less than the average total compensation of the chief executive
officers of the comparable companies. Also, the total compensation of the
senior officers as a group was approximately 15% less than the average paid to
their counterparts at these companies. Considering this information and
individual performance, the salary of each of the senior officers was
increased, effective as of January 1, 1998.
INCENTIVE AWARDS
In establishing the second component of executive compensation--incentive
awards--the Committee annually reviews the Company's performance in relation
to specific corporate financial, operational and strategic objectives. This
component of compensation is intended to relate executive compensation
directly to corporate performance and shareowner value. This program achieves
the Company's objective of placing a large portion of executive compensation
"at risk" by basing up to 40-50% of the senior officers' total compensation on
the achievement of key corporate goals. The incentive awards are made in the
form of cash and restricted Company stock.
/3/Because of his position as President of PP&L Global, Mr. Fagan's incentive
compensation is based on separate goals established for that position.
/4/Mr. Fagan's salary was compared with those of similar subsidiary positions
in both regulated and non-regulated companies.
12
CASH AWARDS
Cash awards are made available to officers for the achievement of specific,
independent goals established for each calendar year. For 1998, maximum annual
awards based on accountability level were established for each officer
according to the following table:
Maximum Awards
(Percent of Base Salary)
------------------------
Chief Executive Officer.............. 60%
Executive Vice President............. 50%
Sr. Vice President................... 40%
Annual awards are determined by applying these target percentages to the
percentage of goal attainment. The performance goals for each year are
established by the Committee, and the Committee reviews actual results at each
year-end to determine the appropriate goal attainment percentage to apply to
the salary targets.
The following were the goal categories for 1998:
I. Financial--PP&L Resources, Inc.--based on the Company's net income and
total return on common stock and the financial performance of subsidiary
energy trading and marketing operations.
II. Operational--PP&L, Inc.--based on customer satisfaction indices, retail
marketing efforts, the performance of PP&L, Inc.'s power plants, cost
control, safety and environmental performance and affirmative action
results.
III. Operational--PP&L Global, Inc.--based on PP&L Global's net income.
The weightings for each of these general categories varied by the level of
the individual officers to reflect the different levels of influence they have
on attainment of the goals, as follows:
Goal Category
Operational- Operational-
Officer Level Financial PP&L PP&L Global
------------- --------- ------------ ------------
Chief Executive Officer 45% 30% 25%
Executive Vice President 35 45 20
Sr. Vice President 30 55 15
When the level of goal attainment in each of the above categories is
measured at the end of each year and the category weightings shown above are
multiplied by the annual award target for each position, each officer's cash
award is determined for the prior year's performance.
RESTRICTED STOCK AWARDS
Under the terms of the Company's Incentive Compensation Plan, restricted
Company stock also is made available to officers based on the achievement of
strategic objectives designed to position the Company to continue to provide
value to its shareowners. Goals for 1998 were related to success in the
Pennsylvania retail market, transactions which increase the Company's and PP&L
Global's domestic and international business presence, the outcome of PP&L,
Inc.'s restructuring proceeding and the financial initiatives related thereto,
and the establishment of a corporate risk management program. Annual awards
are based on the achievement of these strategic goals. The 1998 award targets
for individual officers varied by accountability level, as follows:
Maximum Awards
(Percent of Base Salary)
------------------------
Chief Executive Officer.............. 40%
Executive Vice President............. 35%
Sr. Vice President................... 30%
13
Awards are made in the form of restricted stock equivalent to the dollar
value of the percentage applied to base pay in effect at the end of the year.
This stock award encourages increased stock ownership on the part of the
officers and aligns the interests of management and shareowners.
The Committee determines the applicable restriction period for the stock at
the time of grant, which, under the terms of the Incentive Compensation Plan,
must be at least three years and not more than ten years from the date of
grant. That is, the officer can be divested of this stock during the
restriction period if he or she terminates employment with the Company. The
Plan also provides that, upon retirement, death or disability of an officer,
the outstanding restricted stock awards made to that officer will be prorated.
In such cases, the Committee may provide the officer with the entire award
rather than the prorated portion.
In this way, grants of restricted stock serve as an incentive for senior
management to continue their employment with the Company and, therefore,
contribute to continuity in top management. In the past, the grants of
restricted stock made under the Incentive Compensation Plan have been
restricted for a period of three years.
The 1998 incentive awards made to the five most highly compensated executive
officers are shown in the Summary Compensation Table. The Committee based the
awards for these officers solely on the corporate goals achieved. In January
1999, the Committee reviewed performance achieved during 1998 for the
financial and operational goals under the short-term incentive plan. During
1998, the Company achieved 45% of its financial goals, 80% of its operational
goals for PP&L, Inc. and 100% of its operational goals for PP&L Global. As a
result of the weighting system described above, the senior officers received
the following short-term incentive awards as a percent of base salary: Mr.
Hecht--41.6%; Mr. Long--35.9%; Mr. Biggar--28.7%, Mr. Byram--29.0%; and Mr.
Grey--29.0%. Mr. Fagan received a 1998 short-term incentive award of 67.5% of
base salary, based on separate goals related to PP&L Global's staffing and
organization, strategic planning and strategic acquisition efforts, budgetary
control and the establishment of certain financial capabilities, policies and
programs, and investment and commitments in international projects.
In January 1999, the Committee also reviewed the Company's performance on
the established strategic goals under the long-term incentive plan. During
1998, the Company achieved 78% of these strategic goals. Applying the maximum
targets set forth above, the senior officers received the following long-term
incentive awards as a percent of base salary: Mr. Hecht--31.2%; Mr. Long--
27.3%; Mr. Biggar--22.6%, Mr. Byram--23.4%; and Mr. Grey--23.4%. Mr. Fagan's
1998 long-term incentive award equal to 50.0% of his base salary (1/3 in cash
and 2/3 in restricted stock) was based on an established formula emphasizing
PP&L Global's committed equity investment and cash flow.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
In establishing Mr. Hecht's 1998 salary, the Committee reviewed the salaries
of the chief executive officers of the 16 comparison utilities referenced
above. In conducting this review, the Committee concluded that Mr. Hecht's
1997 salary was about at the average earned by incumbents in similar positions
at those utilities. As a result of this review and Mr. Hecht's performance,
the Committee set his 1998 salary at $645,000, effective January 1, 1998, in
order to maintain this relationship with market conditions.
Based on the Company's performance in 1998 on the specific corporate
financial and operational goals discussed above, Mr. Hecht received a cash
award equal to approximately 41.6% of his year-end salary. Based on the
Company's performance in 1998 on the strategic goals discussed above, Mr.
Hecht received a restricted stock award equal to approximately 31.2% of his
year-end salary.
TAX DEDUCTIBILITY OF EXECUTIVE COMPENSATION
Section 162(m) of the Internal Revenue Code of 1986, as amended, generally
provides that publicly held corporations may not deduct in any taxation year
certain compensation in excess of $1,000,000 paid to the chief executive
officer and the next four most highly compensated executive officers. Section
162(m) did not apply to the Company's 1998 executive compensation. In this
regard, the Company is proposing that its shareowners at the 1999 Annual
Meeting approve (i) the amendment of the Incentive Compensation Plan to
effectuate its new stock option program and to enable the Company to make
stock option awards and other stock-based awards
14
under that Plan that are deductible under Section 162(m) and (ii) the adoption
of a Short-Term Incentive Plan under which cash awards to officers under the
existing short-term incentive program could be deductible under Section
162(m).
The Compensation and Corporate
Governance Committee
E. Allen Deaver, Chair
Elmer D. Gates
Stuart Heydt
Norman Robertson
- -------------------------------------------------------------------------------
PROPOSAL 2: PROPOSED AMENDMENT TO THE ARTICLES OF INCORPORATION
DESCRIPTION OF PROPOSED AMENDMENT
At the Annual Meeting, Shareowners will vote upon the Proposed Amendment to
remove in their entirety the following sections of Article VI of the Company's
Articles: (i) Section 2(C) of Division A, (ii) Section 2(B) of Division B, and
(iii) Section 1(C) of Division E. The full text of the Amended and Restated
Articles, as proposed to be amended by Proposal 2, is set forth on Schedule A
to this Proxy Statement.
The Proposed Amendment would have the effect of removing limitations on the
Company's ability to:
. increase the authorized number of shares of 4 1/2% Preferred Stock or Series
Preferred Stock or issue additional shares of 4 1/2% Preferred Stock or
Series Preferred Stock or issue Senior Stock,
. merge or consolidate with another corporation unless such transaction has
been approved by the Securities and Exchange Commission under the Public
Utility Holding Company Act of 1935,
. incur unsecured indebtedness in an amount in excess of 20% of the sum of the
outstanding secured indebtedness of the Company plus capital and surplus of
the Company (the "Unsecured Debt Limitation"), and
. pay dividends on the Common Stock aggregating an amount in excess of (a) 75%
of the current year's earnings otherwise available for Common Stock, if
after such payment, the ratio of the aggregate of capital for Common Stock
and surplus to the total capitalization of the Company, including surplus,
will be less than 25% or (b) 50% of the current year's earnings otherwise
available for Common Stock, if after such payment, the ratio of the
aggregate of capital for Common Stock and surplus to the total
capitalization, including surplus, will be less than 20% (the "Common Stock
Dividend Limitation").
THE FOREGOING STATEMENTS ARE SUMMARIES OF THE SUBSTANCE OR GENERAL EFFECT OF
THE PROVISIONS OF THE ARTICLES AND ARE QUALIFIED IN THEIR ENTIRETY BY THE FULL
TEXT OF SUCH PROVISIONS SET FORTH IN SCHEDULE A.
REASONS FOR THE PROPOSED AMENDMENT
The electric utility industry has become, and will continue to be,
increasingly competitive as the result of various business, regulatory and
technological developments. Recent federal and state regulatory actions
designed to promote retail and wholesale competition include, among other
things, initiatives to allow customers to choose their electricity supplier.
In fact, as a result of the Pennsylvania Electricity Generation Customer
Choice and Competition Act, all of Pennsylvania's retail electric customers,
including PP&L's customers, will be able to choose their electric supplier in
the near future. Such competition already exists for wholesale electric
customers. The Company believes that significant financial and operational
flexibility will be necessary to succeed in this competitive marketplace. This
is especially true because the restrictions that would be eliminated by the
Proposed Amendment generally do not burden PP&L's new competitors (e.g., power
marketers, independent power producers, exempt wholesale generators and owners
of cogeneration facilities) or even many other public utility companies.
15
The elimination of the Unsecured Debt Limitation is important to the
Company's financial strategy for the new competitive environment. This
financial strategy involves, among other things, a reduction in the Company's
permanent capitalization and a temporary use of a higher degree of leverage.
The elimination of the Unsecured Debt Limitation from the Articles will allow
the Company to utilize more fully various unsecured debt alternatives and thus
improve its ability to take full advantage of changing conditions in the
capital markets. This additional flexibility will, for example, permit the
Company to issue long-term debt when, because of mortgage coverage
restrictions or other reasons, it may be unattractive or not possible to issue
any additional first mortgage bonds. In addition, elimination of the Unsecured
Debt Limitation will afford the Company greater flexibility in the issuance of
short-term debt to meet interim cash requirements with what is usually the
least expensive form of capital.
PP&L Resources currently holds a sufficient number of shares of 4 1/2%
Preferred Stock and Series Preferred Stock to waive any potential exceedances
of the Unsecured Debt Limitation provisions of the Articles proposed to be
eliminated by the Proposed Amendment. If the Proposed Amendment is not
approved, PP&L Resources has informed the Company that it intends to use its
ability to waive the limitations imposed by such provisions from time to time
depending on the financial and strategic requirements of the Company and PP&L
Resources.
PP&L believes that the elimination of the Common Stock Dividend Limitation
will be beneficial to its ability to pay dividends to PP&L Resources due to
its new financial strategy and the new competitive industry environment which
may increase the volatility of the Company's revenue and income streams.
Except for actions that may be taken as a result of the elimination of the
Unsecured Debt Limitation and the Common Stock Dividend Limitation, as
discussed above, the Company does not currently anticipate taking any actions
that would be prohibited by the other provisions of the Articles proposed to
be eliminated by the Proposed Amendment.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary describes certain United States federal income tax
considerations with respect to the receipt of Special Cash Payments in
connection with the approval and adoption of the Proposed Amendment. This
summary is based on the Internal Revenue Code of 1986, as amended to the date
hereof (the "Code"), administrative pronouncements, judicial decisions and
existing and proposed Treasury Regulations, changes to any of which subsequent
to the date of the Proxy Statement may adversely affect the tax consequences
described herein, possibly on a retroactive basis. This summary is addressed
to 4 1/2% Preferred Shareowners who hold shares of 4 1/2% Preferred Stock as
capital assets within the meaning of Section 1221 of the Code. This summary
does not discuss all of the tax consequences that may be relevant to a 4 1/2%
Preferred Shareowner in light of such 4 1/2% Preferred Shareowner's particular
circumstances or to 4 1/2% Preferred Shareowners subject to special rules
(including certain financial institutions, tax-exempt organizations, insurance
companies, dealers in securities or currencies, 4 1/2% Preferred Shareowners
who acquired their shares pursuant to the exercise of stock options or other
compensation arrangements with the Company or 4 1/2% Preferred Shareowners
holding shares as part of a hedging, integrated or conversion transaction,
constructive sale or for straddle for tax purposes). OWNERS OF 4 1/2%
PREFERRED STOCK SHOULD CONSULT THEIR TAX ADVISORS WITH REGARD TO THE
APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR
SITUATIONS, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY
STATE, LOCAL OR FOREIGN TAXING JURISDICTION.
As used herein, the term "United States 4 1/2% Preferred Shareowner" means a
beneficial owner of a share of 4 1/2% Preferred Stock that is for United
States federal income tax purposes (i) a citizen or resident of the United
States or any political subdivision thereof; (ii) a corporation or partnership
created or organized in or under the laws of the United States or of any
political subdivision thereof; (iii) an estate the income of which is subject
to United States federal income taxation regardless of its source; or (iv) a
trust which is subject to the supervision of a court within the United States
and the control of one or more United States persons as described in section
7701(a)(30) of the Code. As used herein, the term "Non-United States 4 1/2%
Preferred Shareowner" means an owner of a share of 4 1/2% Preferred Stock that
is not a United States 4 1/2% Preferred Shareowner.
16
SPECIAL CASH PAYMENTS
United States 4 1/2% Preferred Shareowners. There is no direct authority
concerning the federal income tax consequences of the receipt of Special Cash
Payments. The Company will, for information reporting purposes, treat Special
Cash Payments as ordinary, non-dividend income to recipient United States 4
1/2% Preferred Shareowners.
Non-United States 4 1/2% Preferred Shareowners. The Company will treat
Special Cash Payments paid to Non-United States 4 1/2% Preferred Shareowners
as subject to withholding of United States federal income tax at a rate of
30%. However, a Special Cash Payment that is effectively connected with the
conduct of a trade or business by a Non-United States 4 1/2% Preferred
Shareowner within the United States will not be subject to such withholding
tax (provided such Non-United States 4 1/2% Preferred Shareowner provides two
originals of Internal Revenue Service Form 4224 (or successor form) stating
that such Special Cash Payments are so effectively connected), but instead
will be subject to United States Federal income tax on a net income basis at
applicable graduated individual or corporate rates. Any such effectively
connected Special Cash Payments received by a foreign corporation may be
subject to an additional "branch profits tax" at a 30% rate (or such lower
rate as may be specified by an applicable income tax treaty). A Non-United
States 4 1/2% Preferred Shareowner eligible for a reduced rate of United
States withholding tax pursuant to an income tax treaty may obtain a refund of
any excess amounts withheld by filing an appropriate claim for refund with the
Internal Revenue Service.
BACKUP WITHHOLDING
ANY UNITED STATES 4 1/2% PREFERRED SHAREOWNER WHO VOTES IN FAVOR OF THE
PROPOSED AMENDMENT AND WHO FAILS TO COMPLETE AND SIGN THE FORM W-9 THAT IS
INCLUDED IN THE PROXY (OR, IN THE CASE OF A NON-UNITED STATES 4 1/2% PREFERRED
SHAREOWNER, FORM W-8, OBTAINABLE FROM THE COMPANY) MAY BE SUBJECT TO A
REQUIRED FEDERAL INCOME TAX BACKUP WITHHOLDING OF 31% OF THE SPECIAL CASH
PAYMENT. To prevent United States federal income tax backup withholding with
respect to the Special Cash Payment, a United States 4 1/2% Preferred
Shareowner must provide the Company with the owner's correct Taxpayer
Identification Number ("TIN") and certify that the owner is not subject to
backup withholding of federal income tax by completing the Form W-9 included
in the Proxy. Certain 4 1/2% Preferred Shareowners (including, among others,
all corporations and Non-United States 4 1/2% Preferred Shareowners) are
exempt from backup withholding. For a corporate United States 4 1/2% Preferred
Shareowner to qualify for such exemption, such owner must provide the Company
with a properly completed and executed Form W-9 attesting to its exempt
status. In order for a Non-United States 4 1/2% Preferred Shareowner to
qualify as an exempt recipient, the foreign owner must submit a Form W-8,
Certificate of Foreign Status, signed under penalties of perjury, attesting to
that owner's exempt status. A copy of the Form W-8 may be obtained from the
Company. Any Special Cash Payments paid to Non-United States 4 1/2% Preferred
Shareowners that are subject to the 31% backup withholding will not be subject
to the 30% withholding tax discussed above under "Special Cash Payments--Non-
United States 4 1/2% Preferred Shareowners."
The amount of any backup withholding from a payment to a 4 1/2% Preferred
Shareowner will be allowed as a credit against such owner's United States
federal income tax liability and may entitle such owner to a refund, provided
that the required information is furnished to the Internal Revenue Service.
INDEPENDENT ACCOUNTANTS
Upon the recommendation of PP&L Resources' Audit and Corporate
Responsibility Committee, which is composed of directors who are not employees
of the Company or its Affiliates, the Board of Directors of PP&L Resources
appointed PricewaterhouseCoopers LLP to serve as independent accountants for
the year ending December 31, 1999, for PP&L Resources and its subsidiaries,
including the Company. This appointment is subject to reconsideration by the
Board if it is not ratified by the Shareowners of PP&L Resources.
MISCELLANEOUS
The Board of Directors is not aware of any other matters to be presented for
action at the meeting. If any other matter requiring a vote of the Shareowners
should arise, it is intended that the persons named as proxies will vote in
accordance with their best judgment.
17
METHOD AND EXPENSE OF SOLICITATION OF PROXIES
The cost of soliciting Proxies on behalf of the Board of Directors will be
paid by the Company. In addition to the solicitation by mail, a number of
regular employees may solicit Proxies in person or by telephone, telegraph or
facsimile. The Company has retained Innisfree M&A Incorporated to assist in
the solicitation of Proxies for the Annual Meeting. It is expected that the
remuneration to Innisfree for its services will be $7,500.00. Brokers,
dealers, banks and their nominees who hold shares for the benefit of others
will be asked to send Proxy material to the beneficial owners of the shares,
and the Company will reimburse them for their expenses.
PROPOSALS FOR 2000 ANNUAL MEETING
To be included in the Proxy material for the 2000 Annual Meeting, any
proposal intended to be presented at that Meeting by a Shareowner must be
received by the Secretary no later than November 15, 1999. To be properly
brought before the Meeting, any proposal must be received by seventy-five days
prior to the 2000 Annual Meeting.
ANNUAL FINANCIAL STATEMENTS
The Company's annual financial statements and related management discussion
are appended to this document as Schedule B.
By Order of the Board of Directors.
Robert J. Grey
Secretary
March 12, 1999
18
Schedule A
PP&L, INC.
AMENDED AND RESTATED ARTICLES OF INCORPORATION
ARTICLE I. The name of the Corporation is
PP&L, INC.
ARTICLE II. The location and post office address of the registered office of
the Corporation in this Commonwealth is
Two North Ninth Street
Allentown, Pennsylvania 18101
ARTICLE III. The purpose or purposes for which the Corporation is
incorporated under the Business Corporation Law of the Commonwealth of
Pennsylvania are to engage in, and do any lawful act concerning, any or all
lawful business for which a corporation may be incorporated under said
Business Corporation Law, including but not limited to:
1. The supply of light, heat or power to the public by means of
electricity or by any other means.
2. The production, generation, manufacture, transmission, storage,
distribution or furnishing of artificial or natural gas, electricity or
steam or air conditioning or refrigerating services, or any combination
thereof to or for the public.
3. The diverting, pumping or impounding of water for the development or
furnishing of hydroelectric power to or for the public.
4. The transportation of artificial or natural gas, electricity,
petroleum or petroleum products or water or any combination of such
substances for the public.
5. The diverting, developing, pumping, impounding, distributing or
furnishing of water from either surface or subsurface sources to or for the
public.
6. Manufacturing, processing, owning, using and dealing in personal
property of every class and description, engaging in research and
development, the furnishing of services, and acquiring, owning, using and
disposing of real property of every nature whatsoever.
ARTICLE IV. The term for which the Corporation is to exist is perpetual.
ARTICLE V. The aggregate number of shares which the Corporation shall have
authority to issue is 185,629,936 shares, divided into 629,936 shares of 4
1/2% Preferred Stock, par value $100 per share; 10,000,000 shares of Series
Preferred Stock, par value $100 per share; 5,000,000 shares of Preference
Stock, without nominal or par value; and 170,000,000 shares of Common Stock,
without nominal or par value.
ARTICLE VI. The designations, preferences, qualifications, limitations,
restrictions, and the special or relative rights in respect of the shares of
each class shall be as follows:
Division A -- 4 1/2% PREFERRED STOCK
Section 1. Dividend Rate. The 4 1/2% Preferred Stock shall be entitled to
dividends, as provided in Division C, at the rate of four and one-half percent
(4 1/2%) per annum, such dividends to be cumulative from the date of issuance
thereof.
Section 2. Restrictions on Certain Corporate Action. (A) Upon the vote of a
majority of all the Directors of the Corporation and of a majority of the
total number of shares of stock then issued and outstanding and entitled to
vote, the Corporation may from time to time create or authorize one or more
other classes of stock with such designations, rights, privileges,
limitations, preferences, voting powers, prohibitions, restrictions or
qualifications of the voting and other rights and powers and terms as to
redemption as may be determined by
A-1
said vote, which may be the same or different from the designations, rights,
privileges, limitations, preferences, voting powers, prohibitions,
restrictions or qualifications of the classes of stock of the Corporation then
authorized; provided, however, that no new class of stock shall hereafter be
created or authorized which is entitled to dividends or shares in distribution
of assets on a parity with or in priority to the 4 1/2% Preferred Stock, nor
shall there be created or authorized any securities convertible into shares of
any such stock, unless the holders of record of not less than two-thirds of
the number of shares of 4 1/2% Preferred Stock then outstanding shall consent
thereto in writing or by voting therefor in person or by proxy at the meeting
of shareholders at which the creation or authorization of such new class of
stock or such convertible securities is considered. Any such vote may
authorize any shares of any class then authorized but unissued to be issued as
shares of such new class or classes.
(B) The expressed rights, privileges, terms and conditions of the 4 1/2%
Preferred Stock then outstanding shall not be amended, altered, changed or
repealed in a manner substantially prejudicial to the holders thereof unless
the holders of record of not less than two-thirds of the number of shares of
the 4 1/2% Preferred Stock then outstanding shall consent thereto in writing
or by voting therefor in person or by proxy at the meeting of shareholders at
which such amendment, alteration, change or repeal is considered.
Division B -- SERIES PREFERRED STOCK
Section 1. Division into Series. (A) All shares of Series Preferred Stock
shall be identical except that the dividend rate, the amount to which such
shares shall be entitled upon redemption and upon liquidation, the sinking
fund, if any, as well as the provisions, if any, with respect to
convertibility may vary between different series. The Series Preferred Stock
may be divided into, and issued from time to time, in one or more series, each
of such series to have such distinctive designation, terms, relative rights,
privileges, limitations, preferences and voting powers and such prohibitions,
restrictions, and qualifications of the voting and other rights and powers as
are fixed and determined in this Article VI or in a resolution or resolutions
providing for the issue of such series adopted by the Board of Directors as
provided in this Division B.
(B) Authority is hereby expressly granted to the Board of Directors to
establish one or more series of Series Preferred Stock and with respect to
each series to fix and determine by resolution or resolutions providing for
the issue of such series:
(1) the number of shares to constitute such series and the distinctive
designation thereof to distinguish the shares thereof from the shares of
all other series and classes;
(2) the dividend rate on the shares of such series, and the date or dates
from which dividends shall be cumulative;
(3) the amount to which shares of such series shall be entitled upon
redemption;
(4) the amount to which shares of such series shall be entitled upon
liquidation;
(5) the amount of the sinking fund, if any, for the purchase or
redemption of shares of such series; and
(6) the terms and conditions, if any, upon which the shares of such
series may be converted into other securities of the Corporation.
Section 2. Restrictions on Certain Corporate Action. (A) Upon the vote of a
majority of all of the Directors of the Corporation and of a majority of the
total number of shares of stock then issued and outstanding and entitled to
vote, the Corporation may from time to time create or authorize one or more
classes of stock in addition to the Series Preferred Stock, the 4 1/2%
Preferred Stock, the Preference Stock and the Common Stock, with such
designations, rights, privileges, limitations, preferences, voting powers,
prohibitions, restrictions or qualifications of the voting and other rights
and powers and terms as to redemption as may be determined by said vote, which
may be the same or different from the designations, rights, privileges,
limitations, preferences, voting powers, prohibitions, restrictions or
qualifications of the classes of stock of the Corporation then authorized;
provided, however, that no new class of stock shall hereafter be created or
authorized which is entitled to dividends or shares in distribution of assets
on a parity with or in priority to the Series Preferred Stock, nor shall there
be created or authorized any securities convertible into shares of any such
stock, unless the holders of record of not
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less than two-thirds of the number of shares of the Series Preferred Stock and
the 4 1/2% Preferred Stock then outstanding (consenting or voting as a single
class separate from the holders of the Preference Stock and the Common Stock)
shall consent thereto in writing or by voting therefor in person or by proxy
at the meeting of shareholders at which the creation or authorization of such
new class of stock or such convertible securities is considered. Any such vote
may authorize any shares of any class then authorized but unissued to be
issued as shares of such new class or classes.
(C) The provisions of this Section 2 of this Division B requiring the
approval of a specified percentage of the holders of the Series Preferred
Stock and the 4 1/2% Preferred Stock voting or consenting as a class shall be
construed as in addition to and not in substitution for, any provisions of
Division A of this Article VI requiring the approval of the holders of a
specified percentage of the 4 1/2% Preferred Stock.
(D) The expressed rights, privileges, terms and conditions of the Series
Preferred Stock then outstanding, insofar as they are set forth in the
foregoing subsections of this Section 2 shall not be amended, altered, changed
or repealed in a manner substantially prejudicial to the holders thereof
unless (1) the holders of record of not less than two-thirds of the number of
shares of the Series Preferred Stock and the 4 1/2% Preferred Stock then
outstanding (consenting or voting as a single class separate from the holders
of the Preference Stock and the Common Stock) shall consent thereto in writing
or by voting therefor in person or by proxy at the meeting of shareholders at
which such amendment, alteration, change or repeal is considered, and (2) the
expressed rights, privileges, terms and conditions of the 4 1/2% Preferred
Stock, are, at the same time, similarly amended, altered, changed or repealed.
The expressed rights, privileges, terms and conditions of the Series Preferred
Stock then outstanding, other than those set forth in the foregoing
subsections of this Section 2, shall not be amended, altered, changed or
repealed in a manner substantially prejudicial to the holders thereof unless
the holders of record of not less than two-thirds of the number of shares of
the Series Preferred Stock then outstanding shall consent thereto in writing
or by voting therefor in person or by proxy at the meeting of shareholders at
which such amendment, alteration, change or repeal is considered.
Section 3. Variations Among Series of Series Preferred Stock. (A) 4.60%
Series Preferred Stock. The terms of the "4.60% Series Preferred Stock," in
the respects in which the shares of such series may vary from shares of other
series of the Series Preferred Stock shall be as follows: the dividend rate
shall be 4.60% per annum, and dividends on each share of such series shall be
cumulative from the date or dates of initial issue of shares of such series;
the redemption price shall be $103 per share at any time; $103 per share shall
be payable upon any voluntary liquidation, dissolution or winding up of the
Corporation and $100 per share shall be payable upon any involuntary
liquidation, dissolution or winding up of the Corporation. The number of
shares of this series authorized is 63,000 shares.
(B) 4.40% Series Preferred Stock. The terms of the "4.40% Series Preferred
Stock" in the respects in which the shares of such series may vary from shares
of other series of the Series Preferred Stock shall be as follows: the
dividend rate shall be 4.40% per annum, and dividends on each share of such
series shall be cumulative from the date or dates of the initial issue of
shares of such series; the redemption price shall be $102 per share at any
time; $102 per share shall be payable upon any voluntary liquidation,
dissolution or winding up of the Corporation and $100 per share shall be
payable upon any involuntary liquidation, dissolution or winding up of the
Corporation. The number of shares of this series authorized is 229,214 shares.
(C) 3.35% Series Preferred Stock. The terms of the "3.35% Series Preferred
Stock" in the respects in which the shares of such series may vary from shares
of other series of the Series Preferred Stock shall be as follows: the
dividend rate shall be 3.35% per annum and dividends on each share of such
Series shall be cumulative from the date or dates of the initial issue of
shares of such series; the redemption price shall be $103.50 per share at any
time; $103.50 per share shall be payable upon any voluntary liquidation,
dissolution or winding up of the Corporation and $100 per share shall be
payable upon any involuntary liquidation, dissolution or winding up of the
Corporation. The number of shares of this series authorized is 53,248 shares.
(D) 6.75% Series Preferred Stock. The terms of the "6.75% Series Preferred
Stock" in the respects in which the shares of such series may vary from shares
of other series of the Series Preferred Stock shall be as follows:
(1) The dividend rate shall be 6.75% per annum and dividends on each
share of such Series shall be cumulative from the date or dates of the
initial issue of shares of such series;
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(2) Shares of this Series are not redeemable prior to October 1, 2003. On
or after October 1, 2003, the Corporation may, by resolution of the Board
of Directors or the Executive Committee of the Board of Directors, redeem
all, or from time to time, any part of the outstanding shares of this
Series, at the following redemption prices per share:
If Redeemed During Twelve Month Redemption
Period Ending September 30 Prices
------------------------------- ----------
2004........................................................... 103.38%
2005........................................................... 103.04
2006........................................................... 102.70
2007........................................................... 102.36
2008........................................................... 102.03
2009........................................................... 101.69
2010........................................................... 101.35
2011........................................................... 101.01
2012........................................................... 100.68
2013........................................................... 100.34
and thereafter at $100.00 per share. Any shares of this Series which are
redeemed, repurchased or otherwise reacquired by the Corporation shall,
until further action by the Board of Directors or the Executive
Committee of the Board of Directors, have the status of authorized and
unissued shares of Series Preferred Stock, without designation as to
series.
(3) $100.00 per share shall be payable upon any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation. The shares of
this Series shall not be convertible into shares of any other class or
classes or into any other securities of the Corporation. The number of
shares of this series authorized is 850,000 shares.
(E) 6.125% Series Preferred Stock. The terms of the "6.125% Preferred Stock"
in the respects in which the shares of such series may vary from shares of
other series of the Series Preferred Stock shall be as follows:
(1) The dividend rate shall be 6.125% per share per annum and dividends
on each share of such Series shall be cumulative from the date or dates of
the initial issue of shares of such Series;
(2) So long as any shares of this Series remain outstanding, the
Corporation, after full dividends on all outstanding shares of the 4 1/2%
Preferred Stock and the Series Preferred Stock, including this Series, for
all past dividend periods shall have been paid or set aside, shall redeem
as and for a sinking fund for the retirement of this Series (the "6.125%
Sinking Fund"), out of funds legally available therefor, (i) annually on
October 1 in each of the years 2003 through 2007, 57,500 shares of this
Series, and (ii) on October 1, 2008, the remaining shares of this Series.
The Corporation's obligation to make redemptions for the 6.125% Sinking
Fund on any such October 1 as provided in this subparagraph (2) (such
obligations on each such date being herein called the "6.125% Sinking Fund
Obligation") shall be cumulative so that if on any such October 1 the funds
of the Corporation legally available for the 6.125% Sinking Fund shall be
insufficient to permit the Corporation to discharge its 6.125% Sinking Fund
Obligation on such date, or if for any other reason such 6.125% Sinking
Fund Obligation shall not have been discharged in full on such date, then
such 6.125% Sinking Fund Obligation, to the extent not discharged, shall
become an additional 6.125% Sinking Fund Obligation for each succeeding
October 1 until fully discharged. The price at which shares of this Series
shall be called for redemption through the 6.125% Sinking Fund shall be
$100 per share, plus an amount equal to accumulated and unpaid dividends to
the date of such redemption computed as provided in Section 5 of Division C
of Article VI of these Amended and Restated Articles of Incorporation. The
Corporation's 6.125% Sinking Fund Obligation may be discharged, in whole or
part, by the application of any shares of this Series purchased or
otherwise acquired by the Corporation on or before such date. If the
Corporation shall for any reason fail to discharge in full its 6.125%
Sinking Fund Obligation on any such October 1, the Corporation shall not
thereafter, unless and until such 6.125% Sinking Fund Obligation and its
6.125% Sinking Fund Obligation for each and every prior October 1 shall
have been discharged in full, declare or pay any dividend on, or make any
other distribution of property with respect to, or purchase or otherwise
acquire, any of its Common Stock.
A-4
(3) Shares of this Series are not redeemable prior to October 1, 2003. On
and after October 1, 2003, the Corporation may, by resolution of the Board
of Directors or the Executive Committee of the Board of Directors, redeem
all, or from time to time, any part of the outstanding shares of this
Series at $100 per share. Any shares of this Series which are redeemed,
repurchased or otherwise reacquired by the Corporation shall, until further
action by the Board of Directors or the Executive Committee of the Board of
Directors, have the status of authorized and unissued shares of Series
Preferred Stock, without designation as to series.
(4) $100.00 per share shall be payable upon any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation. The shares of
this Series shall not be convertible into shares of any other class or
classes or into any other securities of the Corporation. The number of
shares of this series authorized is 1,150,000 shares.
(F) 6.33% Series Preferred Stock. The terms of the "6.33% Preferred Stock"
in the respects in which the shares of such series may vary from shares of
other series of the Series Preferred Stock shall be as follows:
(1) The dividend rate shall be 6.33% per share per annum and dividends on
each share of such Series shall be cumulative from the date or dates of the
initial issue of shares of such Series;
(2) So long as any shares of this Series remain outstanding, the
Corporation, after full dividends on all outstanding shares of the 4 1/2%
Preferred Stock and the Series Preferred Stock, including this Series, for
all past dividend periods shall have been paid or set aside, shall redeem
as and for a sinking fund for the retirement of this Series (the "6.33%
Sinking Fund"), out of funds legally available therefor, (i) annually on
July 1 in each of the years 2003 through 2007, 50,000 shares of this
Series, and (ii) on July 1, 2008, the remaining shares of this Series. The
Corporation's obligation to make redemptions for the 6.33% Sinking Fund on
any such July 1 as provided in this subparagraph (2) (such obligations on
each such date being herein called the "6.33% Sinking Fund Obligation")
shall be cumulative so that if on any such July 1 the funds of the
Corporation legally available for the 6.33% Sinking Fund shall be
insufficient to permit the Corporation to discharge its 6.33% Sinking Fund
obligation on such date, or if for any other reason such 6.33% Sinking Fund
Obligation shall not have been discharged in full on such date, then such
6.33% Sinking Fund Obligation, to the extent not discharged, shall become
an additional 6.33% Sinking Fund Obligation for each succeeding July 1
until fully discharged. The price at which shares of this Series shall be
called for redemption through the 6.33% Sinking Fund shall be $100 per
share, plus an amount equal to accumulated and unpaid dividends to the date
of such redemption computed as provided in Section 5 of Division C of
Article VI of these Amended and Restated Articles of Incorporation. The
Corporation's 6.33% Sinking Fund Obligation may be discharged, in whole or
part, by the application of any shares of this Series purchased or
otherwise acquired by the Corporation on or before such date. If the
Corporation shall for any reason fail to discharge in full its 6.33%
Sinking Fund Obligation on any such July 1, the Corporation shall not
thereafter, unless and until such 6.33% Sinking Fund Obligation and its
6.33% Sinking Fund Obligation for each and every prior July 1 shall have
been discharged in full, declare or pay any dividend on, or make any other
distribution of property with respect to, or purchase or otherwise acquire,
any of its Common Stock.
(3) Shares of this Series are not redeemable prior to October 1, 2003. On
and after October 1, 2003, the Corporation may, by resolution of the Board
of Directors or the Executive Committee of the Board of Directors, redeem
all, or from time to time, any part of the outstanding shares of this
Series at $100 per share. Any shares of this Series which are redeemed,
repurchased or otherwise reacquired by the Corporation shall, until further
action by the Board of Directors or the Executive Committee of the Board of
Directors, have the status of authorized and unissued shares of Series
Preferred Stock, without designation as to series.
(4) $100.00 per share shall be payable upon any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation. The shares of
this Series shall not be convertible into shares of any other class or
classes or into any other securities of the Corporation. The number of
shares of this series authorized is 1,000,000 shares.
(G) 5.95% Series Preferred Stock. The terms of the "5.95% Preferred Stock"
in the respects in which the shares of such series may vary from shares of
other series of the Series Preferred Stock shall be as follows:
(1) The dividend rate shall be 5.95% per share per annum and dividends on
each share of such Series shall be cumulative from the date or dates of the
initial issue of shares of such Series;
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(2) The Corporation, after full dividends on all outstanding shares of
the 4 1/2% Preferred Stock and the Series Preferred Stock including this
Series, for all past dividend periods shall have been paid or set aside,
shall redeem as and for a sinking fund for the retirement of this Series
(the "5.95% Sinking Fund"), out of funds legally available therefor, on
April 1, 2001, all of the outstanding shares of this Series. If on April 1,
2001, the required number of shares shall not be redeemed because of the
lack of legally available funds, or for any other reason, the amount
required to be redeemed shall be carried forward until such obligation is
fully discharged. The price at which shares of this Series shall be called
for redemption through the 5.95% Sinking Fund shall be $100 per share, plus
an amount equal to accumulated and unpaid dividends to the date of such
redemption computed as provided in Section 5 of Division C of Article VI of
these Amended and Restated Articles of Incorporation. If the Corporation
shall for any reason fail to discharge in full its 5.95% Sinking Fund
obligation on April 1, 2001, the Corporation shall not thereafter, unless
and until such 5.95% Sinking Fund obligation shall have been discharged in
full, declare or pay any dividend on, or make any other distribution of
property with respect to, or purchase or otherwise acquire, any of its
Common Stock. Any shares of this Series which are redeemed, repurchased or
otherwise reacquired by the Corporation shall, until further action by the
Board of Directors or the Executive Committee of the Board of Directors,
have the status of authorized and unissued shares of Series Preferred
Stock, without designation as to series.
(3) The amount per share for this Series payable to the holders thereof
upon any voluntary or involuntary liquidation, dissolution or winding up of
the Corporation shall be $100. The shares of this Series shall not be
convertible into shares of any other class or classes or into any other
securities of the Corporation. The number of shares of this Series
authorized is 300,000 shares.
(H) 6.05% Series Preferred Stock. The terms of the "6.05% Preferred Stock"
in the respects in which the shares of such series may vary from shares of
other series of the Series Preferred Stock shall be as follows:
(1) The dividend rate shall be 6.05% per share per annum and dividends on
each share of such Series shall be cumulative from the date or dates of the
initial issue of shares of such Series;
(2) The Corporation, after full dividends on all outstanding shares of
the 4 1/2% Preferred Stock and the Series Preferred Stock, including this
Series, for all past dividend periods shall have been paid or set aside,
shall redeem as and for a Sinking Fund for the retirement of this Series
(the "6.05% Sinking Fund"), out of funds legally available therefor, on
April 1, 2002, all of the outstanding shares of this Series. If on April 1,
2002, the required number of shares shall not be redeemed because of the
lack of legally available funds, or for any other reason, the amount
required to be redeemed shall be carried forward until such obligation is
fully discharged. The price at which shares of this Series shall be called
for redemption through the 6.05% Sinking Fund shall be $100 per share, plus
an amount equal to accumulated and unpaid dividends to the date of such
redemption computed as provided in Section 5 of Division C of Article VI of
these Amended and Restated Articles of Incorporation. If the Corporation
shall for any reason fail to discharge in full its 6.05% Sinking Fund
obligation on April 1, 2002, the Corporation shall not thereafter, unless
and until such 6.05% Sinking Fund obligation shall have been discharged in
full, declare or pay any dividend on, or make any other distribution of
property with respect to, or purchase or otherwise acquire, any of its
Common Stock. Any shares of this Series which are redeemed, repurchased or
otherwise reacquired by the Corporation shall, until further action by the
Board of Directors or the Executive Committee of the Board of Directors,
have the status of authorized and unissued shares of Series Preferred
Stock, without designation as to series.
(3) The amount per share for this Series payable to the holders thereof
upon any voluntary or involuntary liquidation, dissolution or winding up of
the Corporation shall be $100. The shares of this Series shall not be
convertible into shares of any other class or classes or into any other
securities of the Corporation. The number of shares of this Series
authorized is 250,000 shares.
(I) 6.15% Series Preferred Stock. The terms of the "6.15% Preferred Stock"
in the respects in which the shares of such series may vary from shares of
other series of the Series Preferred Stock shall be as follows:
(1) The dividend rate shall be 6.15% per share per annum and dividends on
each share of such Series shall be cumulative from the date or dates of the
initial issue of shares of such Series;
(2) The Corporation, after full dividends on all outstanding shares of
the 4 1/2% Preferred Stock and the Series Preferred Stock, including this
Series, for all past dividend periods shall have been paid or set aside,
shall redeem as and for a sinking fund for the retirement of this Series
(the "6.15% Sinking Fund"), out of funds legally available therefor, on
April 1, 2003, all of the outstanding shares of this Series. If on April 1,
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2003, the required number of shares shall not be redeemed because of the
lack of legally available funds, or for any other reason, the amount
required to be redeemed shall be carried forward until such obligation is
fully discharged. The price at which shares of this Series shall be called
for redemption through the 6.15% Sinking Fund shall be $100 per share, plus
an amount equal to accumulated and unpaid dividends to the date of such
redemption computed as provided in Section 5 of Division C of Article VI of
these Amended and Restated Articles of Incorporation. If the Corporation
shall for any reason fail to discharge in full its 6.15% Sinking Fund
obligation on April 1, 2003, the Corporation shall not thereafter, unless
and until such 6.15% Sinking Fund obligation shall have been discharged in
full, declare or pay any dividend on, or make any other distribution of
property with respect to, or purchase or otherwise acquire, any of its
Common Stock. Any shares of this Series which are redeemed, repurchased or
otherwise reacquired by the Corporation shall, until further action by the
Board of Directors or the Executive Committee of the Board of Directors,
have the status of authorized and unissued shares of Series Preferred
Stock, without designation as to series.
(3) The amount per share for this Series payable to the holders thereof
upon any voluntary or involuntary liquidation, dissolution or winding up of
the Corporation shall be $100. The shares of this Series shall not be
convertible into shares of any other class or classes or into any other
securities of the Corporation. The number of shares of this Series
authorized is 250,000 shares.
(J) For the purposes of the foregoing paragraphs (A) through (I), the terms
"involuntary liquidation, dissolution or winding up" shall include, without
being limited to, a liquidation, dissolution or winding up of the Corporation
resulting in the distribution of all of the net proceeds of a sale, lease or
conveyance of all or substantially all of the property or business of the
Corporation to any governmental body including, without limitation, any
municipal corporation or political subdivision or authority.
Division C -- PROVISIONS APPLICABLE TO BOTH THE 4 1/2% PREFERRED STOCK AND THE
SERIES PREFERRED STOCK
Section 1. General. The term "Preferred Stock" whenever used in this Article
VI, shall be deemed to include the 4 1/2% Preferred Stock, the Series
Preferred Stock and any other class of stock entitled to dividends on a parity
with the 4 1/2% Preferred Stock and Series Preferred Stock.
Section 2. Dividends. (A) The shares of Preferred Stock shall be entitled to
the payment of dividends on a parity with each other at the rate or rates
established by or pursuant to the provisions of this Article VI and in
preference to the Preference Stock and the Common Stock, but only when and as
declared by the Board of Directors, out of funds legally available for the
payment of dividends.
(B) Said dividends shall be payable quarterly on January 1, April 1, July 1
and October 1 of each year or otherwise as the Board of Directors may
determine, to shareholders of record as of a date not exceeding forty (40)
days and not less than ten (10) days preceding such dividend payment dates, to
be fixed by the Board of Directors. The holders of the Preferred Stock shall
not be entitled to receive any dividends thereon out of net profits or surplus
earnings other than dividends established by or pursuant to this Article VI.
Section 3. Preferences In Distribution. The shares of the 4 1/2% Preferred
Stock and the Series Preferred Stock shall be entitled to share on a parity
with each other, and shall have a preference over the Preference Stock and the
Common Stock, upon any voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, or upon any distribution of assets, other than
net profits or surplus earnings until there shall have been paid in respect of
the shares of:
(a) 4 1/2% Preferred Stock -- the full par value thereof, or
(b) Series Preferred Stock -- the liquidation price fixed as provided in
Division B;
plus, in either case, an amount, if any, by which an amount equivalent to the
annual dividend upon such shares from the date after which dividends thereon
became cumulative to the date of liquidation exceeds the dividends actually
paid thereon or declared and set apart for payment thereon from such date to
the date of liquidation. The 4 1/2% Preferred Stock and the Series Preferred
Stock shall not receive any share in any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation or in any distribution of assets
in excess of the aggregate amount specified in this section.
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Section 4. Voting Rights. (A) Except as otherwise provided in these Amended
and Restated Articles of Incorporation, each share of the 4 1/2% Preferred
Stock, the Series Preferred Stock, the Common Stock and (if, and to the
extent, stated in the resolution or resolutions providing for the issue of a
series of Preference Stock) the Preference Stock shall be equal in voting
power and shall entitle the holder thereof to one vote upon any question
presented to any shareholders meeting, it being hereby agreed and declared
that a majority in number of shares regardless of the class to which such
shares may belong is a majority in value or in interest within the meaning of
any statute or law requiring the consent of stockholders holding a majority in
interest or a greater amount in value of stock of the Corporation.
(B) If and when dividends payable on any shares of Preferred Stock shall be
in default in an amount equivalent to the annual dividend, or more, per share,
and thereafter until all dividends on the Preferred Stock (of all classes and
series) in default shall have been paid, the holders of the Preferred Stock
voting as a single class, separate from the holders of the Preference Stock
and the Common Stock, shall be entitled to elect the smallest number of
directors necessary to constitute a majority of the full Board of Directors,
and the holders of the Common Stock and the Preference Stock (if, and to the
extent, stated in the resolution or resolutions providing for the issue of a
series of Preference Stock), voting separately as a class, shall have the
right to elect the remaining directors of the Corporation. The terms of
office, as directors, of all persons who may be directors of the Corporation
at the time shall terminate upon the election of a majority of the Board of
Directors by the holders of the Preferred Stock, except that, if the holders
of the Preference Stock and/or the Common Stock shall not have exercised their
right to elect directors of the Corporation (either by voting together as a
single class or by voting separately as two distinct classes, as the case may
be) because of the lack of a quorum consisting of a majority of the required
class, then such remaining directors shall be elected by the directors whose
term of office is thus terminated and who have not been elected by the holders
of the Preferred Stock as a class; and in that event, such elected directors
shall hold office for the interim period, pending such time s a quorum of the
requisite class shall be present at a meeting held for the election of
directors.
(C) If and when all dividends then in default on the Preferred Stock, then
outstanding, shall be paid (and such dividends shall be declared and paid out
of any funds legally available therefor as soon as reasonably practicable),
the holders of the Preferred Stock shall be divested of any special right with
respect to the election of directors and the voting power of the holders of
the Preferred Stock and the holders of the Common Stock and the Preference
Stock (to the extent stated in the resolution or resolutions providing for the
issue of a series of Preference Stock) shall revert to the status existing
before the first dividend payment date on which dividends on any shares of the
Preferred Stock were not paid in full; but always subject to the same
provisions for vesting such special rights in the holders of the Preferred
Stock in case of further like default or defaults on dividends thereon. Upon
the termination of any such special voting right, the terms of office of all
persons who may have been elected directors of the Corporation by vote of the
holders of the Preferred Stock, as a class, pursuant to such special voting
right shall forthwith terminate, and the resulting vacancies shall be filled
by the vote of a majority of the remaining directors.
(D) In case of any vacancy in the office of a director occurring among the
directors elected by the holders of the Preferred Stock, voting as a single
class separate from the holders of the Common Stock and the holders of any
series of Preference Stock with voting rights, the remaining directors elected
by the holders of the Preferred Stock, by affirmative vote of a majority
thereof, or the remaining director so elected if there be but one, may elect a
successor or successors to hold office for the unexpired terms of the director
or directors whose place or places shall be vacant.
(E) In case of any vacancy in the office of a director occurring among the
directors not elected by the holders of the Preferred Stock, the remaining
directors not elected by the holders of the Preferred Stock, by affirmative
vote of a majority thereof, or the remaining such director if there be but
one, may elect a successor or successors to hold office for the unexpired term
of the director or directors whose place or places shall be vacant.
(F) Whenever the right shall have accrued to the holders of the Preferred
Stock to elect directors, voting as a single class separate from the holders
of the Common Stock and the holders of any series of Preference Stock with
voting rights, then upon request in writing signed by any holder of the
Preferred Stock entitled to vote, delivered by registered mail or in person to
the president, a vice president or secretary of the Corporation, it shall be
the duty of such officer forthwith to cause notice to be given to the
shareholders entitled to vote of a meeting to be held at such time as such
officer may fix, not less than ten (10) nor more than sixty (60) days after
the
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receipt of such request, for the purpose of electing directors. At all
meetings of shareholders held for the purpose of electing directors during
such time as the holders of a class or classes of stock shall have the special
right, voting as a single class, separate from the holders of the other class
or classes of stock (not entitled to such special right), to elect directors,
the presence in person or by proxy of the holders of a majority of such other
class or classes of stock (counted either separately as single classes or
together as a single class, as the case may be) shall be required to
constitute a quorum of such class or classes for the election of directors,
and the presence in person or by proxy of the holders of a majority of the
outstanding shares of the class or classes of stock entitled to such special
right shall be required to constitute a quorum of such class or classes for
the election of directors; provided, however, that the absence of a quorum of
the holders of any such class or classes of stock shall not prevent the
election at any such meeting or any adjournment thereof of directors by any
other class or classes if the necessary quorum of the holders of stock of such
other class or classes is present in person or by proxy at such meeting or
adjournment thereof; and provided further that in the event a quorum of the
holders of the Preferred Stock is not present, then the election of the
directors elected by the holders of any other class or classes of stock shall
not become effective and the directors so elected by such other class or
classes of stock shall not assume their offices and duties until the holders
of the Preferred Stock shall have elected the directors they shall be entitled
to elect; and provided further, however, that in the absence of a quorum of
the holders of stock of any class, a majority of the holders of the stock of
such class who are present in person or by proxy shall have the power to
adjourn the election of the directors to be elected by such class from day to
day or for such longer periods, not exceeding 15 days, each, as such majority
shall direct without notice other than announcement at the meeting until the
requisite number of holders of such class shall be present in person or by
proxy.
Section 5. Redemption. (A) By a majority vote of the Board of Directors of
the Corporation:
(1) the 4 1/2% Preferred Stock may be redeemed in whole or in part at any
time at One Hundred Ten Dollars ($110.00) per share, or
(2) any series of Series Preferred Stock may be redeemed in whole or in
part at any time at the redemption price fixed and determined as specified
in Division B;
plus, in either case, an amount, if any, by which an amount equivalent to the
annual dividend upon such shares from the date after which dividends thereon
became cumulative to the date of redemption exceeds the dividends actually
paid thereon or declared and set apart for payment thereon from such date to
the date of redemption. If, pursuant to such vote, less than all of the shares
of any class or series thereof of the Preferred Stock are to be redeemed, the
shares to be redeemed shall be selected by lot, in such manner as the Board of
Directors of the Corporation shall determine, by a bank or trust company
chosen for that purpose by the Board of Directors of the Corporation.
(B) Nothing herein contained shall limit any right of the Corporation to
purchase or otherwise acquire any shares of the Preferred Stock.
(C) Notice of the intention of the Corporation to redeem shares of the
Preferred Stock or any thereof shall be mailed thirty (30) days before the
date of redemption to each holder of record of the shares to be redeemed, at
his last known post office address as shown by the records of the Corporation.
At any time after such notice has been mailed as aforesaid, the Corporation
may deposit the aggregate redemption price (or the portion thereof not already
paid in the redemption of shares so to be redeemed) with any bank or trust
company in the City of Philadelphia, Pennsylvania; City of Allentown,
Pennsylvania; or in the City of New York, New York, named in such notice,
payable in amounts aforesaid to the respective orders of the record holders of
the shares so to be redeemed, on endorsement and surrender of their
certificates, and thereupon said holders shall cease to be shareholders with
respect to said shares and from and after the making of such deposit, said
holders shall have no interest in or claim against the Corporation with
respect to said shares, but shall be entitled only to receive said moneys from
said bank or trust company with interest, if any, allowed by such bank or
trust company on such moneys deposited as provided in this subsection (C), on
endorsement and surrender of their certificates as aforesaid.
(D) Any moneys so deposited, plus interest thereon, if any, and remaining
unclaimed at the end of six years from the date fixed for redemption, if
thereafter requested by resolution of the Board of Directors of the
Corporation, shall be repaid to the Corporation and in the event of such
repayment to the Corporation, such
A-9
holders of record of the shares so redeemed as shall not have made claim
against such moneys prior to such repayment to the Corporation shall be deemed
to be unsecured creditors of the Corporation for an amount without interest
equivalent to the amount deposited, plus interest thereon, if any, allowed by
such bank or trust company, as above stated, for the redemption of such shares
and so paid to the Corporation.
Division D -- PREFERENCE STOCK
Section 1. General. To the extent permitted by these Amended and Restated
Articles of Incorporation, the Board of Directors, by majority vote of a
quorum, shall have the authority to issue shares of Preference Stock from time
to time in one or more series, and to fix by resolution, at the time of
issuance of each of such series, the distinctive designations, terms, relative
rights, privileges, qualifications, limitations, options, conversion rights,
preferences, and voting powers, and such prohibitions, restrictions and
qualifications of voting or other rights and powers thereof except as they are
fixed and determined in this Article VI. The dividend rate or rates, dividend
payment dates or other terms of a series of Preference Stock may vary from
time to time dependent upon facts ascertainable outside of these Amended and
Restated Articles of Incorporation if the manner in which the facts will
operate to fix or change such terms is set forth in the express terms of the
series or upon terms incorporated by reference to an existing agreement
between the Corporation and one or more other parties or to another document
of independent significance or otherwise to the extent permitted by the
Business Corporation Law of 1988.
Section 2. Dividends. Subject to the provisions of Section 2(A) of Division
C, the holders of shares of each series of Preference Stock shall be entitled
to receive, when and as declared by the Board of Directors, out of any funds
legally available for the purpose under 15 Pa.C.S. (S) 1551 (relating to
distributions to shareholders) or any superseding provision of law subject to
any additional limitations in the express terms of the series, cash dividends
at the rate or rates and on the terms which shall have been fixed by or
pursuant to the authority of the Board of Directors with respect to such
series and no more, payable at such time or times as may be fixed by or
pursuant to the authority of the Board of Directors. If and to the extent
provided by the express terms of any series of Preference Stock, the holders
of the series shall be entitled to receive such other dividends as may be
declared by the Board of Directors.
Section 3. Liquidation of the Corporation. Subject to the provisions of
Section 3 of Division C, in the event of voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the holders of shares of
Preference Stock shall be entitled to receive from the assets of the
Corporation (whether capital or surplus), prior to any payment to the holders
of shares of Common Stock or of any other class of stock of the Corporation
ranking as to assets subordinate to the Preference Stock, the amount per share
(which, in the case of an involuntary liquidation, dissolution or winding up,
shall not be in excess of the original offering price per share (not including
accrued dividends, if any) or $100 per share, whichever is less) which shall
have been fixed and determined by the Board of Directors with respect thereto,
plus the accrued and unpaid dividends thereon computed to the date on which
payment thereof is made available, whether or not earned or declared. For the
purposes of this section, the terms "involuntary liquidation, dissolution or
winding up" shall include, without being limited to, a liquidation,
dissolution or winding up of the Corporation resulting in the distribution of
all of the net proceeds of a sale, lease or conveyance of all or substantially
all of the property or business of the Corporation to any governmental body
including, without limitation, any municipal corporation or political
subdivision or authority.
Section 4. Conversion Privileges. In the event any series of the Preference
Stock is issued with the privilege of conversion, such stock may be converted,
at the option of the record holder thereof, at any time or from time to time,
as determined by the Board of Directors, in the manner and upon the terms and
conditions stated in the resolution establishing and designating the series
and fixing and determining the relative rights and preferences thereof.
Section 5. Redemption. The Corporation, at its option to be exercised by its
Board of Directors, may redeem the whole or any part of the Preference Stock
or of any series thereof at such time or times as may be fixed by the Board,
at the applicable price for each share, and upon the terms and conditions
which shall have been fixed and determined by the Board with respect thereto.
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Section 6. Voting Rights. Each holder of record of shares of a series of
Preference Stock shall have full voting rights of one vote per share or such
other limited, multiple, fractional or conditional or no voting rights as
shall be stated in the resolution or resolutions of the Board of Directors
providing for the issue of the shares of such series. Unless provided in such
resolution or resolutions, no holder of shares of Preference Stock shall have
cumulative voting rights.
Division E -- COMMON STOCK
Section 1. Dividends And Shares In Distribution On Common Stock. (A) Subject
to the rights of the holders of the Senior Stock, and the Preference Stock and
subordinate thereto, the Common Stock alone shall receive all further
dividends and shares upon liquidation, dissolution, winding up or
distribution.
(B) A consolidation or merger of the Corporation with or into any other
corporation or corporations shall not be deemed a distribution of assets of
the Corporation within the meaning of any provision of this Article VI.
Section 2. Voting Rights. Except as otherwise provided in these Amended and
Restated Articles of Incorporation, each share of the 4 1/2% Preferred Stock,
the Series Preferred Stock and the Common Stock shall be equal in voting power
and shall entitle the holder thereof to one vote upon any question presented
to any shareholders' meeting, it being hereby agreed and declared that a
majority in number of shares (including, if and to the extent provided
pursuant to Division D, shares of Preference Stock) regardless of the class to
which such shares may belong is a majority in value or in interest within the
meaning of any statute or law requiring the consent of stockholders holding a
majority in interest or a greater amount in value of stock of the Corporation.
Division F -- GENERAL
Pre-emptive Rights. The Corporation may issue or sell shares, option rights,
or securities having conversion or option rights for money or otherwise
without first offering them to shareholders of any class or classes.
Redemption. Any shares of the 4 1/2% Preferred Stock, the Series Preferred
Stock, the Preference Stock and the Common Stock which are redeemed,
repurchased or otherwise reacquired by the Corporation shall, until further
action by the Board of Directors or the Executive Committee of the Board of
Directors, have the status of authorized and unissued shares, without, in the
case of the Series Preferred Stock, designation as to series.
Convertibility. Unless otherwise provided in the terms of a series of Series
Preferred Stock or Preference Stock or otherwise in these Amended and Restated
Articles of Incorporation, the shares of each of the 4 1/2% Preferred Stock,
the Series Preferred Stock, the Preference Stock and the Common Stock,
respectively, shall not be convertible into shares of any other class or
classes or into any other securities of the Corporation.
ARTICLE VII. A majority of the directors may amend, alter or repeal the
Bylaws, subject to the power of the shareholders to change such action;
provided, however, that any amendment, alteration or repeal of, or the
adoption of any provision inconsistent with, Sections 3.01, 3.01.1, 3.04,
3.05, or 3.13 of the Bylaws, if by action of the shareholders, shall be only
upon the affirmative vote of the shareholders entitled to cast at least two-
thirds of the votes which all shareholders are entitled to cast, and if by
action of the directors, shall be only upon the approval of two-thirds of the
directors.
ARTICLE VIII. These Amended and Restated Articles of Incorporation may be
amended in the manner from time to time prescribed by statute and all rights
conferred upon shareholders herein are granted subject to this reservation;
provided, however, that, notwithstanding the foregoing (and in addition to any
vote that may be required by law, these Amended and Restated Articles of
Incorporation or the Bylaws), the affirmative vote of the shareholders
entitled to cast at least two-thirds of the votes which all shareholders are
entitled to cast shall be required to amend, alter or repeal, or to adopt any
provision inconsistent with, Articles VII or VIII of these Amended and
Restated Articles of Incorporation.
ARTICLE IX. The following provisions of the Business Corporation Law of 1988
shall not be applicable to the Corporation: 15 Pa.C.S. (S) 2538 (relating to
approval of transactions with interested shareholders) and 15 Pa.C.S.
Subchapter E (relating to control transactions).
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Schedule B
[Logo of PP&L]
PP&L, Inc.
1998 Financial Statements
CONTENTS
Page
----
Glossary of Terms and Abbreviations....................................... B-1
Review of the Financial Condition and Results of Operations............... B-4
Report of Independent Accountants......................................... B-18
Management's Report on Responsibility for Financial Statements............ B-19
Consolidated Statement of Income.......................................... B-20
Consolidated Statement of Cash Flows...................................... B-21
Consolidated Balance Sheet................................................ B-22
Consolidated Statement of Shareowner's Common Equity...................... B-24
Consolidated Statement of Preferred Stock................................. B-25
Consolidated Statement of Company-Obligated Mandatorily Redeemable
Preferred Securities..................................................... B-26
Consolidated Statement of Long-Term Debt.................................. B-27
Notes to Financial Statements............................................. B-28
Selected Financial and Operating Data..................................... B-45
Executive Officers of PP&L................................................ B-46
Shareowner and Investor Information....................................... B-47
Quarterly Financial Data.................................................. B-49
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
BG&E--Baltimore Gas & Electric Company
CERCLA--Comprehensive Environmental Response, Compensation and Liability Act
Clean Air Act (Federal Clean Air Act Amendments of 1990)--legislation
enacted to address environmental issues including acid rain, ozone and toxic
air emissions.
CTC--competitive transition charge
Customer Choice Act--(Pennsylvania Electricity Generation Customer Choice
and Competition Act)--legislation enacted to restructure the state's electric
utility industry to create retail access to a competitive market for
generation of electricity
DEP--Pennsylvania Department of Environmental Protection
District Court--United States District Court for the Eastern District of
Pennsylvania.
DOE--Department of Energy
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, an organization that aids the FASB in
identifying emerging issues that may require FASB action.
EMF--electric and magnetic fields
Energy Act (Energy Policy Act of 1992)--legislation passed by Congress to
promote competition in the electric energy market for bulk power.
Energy Marketing Center--organization within PP&L responsible for marketing
and trading wholesale energy
EPA--Environmental Protection Agency
ESOP--Employee Stock Ownership Plan
FASB (Financial Accounting Standards Board)--a rulemaking organization that
establishes financial accounting and reporting standards.
FGD--flue gas desulfurization equipment installed at coal-fired power plants
to reduce sulfur dioxide emissions.
FERC (Federal Energy Regulatory Commission)--federal agency that regulates
interstate transmission and sale of electricity and related matters.
GRT--Gross Receipts Tax
H.T. Lyons--H.T. Lyons, Inc., a PP&L Resources unregulated subsidiary
specializing in mechanical contracting and engineering.
IBEW--International Brotherhood of Electrical Workers
ISO--Independent System Operator
ITC--intangible transition charge
JCP&L--Jersey Central Power & Light Company
Major utilities--Atlantic, BG&E and JCP&L
B-1
McCarl's--McCarl's Inc., a PP&L Resources unregulated subsidiary
specializing in mechanical contracting and engineering.
McClure--McClure Company, a PP&L Resources unregulated subsidiary
specializing in mechanical contracting and engineering.
MSHA--Mine Safety and Health Administration
NOx--nitrogen oxide
NPDES--National Pollutant Discharge Elimination System
NRC (Nuclear Regulatory Commission)--federal agency that regulates operation
of nuclear power facilities
NUG (Non-Utility Generator)--generating plants not owned by regulated
utilities. If the NUG meets certain criteria, its electrical output must be
purchased by public utilities as required by PURPA.
OCA--Pennsylvania Office of Consumer Advocate
OSM--United States Office of Surface Mining
Pa. CNI--Pennsylvania corporate net income tax
PCB (Polychlorinated Biphenyl)--additive to oil used in certain electrical
equipment up to the late-1970s. Now classified as a hazardous chemical.
PECO--PECO Energy Company
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 the U.S.
Plan--PP&L's non-contributory defined benefit pension plan.
PP&L--PP&L, Inc.
PP&L Capital Funding--PP&L Capital Funding, Inc., PP&L Resources' financing
subsidiary.
PP&L Capital Trust--a Delaware statutory business trust created to issue
Preferred Securities, whose common stock is held by PP&L.
PP&L Capital Trust II--a Delaware statutory business trust created to issue
Preferred Securities, whose common stock is held by PP&L.
PP&L EnergyPlus--Refers to PP&L, Inc. d/b/a PP&L EnergyPlus, and PP&L
EnergyPlus Co., a PP&L, Inc. unregulated subsidiary which is involved in
retail electric generating supply. During 1998, PP&L, Inc. d/b/a PP&L
EnergyPlus provided retail electric generating supply in the Pennsylvania
retail pilot program. As a result of the PUC restructuring settlement, PP&L
EnergyPlus became a separate subsidiary of PP&L, Inc. in September 1998. As of
January 1999, PP&L EnergyPlus Co. is providing retail electric generating
supply to customers throughout Pennsylvania.
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 and other subsidiaries.
PP&L Spectrum--PP&L Spectrum, Inc., a PP&L Resources unregulated subsidiary
which offers energy-related products and services.
PP&L's Mortgage--PP&L's Mortgage and Deed of Trust, dated October 1, 1945.
Preferred Securities--Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely company debentures (issued by
two Delaware statutory business trusts).
PUC (Pennsylvania Public Utility Commission)--state agency that regulates
certain ratemaking, services, accounting, and operations of Pennsylvania
utilities.
B-2
PUC Decision--final order issued by the PUC on September 27, 1995 pertaining
to PP&L's base rate case filed in December 1994.
PUC Final Order--Final order issued by the PUC on August 27, 1998, approving
the settlement of PP&L, Inc.'s restructuring proceeding.
PUHCA--Public Utility Holding Company Act of 1935.
PURPA (Public Utility Regulatory Policies Act of 1978)--legislation passed
by Congress to encourage energy conservation, efficient use of resources, and
equitable rates.
RCRA--1976 Resource Conservation and Recovery Act.
SBRCA--Special Base Rate Credit Adjustment.
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.
SO/2/--Sulfur dioxide.
STAS (State Tax Adjustment Surcharge)--rate adjustment mechanism to customer
bills for changes in certain state taxes.
Superfund--federal and state legislation that addresses remediation of
contaminated sites.
VEBA (Voluntary Employee Benefit Association Trust)--trust accounts for
health and welfare plans for future payments to employees, retirees or their
beneficiaries.
VERP--Voluntary Early Retirement Program.
Year 2000--a set of date-related problems that may be experienced by
software systems or applications.
B-3
REVIEW OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PP&L, INC.
PP&L is an operating public utility which provides electricity delivery
service in eastern and central Pennsylvania, sells retail electricity
throughout Pennsylvania and markets wholesale electricity in 28 states and
Canada. PP&L EnergyPlus, a PP&L subsidiary, sells competitively-priced energy
and energy services to newly deregulated markets. PP&L is the principal
subsidiary of PP&L Resources. PP&L Resources is also the parent holding
company of PP&L Global, PP&L Spectrum, PP&L Capital Funding, Penn Fuel Gas,
H.T. Lyons, McClure, and McCarl's.
Terms and abbreviations appearing in the Review of the Financial Condition
and Results of Operations are explained in the glossary.
Forward-looking Information
Certain statements contained in these Financial Statements 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 believes 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 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's profitability and liquidity; new accounting
requirements or new 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 and its subsidiaries) and operating costs; performance
of new ventures; political, regulatory or economic conditions in foreign
countries; foreign exchange rates; 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'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 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 PP&L
undertakes no obligation to update the information contained in such statement
to reflect subsequent developments or information.
Results of Operations
Earnings
Excluding the effects of weather and several one-time and other adjustments,
most of which are related to the transition to a competitive electricity
market in Pennsylvania, earnings available to PP&L Resources were $333 million
in 1998, $317 million in 1997 and $320 million in 1996. Abnormal weather in
1998 adversely affected earnings by $33 million, the largest such effect in
more than a decade.
On an as-reported basis, PP&L lost $587 million in 1998, versus earnings of
$308 million in 1997 and $329 million in 1996. The following table highlights
the major items that impacted earnings for each of these years:
B-4
1998 1997 1996
----- ---- ----
($ Millions)
Earnings available to PP&L Resources--excluding weather,
one-time adjustments and other impacts of restructuring...... $ 333 $317 $320
Weather variances on billed sales............................. (33) (4) 9
One-time adjustments:
PUC restructuring charge (See Note 3)....................... (915)
FERC municipalities settlement (See Note 3)................. (33)
SER settlement.............................................. 18
Penn Fuel Gas acquisition costs............................. 5 (5)
Other impacts of restructuring.............................. 38
----- ---- ----
Earnings available to PP&L Resources--reported................ $(587) $308 $329
===== ==== ====
Earnings in 1998 were negatively impacted by $948 million of after-tax
charges related to the settlement of PP&L's restructuring case before the PUC
and another competition-related case before FERC. Several one-time adjustments
helped earnings, including a change in the accounting treatment of PP&L's
proportionate share of Penn Fuel Gas acquisition costs and $30 million in
proceeds from a settlement with SER regarding a contract dispute over power
purchase costs.
The PUC restructuring adjustments also provided a favorable impact of about
$38 million on third and fourth quarter earnings of 1998. These adjustments
included lower depreciation on impaired generation assets, reduced accruals
for taxes other than income and a regulatory adjustment to the accounting for
unbilled revenues. These favorable impacts were partially offset by the direct
expensing of costs of computer software identified as impaired as part of the
restructuring accounting adjustments.
After eliminating the effects of these adjustments, 1998 earnings improved
by $16 million over 1997. This earnings improvement reflects higher weather-
normalized sales in all customer classes, particularly in the third and fourth
quarters of 1998. Weather-adjusted delivery sales to customers in central and
eastern Pennsylvania were 2.9% higher in 1998 than in 1997. Earnings were also
favorably affected by increased wholesale electricity revenues.
These earnings improvements were partially offset by higher operating
expenses incurred in 1998 over 1997. This increase reflects higher costs
associated with computer information systems, and additional payroll,
consultant services and other expenses to meet the requirements of retail
competition. Increased firm transmission costs related to the Energy Marketing
Center activities and a higher provision for uncollectible customer accounts
also increased operating expenses.
Adjusted 1997 earnings were $3 million lower than in 1996. Higher revenues
from bulk power sales and trading activity of the Energy Marketing Center
offset the impact of the phase-down of contractual sales to JCP&L. Earnings
also benefited from refinancing activities.
The reduction in contractual bulk power sales to JCP&L and other major
utilities will continue to adversely impact earnings over the next few years.
However, the Energy Marketing Center will resell this returning electric
energy and capacity on the open market, along with its other energy trading
activities, in an effort to offset the loss in revenues from declining
contractual sales.
Electric Energy Sales
Electricity sales for 1998, 1997 and 1996 were as follows:
1998 1997 1996
------ ------ ------
(Millions of kWh)
Electricity delivered to retail customers by PP&L (a)..... 32,137 31,964 32,307
Less: Electricity supplied during pilot by others......... 1,999 65
------ ------ ------
Electricity supplied to retail customers by PP&L.......... 30,138 31,899 32,307
Electricity supplied to retail customers by PP&L
EnergyPlus during the pilot.............................. 1,507
------ ------ ------
Total electricity supplied to retail customers (a)........ 31,645 31,899 32,307
Wholesale Energy Sales.................................... 36,706 21,454 14,340
- -------
(a) kWh for customers residing in PP&L's service territory who are receiving
energy from PP&L or PP&L EnergyPlus will be reflected in both of these
categories.
B-5
Under Pennsylvania's competition pilot program, customers were allowed to
choose the supplier of their electricity in 1998. Pilot customers continued to
have the utility that served their territory deliver electricity from the
supplier of choice. "Electricity delivered to retail customers by PP&L" is the
amount of electricity delivered by PP&L to customers in its service territory.
"Electricity supplied to retail customers by PP&L" represents the amount of
electricity supplied to PP&L service territory customers who did not
participate 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 participated in the pilot program and chose PP&L
EnergyPlus as their energy supplier.
Electricity delivered to retail customers increased by 173 million kWh, or
0.5%, from the comparable period in 1997. If normal weather had been
experienced in 1998 and 1997, deliveries would have increased by 2.9%. This
increase is attributable to strong third and fourth quarter deliveries to all
customer classes. Electricity delivered decreased by 343 million kWh, or 1.1%,
in 1997 from 1996. However, if normal weather had been experienced, deliveries
in 1997 would have increased by 0.2%.
Total electricity supplied to retail customers has decreased for the past
two years. This decrease was due to milder weather in both 1998 and 1997 as
compared to 1996, as well as 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. See "Operating Revenues: Wholesale Energy Marketing
and Trading Activities" for more information.
Energy Marketing and 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. PP&L enters into these agreements to market available energy and
capacity from its generating assets and to profit from market price
fluctuations. If PP&L was 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 (or
their 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 the Company's risk management
policy and programs, including established credit policies in evaluating
counterparty credit risk. PP&L has not experienced any material losses due to
non-performance by counterparties to date.
During 1998, the Energy Marketing Center entered into commodity forward and
option contracts for the physical purchase and sale of energy; these
transactions were reflected in the financial statements under the accrual
method of accounting. As of January 1, 1999, PP&L adopted mark-to-market
accounting for energy contracts entered into for trading purposes, in
accordance with EITF 98-10, "Accounting for Contracts Involved in Energy
Trading and Risk Management Activities" and, as a result, recognized a $6.0
million after-tax credit to energy purchases. Under mark-to-market accounting,
gains and losses that result from changes in the market prices on contracts
entered into for trading purposes will be reflected in current earnings. For
purposes of EITF 98-10, energy trading activities refer to energy contracts
entered into with the objective of generating profits on or from exposure to
shifts or changes in market prices, and risk management activities refer to
energy contracts that are designated as and effective as hedges of non-trading
activities (i.e., marketing available capacity and energy
B-6
and purchasing fuel for consumption). PP&L will continue to use accrual
accounting for energy contracts that are hedges of non-trading activities
until it adopts SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities," which it expects will occur effective January 1, 2000. SFAS 133,
which expands the definition of a derivative to include most of PP&L commodity
contracts that require physical delivery, requires that an entity recognize
all derivatives in the statement of financial position at fair value. The
accounting for changes in the fair value of a derivative will depend on the
intended use of the derivative and the resulting designation.
Market Risk Sensitive Instruments
Quantitative and Qualitative Disclosures About Market Risk
PP&L actively manages the market risk inherent in its commodity, debt,
foreign currency and equity positions. The Board of Directors of PP&L has
adopted a risk management policy to manage the risk exposures related to
energy prices, interest rates and foreign currency exchange rates. The policy
establishes a Risk Management Committee comprised of certain executive
officers which oversees the risk management function.
The forward-looking information presented below provides only estimates of
what may occur in the future, assuming certain adverse market conditions, due
to reliance on model assumptions. As a result, actual future results may
differ materially from those presented. These disclosures are not precise
indicators of expected future losses, but only indicators of reasonably
possible losses.
Commodity Price Risk--Energy Marketing Center
PP&L's risk management program is designed to manage the risks associated
with market fluctuations in the price of electricity, natural gas, oil and
emission allowances. The Company's risk management policy and programs include
risk identification, risk limits management with measurement and controls for
real time risk monitoring. In 1998, PP&L entered into fixed-price forward and
option contracts that required physical delivery of the commodity. In 1999,
PP&L expects to continue to use such contracts as well as other contracts,
such as futures and options that could be settled either in cash or by
physical delivery of the underlying commodity; exchange-for-physical
transactions; over-the-counter contracts, such as swap agreements where
settlement is generally based on the difference between a fixed and index-
based price for the underlying commodity; and tolling, reverse tolling, or
other contractual arrangements.
PP&L enters into contracts to hedge the impact of market fluctuations in its
energy-related assets, liabilities, and other contractual arrangements. In
addition, as defined by EITF 98-10, PP&L enters into these contracts for
trading purposes to take advantage of market opportunities. PP&L may at times
create a net open position in its portfolio that could result in material
losses if prices do not move in the manner or direction anticipated.
PP&L uses various methodologies to simulate forward price curves in the
energy markets to estimate the size and probability of changes in market value
resulting from commodity price movements. The methodologies require several
key assumptions, including selection of confidence levels, the holding period
of the commodity positions, and the depth and applicability to future periods
of historical commodity price information. As of December 31, 1998, PP&L
estimated that a 10% decline in market prices across all geographic areas and
time periods could have adversely changed the value of PP&L's trading
portfolio by approximately $16 million. For PP&L's non-trading portfolio, a
10% decline in market prices across all geographic areas and time periods
could have positively changed the value of PP&L's non-trading portfolio by $17
million; however, this would be offset by the decline in the value of the
underlying commodity, the electricity generated. In addition to commodity
price risk, PP&L's commodity positions are also subject to operational and
event risks including, among others, increases in load demand and forced
outages at generating plants.
Beginning in October 1998, the PJM ISO established capacity auctions to
increase price transparency and liquidity. PP&L expects to participate fully
in this capacity market and will apply its existing risk management policies
and procedures to its capacity transactions. In the future, capacity is
expected to evolve into an actively traded commodity, similar to electricity.
Commodity Price Risk--PP&L EnergyPlus
PP&L EnergyPlus was created in September 1998 as a retail marketing
subsidiary of PP&L. During 1998, PP&L EnergyPlus entered into various
arrangements, effective in 1999, with retail customers who elect to shop
B-7
for an energy provider. These contracts commit PP&L EnergyPlus to the sale of
electricity or natural gas without a specified firm volume. The longest sales
contract extends for three years. To hedge the price risk of these
transactions, PP&L EnergyPlus has entered into forward purchase contracts and
has the ability to supply the electricity through an option contract with the
Energy Marketing Center. Therefore, the potential for near-term losses
associated with PP&L EnergyPlus' commodity position is immaterial.
Interest Rate Risk
As a result of deregulation and the new competitive environment, PP&L is
exposed to increased interest rate risk. PP&L plans to manage its interest
expense risk by using financial derivative products to adjust the mix of fixed
and floating rate interest rates in its debt portfolio, adjust the duration of
its debt portfolio and lock in U.S. treasury rates in anticipation of future
financing, when appropriate. Risk limits were developed using value at risk
methodology and are designed to balance risk exposure to volatility in
interest expense and losses in the fair value of PP&L's long-term fixed rate
debt due to changes in the absolute level of interest rates. As of December
31, 1998, PP&L had no financial derivative instruments outstanding.
PP&L is also exposed to changes in earnings and cash flows as a result of
changes in interest rates for commercial paper and other short-term debt. At
December 31, 1998, PP&L's potential annual maximum exposure to increased
interest expense due to an increase in interest rates over a 30-day period,
based on a confidence level of 97.5%, was estimated at $1.8 million. This
amount has been determined by considering the impact of a hypothetical
increase in interest rates on the company's commercial paper and other short-
term debt balances as of December 31, 1998. Historically, there is a 97.5%
probability that interest rates for commercial paper and other short-term debt
will not increase more than 50 basis points over a 30-day period.
PP&L is also exposed to changes in the fair value of its long-term, fixed
rate debt. At December 31, 1998, PP&L estimated its potential maximum exposure
to a change in the fair value of its long-term fixed rate debt through an
adverse movement in interest rates over a one-day period, based on a
confidence level of 97.5%, at $20 million. Historically, there is a 97.5%
probability that fixed interest rates will not increase more than 13 basis
points over a one-day period.
Market events that are inconsistent with historical trends could cause
actual results to exceed estimated levels.
Nuclear Decommissioning Fund--Securities Price Risk
PP&L maintains trust funds, as required by the NRC, to fund certain costs of
decommissioning Susquehanna. As of December 31, 1998, these funds were
invested primarily in domestic equity securities and fixed rate, fixed income
securities and are reflected at fair value on the Consolidated Balance Sheet.
The mix of securities is designed to provide returns to be used to fund
Susquehanna's decommissioning and to compensate for inflationary increases in
decommissioning costs. However, the equity securities included in the trusts
are exposed to price fluctuation in equity markets, and the value of fixed
rate, fixed income securities are exposed to changes in interest rates. PP&L
actively monitors the investment performance and periodically reviews asset
allocation in accordance with PP&L's nuclear decommissioning trust policy
statement. A hypothetical 10% increase in interest rates and 10% decrease in
equity prices would result in a $13.7 million reduction in the fair value of
the trust assets.
PP&L's restructuring settlement agreement provides for the collection of
authorized nuclear decommissioning costs through the CTC. Additionally, PP&L
is permitted to seek recovery from customers of up to 96% of any increases in
these costs. Therefore, PP&L securities price risk is expected to remain
immaterial.
B-8
Operating Revenues: Electric Operations
The increase (decrease) in revenues from electric operations was
attributable to the following:
1998 vs 1997 1997 vs 1996
------------ ------------
(Millions of Dollars)
Retail Electric Revenues
Weather effect...................................... $(63) $(30)
Sales volume and sales mix effect................... 67 (1)
Unbilled revenues................................... 10 16
Pilot shopping credit above market price............ (14)
Other, net.......................................... 7 9
Energy revenues....................................... (29)
Other Electric Revenues............................... 6 4
---- ----
$ 13 $(31)
==== ====
Operating revenues for electric operations increased by $13 million in 1998
over 1997. 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 and
the effects of milder than normal weather experienced in 1998, revenues from
electric operations would have increased by $53 million.
This revenue increase can be attributed to strong retail electric sales in
the third and fourth quarters of 1998. Excluding the effects of weather,
electricity delivered to retail customers increased for all customer classes,
2.9% in total, in 1998 over 1997.
Operating revenues decreased by $31 million in 1997 from 1996. Revenues from
service area sales in 1997 were slightly lower than 1996. The decrease was
attributable to mild weather in 1997 and a change in the regulatory treatment
of energy costs by the PUC. For 1997 and 1998 underrecovered energy costs (up
to a cap of $31.5 million annually) were not recorded as energy revenues, but
as regulatory credits, which offset "Other Operating Expenses."
Operating Revenues: Wholesale Energy Marketing and Trading Activities
The increase (decrease) in revenues from wholesale energy marketing and
trading activities was attributable to the following:
1998 vs 1997 1997 vs 1996
------------ ------------
(Millions of Dollars)
Bilateral sales....................................... $496 $183
PJM................................................... 63 17
Cost-based contracts.................................. (45) (27)
Oil & gas sales....................................... 62
Other................................................. (3) (4)
---- ----
$573 $169
==== ====
Revenues from wholesale energy marketing and trading activities increased by
$573 million in 1998 and $169 million in 1997 when compared to the prior
years. 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 in March of 1998. This increase in revenues
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.
During 1998, the national energy trading market 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 "Energy Marketing and Trading Activities" for more information.
PUC Restructuring Proceeding
Refer to Financial Note 2 to Financial Statements for information regarding
the PUC restructuring proceeding.
B-9
Cost of Electric Fuel
Electric fuel expense increased by $14 million in 1998 when compared to
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 wholesale energy marketing and trading activities of the Energy
Marketing Center. This increase was partially offset by lower fuel prices for
all units, especially oil/gas-fired stations.
Fuel expense for 1997 increased by $18 million from 1996. This increase was
primarily due to PP&L's coal-fired units operating at higher output to support
increased wholesale electric market activity. The increase was slightly offset
by a decrease in the unit fuel prices for coal-fired and gas-fired generation.
Energy Purchases
Energy purchases increased by $556 million in 1998 when compared to 1997.
The increase was primarily due to greater quantities of energy purchased to
meet the increased wholesale energy marketing and trading activities of the
Energy Marketing Center, which includes increased purchases of natural gas and
capacity 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 market volatility.
Energy purchases in 1997 increased by $152 million over 1996. This increase
was primarily due to increased marketing and trading activities of the Energy
Marketing Center. Higher overall market prices of power during 1997 compared
to 1996 contributed to the increase in purchased power costs.
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 also announced its
intention to sell its Sunbury coal-fired generating station in 1999.
Depreciation and Amortization
Depreciation and amortization expenses in 1998 decreased by $50 million from
1997. This decrease reflects the write-down of impaired generation-related
assets in connection with the restructuring adjustments recorded in June 1998.
See Note 3 to Financial Statements for additional information.
Depreciation and amortization expenses in 1997 increased by $10 million from
1996. This increase was primarily due to depreciation on plant additions and
amortization of newly implemented computer software.
Other Operation and Maintenance Expenses
Other operation and maintenance expenses increased by $77 million from 1997
to 1998. This increase reflects higher costs associated with computer
information systems, and additional payroll, consultant services and other
expenses to meet the requirements of retail competition. This increase also
reflects additional software expenses, increased firm transmission costs
related to the Energy Marketing Center activities and higher provisions for
uncollectible customer accounts.
These increases were partially offset by credits recorded in connection with
the competition pilot program. The PUC has authorized PP&L to seek future
recovery of the revenue lost in 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 $14
million in 1998, and were recorded as offsets to "Other Operating Expense."
Other operation and maintenance expenses in 1997 decreased by $25 million
from 1996. Excluding the effect of underrecovered energy costs, operation and
maintenance expenses increased by $7 million in 1997. These increases were
primarily due to costs associated with the pilot program, the PUC
restructuring filing and the FERC transmission access filing.
Prior to 1997, underrecovered energy costs were accrued as energy revenues.
In 1997 and 1998, these underrecovered costs were recorded as regulatory
credits (up to a PUC-mandated cap of $31.5 million), which
B-10
are reflected in the income statement as a reduction of "Other Operating
Expense." This reflects a change in the regulatory treatment of undercollected
energy costs by the PUC. See Note 1 to Financial Statements.
Other Income
Other income increased by $65 million from 1997 to 1998. PP&L's earnings for
1998 reflect a $30 million recovery from SER as a result of a settlement
agreement. This settlement agreement resolved disputes concerning the prices
PP&L paid for power purchased from SER since 1990. The accounting treatment of
Penn Fuel Gas acquisition costs also contributed to the change in other income
from 1997 to 1998. The acquisition by PP&L Resources was originally
contemplated as a pooling of interests, and PP&L's proportionate share of
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, 1998 earnings include interest income of $6 million from
a 1988 Gross Receipts Tax settlement, and a $4 million gain from sale of non-
utility property.
Other income and deductions for 1997 decreased by $5 million from 1996. This
decrease was primarily due to a $6 million pre-tax charge for PP&L's
proportionate share of estimated costs associated with the acquisition of Penn
Fuel Gas by PP&L Resources.
Financing Costs
PP&L reduced its long-term financing costs during the past few years by
retiring long-term debt with the proceeds from the sale of securities at a
lower cost. Interest on long-term debt and dividends on preferred stock
decreased from $241 million in 1995 to $236 million in 1998, for a total
decrease of $5 million. Interest on short-term debt, net of capitalized
interest and AFUDC borrowed funds, decreased from $13 million in 1995 to $8
million in 1998.
Income Taxes
Income tax expense for 1998 increased by $26 million, or 10.5%, from 1997.
This was primarily due to an increase in pre-tax book income of $87 million.
Income tax expense for 1997 decreased by $8 million, or 3.1%, from 1996.
This was primarily due to a decrease in pre-tax book income of $17 million.
Financial Condition
Capital Expenditure Requirements
The schedule below shows PP&L's current capital expenditure projections for
the years 1999-2003 and actual spending for the year 1998.
PP&L's Capital Expenditure Requirements
Projected
------------------------
Actual
1998 1999 2000 2001 2002 2003
------ ---- ---- ---- ---- ----
(Millions of Dollars)
Construction expenditures
Generating facilities......................... $ 91 $ 97 $117 $125 $104 $ 93
Transmission and distribution facilities...... 102 110 123 125 125 135
Environmental................................. 6 13 2 2 42 71
Other......................................... 44 26 19 19 18 17
---- ---- ---- ---- ---- ----
Total Construction Expenditures............. 243 246 261 271 289 316
Nuclear fuel owned and leased................... 55 47 63 65 67 68
Other leased property........................... 26 21 21 21 21 21
---- ---- ---- ---- ---- ----
Total Capital Expen- ditures................ $324 $314 $345 $357 $377 $405
==== ==== ==== ==== ==== ====
Construction expenditures include AFUDC and Capitalized Interest which are
expected to be less than $9.5 million in each of the years 1999-2003.
B-11
PP&L's capital expenditure projections for the years 1999-2003 total about
$1.8 billion. Capital expenditure plans are revised from time to time to
reflect changes in conditions.
Financing and Liquidity
Net cash provided by operating activities decreased by $91 million in 1998
compared with 1997. This decrease was primarily due to the decline in net
income when adjusted for the impact of certain non-cash items. Earnings in
1998 benefited from lower depreciation and regulatory credits and other non-
cash transactions. Net cash provided by operating activities decreased by $13
million from 1996 to 1997.
Net cash used in investing activities was $354 million lower in 1998 than
1997. This decrease was primarily due to a $375 million loan by a subsidiary
to the holding company PP&L Resources in 1997. Net cash used in investing
activities was $278 million higher in 1997 compared with 1996. This increase
was primarily due to the $375 loan to the holding company PP&L Resources,
partially offset by lower construction expenditures and by liquidation of a
subsidiary's long-term investments to make funds available for other investing
and financing activities.
Net cash used in financing activities was $167 million higher in 1998 than
1997. This reflects a $250 million issuance of Preferred Securities in 1997,
partially offset by increased dividends paid. Net cash used in financing
activities in 1997 was $131 million lower than in 1996. This reflects the $250
million issuance of Preferred Securities in 1997, partially offset by
increased retirement of long-term debt.
From 1996 through 1998, PP&L issued $325 million of long-term debt. Proceeds
from these security sales were used, in part, to retire $621 million of long-
term debt to lower financing costs. During the years 1996-1998, PP&L also
incurred $234 million of obligations under capital leases (primarily nuclear
fuel).
PP&L Capital Funding provides debt funding for PP&L Resources and its
subsidiaries other than PP&L. In order to ensure liquidity, PP&L and PP&L
Capital Funding share a joint facility with a group of banks. This joint
facility is comprised of a 364-day revolving credit agreement and a five-year
revolving credit agreement. In March 1998, the existing 364-day revolving
credit agreement was increased from $150 million to $350 million. This
increase, when added to the $300 million five-year revolving credit agreement,
brought to $650 million the total amount of revolving credit available to PP&L
and PP&L Capital Funding under the joint agreement. In November 1998, PP&L,
PP&L Capital Funding, and PP&L Resources replaced the existing 364-day
facility with an amended and restated 364-day revolving credit arrangement
terminating in November 1999. The five-year revolving credit agreement expires
in 2002. Separately, in July 1998, PP&L Capital Funding entered into five
separate $80 million, 364-day credit facilities with five banks. PP&L
Resources guarentees all obligations of PP&L Capital Funding under the
foregoing facilities. As of December 31, 1998, no borrowings were outstanding
under any revolving credit arrangements.
Under the PUC restructuring order of August 27, 1998, PP&L is permitted to
issue transition bonds to securitize up to $2.85 billion of its stranded
costs. PP&L is planning to pursue such securitization later in 1999. The
proceeds will be used by PP&L to retire outstanding debt and to repurchase
common stock from PP&L Resources.
See Note 8 to Financial Statements for additional financing activities in
1998.
Financial Indicators
The results of 1998, 1997 and 1996 were impacted by extraordinary items,
other one-time adjustments and weather. (See "Earnings" for more information.)
The following financial indicators for PP&L reflect the elimination of these
impacts from earnings.
1998 1997 1996
----- ----- -----
Earnings available to PPL Resources, as adjusted
($millions).............................................. $ 333 $ 317 $ 320
Return on average common equity........................... 12.60% 12.06% 12.41%
Ratio of pre-tax income to interest charges............... 4.09 3.71 3.58
B-12
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 SO/2/ 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 toxin of greatest concern, but that more
evaluation is needed before it can determine whether regulation of air toxins
from fossil fuel plants is necessary. The EPA is now seeking mercury and
chlorine sampling and other data from electric generating units, including
PP&L's. 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." 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.
B-13
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 2003 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 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 2003 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 December
31, 1998, PP&L has completed work on slightly more than half of the sites
included in the consent order.
At December 31, 1998, PP&L had accrued approximately $6 million,
representing the amounts PP&L can reasonably estimate it will have to spend to
remediate sites involving the removal of hazardous or toxic substances,
including those covered by the company's consent order mentioned above. Future
cleanup or remediation work at sites currently under review, or at sites not
currently identified, may result in material additional operating costs which
PP&L cannot estimate at this time. In addition, certain federal and state
statutes, including Superfund and the Pennsylvania Hazardous Sites Cleanup
Act, empower certain governmental agencies, such as the EPA and the DEP, to
seek compensation from the responsible parties for the lost value of damaged
natural resources. The EPA and the DEP may file such compensation claims
against the parties, including PP&L, held responsible for cleanup of such
sites. Such natural resource damage claims against PP&L could result in
material additional liabilities.
General
Due to the environmental issues discussed above or other environmental
matters, PP&L may be required to modify, replace or cease operating certain
facilities to comply with statutes, regulations and actions by regulatory
bodies or courts. In this regard, PP&L also may incur capital expenditures,
operating expenses and other costs in amounts which are not now determinable
but which could be material.
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 Note 2 to Financial Statements 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 chose their
B-14
electric supplier. PP&L continued 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 could
participate in the pilot programs. Approximately 87 suppliers obtained such
licenses to participate in the pilot programs.
Reference is also made to "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'
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 prior to June 1, 1999 (increasing to
$22.41 per kilowatt-year from June 1, 1999 through December 31, 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 Note 3 to Financial Statements "Accounting for the
Effects of Certain Types of Regulation," 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. 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
B-15
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 was approved by the FERC in December 1998.
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 under the PJM Open Access
Transmission Tariff and related agreements of the PJM. The FERC accepted the
EGS Coordination Tariff for filing in October 1998 but in a later order stated
that it would issue a decision holding that the EGS Coordination Tariff did
not need to be filed with the FERC. That decision has not yet been issued.
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 was accepted by the FERC in
December 1998.
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 accepted PP&L EnergyPlus' application in December 1998.
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 a filed code of conduct governing its relationship with
affiliates that engage in the sale and/or transmission of electric energy.
Year 2000
PP&L 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
reasonable worst case scenario regarding Year 2000 issues could result in
computer shutdown or erroneous calculations causing operational problems at
the generating stations; diminished ability to monitor, control and coordinate
generation with the transmission and distribution systems; and adverse impacts
on 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 towards compliance. 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 has identified and communicated with critical suppliers, such as fuel
suppliers, in order to obtain assurances that they are in compliance with Year
2000 issues. The majority of the responses from these parties are favorable,
with some responses still being evaluated and followed-up as appropriate.
Delivery of electricity is dependent on the overall reliability of the
electric grid. PP&L is cooperating and coordinating with the North American
Electric Reliability Council and the PJM Interconnection regarding Year 2000
remediation efforts.
B-16
As of December 31, 1998, PP&L estimates that approximately 75% of mainframe
applications that will remain in production have been determined as being Year
2000 compliant. It is anticipated that all mission-critical systems (i.e.
mainframe, embedded technologies, and client server applications) will be Year
2000 ready by July 1, 1999 and all systems ready by November 30, 1999. Year
2000 compliant means computer systems or equipment with date-sensitive chips
will accurately process date and time data. Year 2000 ready means that the
computer systems or equipment with date-sensitive chips can be used on January
1, 2000, and beyond, but are not fully year 2000 compliant.
PP&L has basic contingency plans in place 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 may be necessary and, as part of the seven-
step remediation process, continues to work on identifying and developing
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 NRC, 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/ready or to submit a status report summarizing the on-going work.
PP&L filed its written response, detailing its Year 2000 compliance
activities, with the NRC in August 1998.
In July 1998, the PUC initiated a non-adversarial 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 required 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 by that date. PP&L filed its written response to these questions in
August 1998 and in November 1998 submitted testimony to the PUC that the
Company would have its mission-critical systems Year 2000 ready by July 1,
1999 and all systems ready by November 30, 1999.
At this time, PP&L has achieved the following completion percentages on the
seven steps referenced above for Year 2000 compliance: awareness, 87%;
inventory, 97%; assessment, 87%; remediation, 70%; testing, 72%;
implementation, 56%; and additional contingency plans (beyond the basic plans
referenced above), 16%.
Based upon present assessments, PP&L estimates that it will incur
approximately $15 million in Year 2000 remediation costs. Through December 31,
1998, PP&L spent approximately $8 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.
B-17
Report of Independent Accountants
To the Shareowners and Board of Directors of PP&L, Inc.
In our opinion, the accompanying consolidated balance sheet and consolidated
statements of preferred stock, of company-obligated mandatorily redeemable
preferred securities and of long-term debt and the related consolidated
statements of income, of cash flows and of shareowner's common equity present
fairly, in all material respects, the consolidated financial position of PP&L,
Inc. and subsidiaries (the "Company") at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 1, 1999
B-18
PP&L, Inc.
Management's Report on Responsibility for Financial Statements
The management of PP&L, Inc. is responsible for the preparation, integrity
and objectivity of the consolidated financial statements and all other
sections of this annual report. The financial statements were prepared in
accordance with generally accepted accounting principles and the Uniform
System of Accounts prescribed by the Federal Energy Regulatory Commission. In
preparing the financial statements, management makes informed estimates and
judgments of the expected effects of events and transactions based upon
currently available facts and circumstances. Management believes that the
financial statements are free of material misstatement and present fairly the
financial position, results of operations and cash flows of PP&L.
PP&L's consolidated financial statements have been audited by
PricewaterhouseCoopers LLP (PricewaterhouseCoopers) independent certified
public accountants. PricewaterhouseCoopers' appointment as auditors was
previously ratified by the shareowners of PP&L Resources. Management has made
available to PricewaterhouseCoopers all PP&L's financial records and related
data, as well as the minutes of shareowners' and directors' meetings.
Management believes that all representations made to PricewaterhouseCoopers
during its audit were valid and appropriate.
PP&L maintains a system of internal control designed to provide reasonable,
but not absolute, assurance as to the integrity and reliability of the
financial statements, the protection of assets from unauthorized use or
disposition and the prevention and detection of fraudulent financial
reporting. The concept of reasonable assurance recognizes that the cost of a
system of internal control should not exceed the benefits derived and that
there are inherent limitations in the effectiveness of any system of internal
control.
Fundamental to the control system is the selection and training of qualified
personnel, an organizational structure that provides appropriate segregation
of duties, the utilization of written policies and procedures and the
continual monitoring of the system for compliance. In addition, PP&L maintains
an internal auditing program to evaluate PP&L's system of internal control for
adequacy, application and compliance. Management considers the internal
auditors' and PricewaterhouseCoopers' recommendations concerning its system of
internal control and has taken actions which are believed to be cost-effective
in the circumstances to respond appropriately to these recommendations.
Management believes that PP&L's system of internal control is adequate to
accomplish the objectives discussed in this report.
The Board of Directors, acting through PP&L Resources' Audit and Corporate
Responsibility Committee, oversees management's responsibilities in the
preparation of the financial statements. In performing this function, the
Audit and Corporate Responsibility Committee, which is composed of four
independent directors, meets periodically with management, the internal
auditors and the independent certified public accountants to review the work
of each. The independent certified public accountants and the internal
auditors have free access to PP&L Resources' Audit and Corporate
Responsibility Committee and to the Board of Directors, without management
present, to discuss internal accounting control, auditing and financial
reporting matters.
Management also recognizes its responsibility for fostering a strong ethical
climate so that PP&L's affairs are conducted according to the highest
standards of personal and corporate conduct. This responsibility is
characterized and reflected in PP&L's business policies and guidelines. These
policies and guidelines address: the necessity of ensuring open communication
within PP&L; potential conflicts of interest; proper procurement activities;
compliance with all applicable laws, including those relating to financial
disclosure; and the confidentiality of proprietary information.
/s/ William F. Hecht
William F. Hecht
Chairman, President and Chief Executive Officer
/s/ John R. Biggar
John R. Biggar
Senior Vice President and Chief Financial Officer
B-19
CONSOLIDATED STATEMENT OF INCOME
PP&L, Inc. and Subsidiaries
(Millions of Dollars)
1998 1997 1996
------ ------ ------
Operating Revenues
Electric operations..................................... $2,410 $2,397 $2,428
Wholesale energy marketing and trading activities....... 1,223 650 481
Energy related businesses (Note 1)...................... 10 2 2
------ ------ ------
Total Operating Revenues.............................. 3,643 3,049 2,911
------ ------ ------
Operating Expenses
Operation
Cost of electric fuel................................... 480 466 448
Energy purchases........................................ 1,060 504 352
Other operating......................................... 594 513 531
Maintenance............................................... 180 184 191
Depreciation and amortization (Note 1).................... 335 385 375
Taxes, other than income (Note 5)......................... 185 204 203
Energy related businesses (Note 1)........................ 8 3 2
------ ------ ------
Total Operating Expenses.................................. 2,842 2,259 2,102
------ ------ ------
Operating Income.......................................... 801 790 809
Other Income.............................................. 77 12 17
------ ------ ------
Income Before Interest and Income Taxes................... 878 802 826
Interest Expense.......................................... 196 207 214
------ ------ ------
Income Before Income Taxes and Extraordinary Items........ 682 595 612
Income Taxes (Note 5)..................................... 273 247 255
------ ------ ------
Income Before Extraordinary Items......................... 409 348 357
Extraordinary Items (net of $666 income taxes) (Note 3)... (948)
------ ------ ------
Net Income (Loss) Before Dividends on Preferred Stock..... (539) 348 357
Dividends on Preferred Stock.............................. 48 40 28
------ ------ ------
Earnings Available to PP&L Resources, Inc................. $ (587) $ 308 $ 329
====== ====== ======
See accompanying Notes to Financial Statements.
B-20
CONSOLIDATED STATEMENT OF CASH FLOWS
PP&L, Inc. and Subsidiaries
(Millions of Dollars)
1998 1997 1996
----- ----- -----
Cash Flows From Operating Activities
Net income (loss) from continuing operations.............. $(539) $ 348 $ 357
Extraordinary items (net of income taxes of $666)......... (948)
----- ----- -----
Net income before extraordinary items..................... 409 348 357
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization........................... 335 385 375
Amortization of property under capital leases........... 58 68 86
Regulatory debits and credits........................... (61) (36) (10)
Deferred income taxes and investment tax credits........ 12 20 (1)
Change in current assets and current liabilities
Fuel inventories...................................... (8) 11 (14)
Other................................................. 16 (25) (38)
Other operating activities--net......................... (66) 15 44
----- ----- -----
Net cash provided by operating activities........... 695 786 799
----- ----- -----
Cash Flows From Investing Activities
Property, plant and equipment expenditures................ (297) (310) (360)
Proceeds from sales of nuclear fuel to trust.............. 54 60 93
Purchases of available-for-sale securities................ (15) (72) (90)
Sales and maturities of available-for-sale securities..... 69 88 93
Purchases and sales of other financial investments--net... 76
Loan to parent............................................ (375)
Other investing activities--net........................... 6 (4) 5
----- ----- -----
Net cash used in investing activities............... (183) (537) (259)
----- ----- -----
Cash Flows From Financing Activities
Issuance of long-term debt................................ 200 9 116
Issuance of Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts holding solely
company debentures....................................... 250
Capital contribution from parent.......................... 6 7 32
Retirement of long-term debt.............................. (266) (210) (145)
Payments on capital lease obligations..................... (58) (67) (86)
Common and preferred dividends paid....................... (412) (344) (296)
Net increase (decrease) in short-term debt................ 35 35 (79)
Other financing activities--net........................... (1) (9) (2)
----- ----- -----
Net cash used in financing activities............... (496) (329) (460)
----- ----- -----
Net Increase (Decrease) in Cash and Cash Equivalents...... 16 (80) 80
Cash and Cash Equivalents at Beginning of Period.......... 15 95 15
----- ----- -----
Cash and Cash Equivalents at End of Period................ $ 31 $ 15 $ 95
===== ===== =====
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest (net of amount capitalized).................... $ 208 $ 201 $ 208
Income taxes............................................ $ 261 $ 253 $ 289
See accompanying Notes to Financial Statements.
B-21
CONSOLIDATED BALANCE SHEET AT DECEMBER 31,
PP&L, Inc. and Subsidiaries
(Millions of Dollars)
1998 1997
------ ------
Assets
Property, Plant and Equipment
Electric utility plant in service--net (Note 1)..................
Transmission and distribution.................................. $2,179 $2,160
Generation..................................................... 1,601 4,022
General and intangible......................................... 223 232
------ ------
4,003 6,414
Construction work in progress--at cost........................... 117 185
Nuclear fuel owned and leased--net............................... 162 167
------ ------
Electric utility plant--net.................................... 4,282 6,766
Gas and oil utility plant--net................................... 28 30
Other property--net.............................................. 21 24
------ ------
4,331 6,820
------ ------
Investments
Loan to parent................................................... 429 375
Nuclear plant decommissioning trust fund (Notes 1 and 6)......... 206 163
Financial investments (Notes 1 and 7)............................ 1 52
Investment in unconsolidated affiliate at equity (Note 1)........ 17 17
Other (Note 7)................................................... 12 13
------ ------
665 620
------ ------
Current Assets
Cash and cash equivalents (Note 1)............................... 31 15
Accounts receivable (less reserve: 1998, $16; 1997, $16)
Utility customers.............................................. 163 188
Other.......................................................... 67 64
Unbilled revenues
Utility customers.............................................. 104 90
Other.......................................................... 61 36
Fuel, materials and supplies--at average cost.................... 196 200
Prepayments...................................................... 14 26
Other............................................................ 58 51
------ ------
694 670
------ ------
Regulatory Assets and Other Noncurrent Assets (Note 3)
Recoverable transition costs................................... 2,819
Other.......................................................... 329 1,362
------ ------
3,148 1,362
------ ------
$8,838 $9,472
====== ======
See accompanying Notes to Financial Statements.
B-22
1998 1997
------ ------
Liabilities
Capitalization
Common equity
Common stock................................................. $1,476 $1,476
Additional paid-in capital................................... 70 64
Earnings reinvested (Note 3)................................. 210 1,092
Capital stock expense and other.............................. (26) (20)
------ ------
1,730 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
------ ------
5,015 5,811
------ ------
Current Liabilities
Short-term debt (Note 8)..................................... 80 45
Long-term debt due within one year........................... 150 30
Capital lease obligations due within one year................ 59 58
Above market NUG purchases due within one year (Note 3)...... 105
Accounts payable............................................. 189 148
Taxes and interest accrued................................... 86 99
Dividends payable............................................ 12 81
Other........................................................ 114 107
------ ------
645 688
------ ------
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes and investment tax credits (Note 5).... 1,561 2,221
Above market NUG purchases (Note 3).......................... 775
Capital lease obligations.................................... 109 113
Other (Notes 1 and 6)........................................ 733 639
------ ------
3,178 2,973
------ ------
Commitments and Contingent Liabilities (Note 11)...............
------ ------
$8,838 $9,472
====== ======
See accompanying Notes to Financial Statements.
B-23
CONSOLIDATED STATEMENT OF SHAREOWNER'S COMMON EQUITY
PP&L, Inc. and Subsidiaries
(Millions of Dollars)
For the Years Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
Common stock at beginning of year....... $ 1,476 $ 1,476 $ 1,476
Sale of common stock..................
----------- ----------- -----------
Common stock at end of year............. 1,476 1,476 1,476
----------- ----------- -----------
Additional paid-in capital at beginning
of year................................ 64 57 25
Capital contribution from PP&L
Resources............................ 6 7 32
----------- ----------- -----------
Additional paid-in capital at end of
year................................... 70 64 57
----------- ----------- -----------
Earnings reinvested at beginning of
year................................... 1,092 1,094 1,034
Net income (loss)..................... (539) 348 357
Cash dividends declared:
Common stock........................ (295) (310) (269)
Preferred stock..................... (48) (40) (28)
----------- ----------- -----------
Earnings reinvested at end of year...... 210 1,092 1,094
----------- ----------- -----------
Capital stock expense and other at
beginning of year...................... (20) (10) (7)
Other................................. (6) (10) (3)
----------- ----------- -----------
Capital stock expense and other at end
of year................................ (26) (20) (10)
----------- ----------- -----------
Total Shareowner's Common Equity........ $ 1,730 $ 2,612 $ 2,617
=========== =========== ===========
Common stock shares at beginning of year
(a).................................... 157,300,382 157,300,382 157,300,382
Common stock issued...................
Common stock purchased................
----------- ----------- -----------
Common stock shares at end of year...... 157,300,382 157,300,382 157,300,382
----------- ----------- -----------
- -------
(a) No par value. 170,000,000 shares authorized. All common shares of PP&L
stock are owned by PP&L Resources.
See accompanying Notes to Financial Statements.
B-24
CONSOLIDATED STATEMENT OF PREFERRED STOCK AT DECEMBER 31,
PP&L, Inc. and Subsidiaries (a)
(Millions of Dollars)
Outstanding Shares
----------- Outstanding Shares
1998 1997 1998 Authorized
----- ----- ----------- ----------
Preferred Stock--$100 par, cumulative
4 1/2%.................................... $ 53 $ 53 530,189 629,936
Series.................................... 413 413 4,133,556 10,000,000
----- -----
$ 466 $ 466
===== =====
Details of Preferred Stock (b)
Sinking Fund
Provisions
------------------------
Optional
Outstanding Shares Redemption Shares to be
----------- Outstanding Price Per Redeemed Redemption
1998 1997 1998 Share Annually Period
----- ----- ----------- ---------- ------------ ----------
With Sinking Fund
Requirements
Series Preferred
5.95%.................. $ 30 $ 30 300,000 (c) 300,000 April 2001
6.05%.................. 25 25 250,000 (c) 250,000 April 2002
6.125%................. 115 115 1,150,000 (c) (d) 2003-2008
6.15%.................. 25 25 250,000 (c) 250,000 April 2003
6.33%.................. 100 100 1,000,000 (c) (e) 2003-2008
----- -----
$ 295 $ 295
===== =====
Without Sinking Fund
Requirements
4 1/2% Preferred....... $ 53 $ 53 530,189 $110.00
Series Preferred
3.35%.................. 4 4 41,783 103.50
4.40%.................. 23 23 228,773 102.00
4.60%.................. 6 6 63,000 103.00
6.75%.................. 85 85 850,000 (c)
----- -----
$ 171 $ 171
===== =====
Increases (Decreases) in Preferred Stock
There were no issuances or redemptions of preferred stock in 1998, 1997 or
1996.
- -------
(a) Each share of PP&L's preferred stock entitles the holder to one vote on
any question presented to PP&L's shareowners' meetings. There were
5,000,000 shares of PP&L's preference stock authorized; none were
outstanding at December 31, 1998 and 1997, respectively.
(b) The involuntary liquidation price of the preferred stock is $100 per
share. The optional voluntary liquidation price is the optional redemption
price per share in effect, except for the 4 1/2% Preferred Stock for which
such price is $100 per share (plus in each case any unpaid dividends).
(c) These series of preferred stock are not redeemable prior to the following
years: 5.95%, 2001; 6.05%, 2002; 6.125%, 6.15%, 6.33% and 6.75%, 2003.
(d) Shares to be redeemed annually on October 1 as follows: 2003-2007, 57,500;
2008, 862,500.
(e) Shares to be redeemed annually on July 1 as follows: 2003-2007, 50,000;
2008, 750,000.
See accompanying Notes to Financial Statements.
B-25
CONSOLIDATED STATEMENT OF COMPANY-OBLIGATED MANDATORILY
REDEEMABLE PREFERRED SECURITIES AT DECEMBER 31,
PP&L, Inc. and Subsidiaries (a)
(Millions of Dollars)
Outstanding Outstanding
----------- -----------
1998 1997 1998 Authorized Maturity(b)
----- ----- ----------- ---------- -----------
Company-Obligated Mandatorily
Redeemable Preferred
Securities of Subsidiary
Trusts Holding Solely Company
Debentures--$25 per security
8.10%........................ $ 150 $ 150 6,000,000 6,000,000 July 2002
8.20%........................ 100 100 4,000,000 4,000,000 April 2002
----- -----
$ 250 $ 250
===== =====
- -------
(a) In 1997 PP&L arranged for the issuance of a total of $250 million of
company-obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely company debentures by PP&L Capital Trust
and PP&L Capital Trust II, two Delaware statutory business trusts. These
preferred securities are supported by a corresponding amount of junior
subordinated deferrable interest debentures issued by PP&L to the trusts.
PP&L owns all of the common securities, representing the remaining
undivided beneficial ownership interest in the assets of the trusts. The
proceeds derived from the issuance of the Preferred Securities and the
common securities were used by PP&L Capital Trust and PP&L Capital Trust
II to acquire $103 million and $155 million principal amount of Junior
Subordinated Deferrable Interest Debentures, ("Subordinated Debentures")
respectively. PP&L has guaranteed all of the trusts' obligations under the
Preferred Securities.
(b) The preferred securities are subject to mandatory redemption, in whole or
in part, upon the repayment of the Subordinated Debentures at maturity or
their earlier redemption. At the option of PP&L, the Subordinated
Debentures are redeemable on and after the dates shown above in whole at
any time or in part from time to time. The amount of preferred securities
subject to such mandatory redemption will be equal to the amount of
related Subordinated Debentures maturing or being redeemed. The redemption
price is $25 per security plus an amount equal to accumulated and unpaid
distributions to the date of redemption.
See accompanying Notes to Financial Statements.
B-26
CONSOLIDATED STATEMENT OF LONG-TERM DEBT AT DECEMBER 31,
PP&L, Inc. and Subsidiaries
(Millions of Dollars)
Outstanding
----------------
1998 1997 Maturity(b)
------ ------ -----------------
First Mortgage Bonds (a)
5 1/2%............................... $ 150 April 1, 1998
6%................................... $ 125 125 June 1, 2000
7 3/4%............................... 150 150 May 1, 2002
6 7/8%............................... 100 100 February 1, 2003
6 1/8% to 6 7/8%..................... 625(c) 425 2004-2008
7.70%................................ 200 200 2009-2013(d)
7 3/8%............................... 100 100 2014-2018
6 3/4% to 9 3/8%..................... 815 815 2019-2023
7.30%................................ 150 150 2024-2028
First Mortgage Pollution Control Bonds
(a)
6.40% Series H....................... 90 90 November 1, 2021
5.50% Series I....................... 53 53 February 15, 2027
6.40% Series J....................... 116 116 September 1, 2029
6.15% Series K....................... 55 55 August 1, 2029
------ ------
2,579 2,529
Unsecured promissory notes............. 116
Pollution Control Revenue Bonds........ 9 9
------ ------
2,588 2,654
Unamortized (discount) and premium--
net................................... (19) (21)
------ ------
2,569 2,633
Less amount due within one year........ 150
------ ------
Total PP&L long-term debt.......... $2,569 $2,483
====== ======
- -------
(a) Substantially all owned electric utility plant is subject to the lien of
PP&L's Mortgage.
(b) Aggregate long-term debt maturities through 2003 are (millions of
dollars): 2000, $125; 2002, $150; 2003, $100. There are no bonds
outstanding that have sinking fund requirements.
(c) 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.
(d) Any registered owner of these bonds has the right to require PP&L to
redeem such owner's bonds on October 1, 1999 at a price of 100% of the
principal amount.
See accompanying Notes to Financial Statements.
B-27
NOTES TO FINANCIAL STATEMENTS
Terms and abbreviations appearing in Notes to Financial Statements are
explained in the glossary.
1. Summary of Significant Accounting Policies
Business and Consolidation
As of December 31, 1998, PP&L Resources was the parent holding company of
PP&L, PP&L Global, PP&L Spectrum, PP&L Capital Funding, Penn Fuel Gas, H.T.
Lyons and McClure. PP&L is an operating public utility which provides
electricity delivery service in eastern and central Pennsylvania, sells retail
electricity throughout Pennsylvania and markets wholesale electricity in 28
states and Canada. PP&L Energy Plus, a PP&L subsidiary, sells competitively-
priced energy and energy services to newly deregulated markets.
The consolidated financial statements include the accounts of PP&L and its
direct and indirect wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated.
The investment in Safe Harbor Water Power Corporation, of which PP&L owns
one-third of the outstanding capital stock representing one-half of the voting
securities, is recorded using the equity method of accounting.
Reclassification
Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform to the current presentation.
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 generated by PP&L's wholesale energy and trading
activities are now separately disclosed. Also, income taxes are no longer
reflected as "Operating Expense," which was the traditional disclosure used by
utilities. Lastly, nuclear decommissioning expense had historically been
classified as "Other operating" expense. These expenses have been reclassified
as depreciation expense.
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 Note
3 for further information.
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.
Accounting Records
The accounting records for PP&L are maintained in accordance with the
Uniform System of Accounts prescribed by the FERC and adopted by the PUC.
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.
B-28
Utility Plant
Additions to utility plant and replacement of units of property are
capitalized at cost. AFUDC is capitalized as part of the construction costs
for regulated projects. Effective June 30, 1998, the recording of AFUDC was
discontinued on generation-related construction projects, since these assets
are no longer subject to the provisions of SFAS 71. Instead, capitalized
interest is recorded on generation-related projects in accordance with SFAS
34, "Capitalizing Interest Costs."
The cost of units of depreciable property retired or replaced is charged to
accumulated depreciation. Expenditures for maintenance and repairs of property
and the cost of replacing items determined to be less than a unit of property
are charged to operating expense. The cost to retire depreciable units of
generation-related property is charged to operating expense while the cost to
retire depreciable units of regulated property is charged to accumulated
depreciation.
Following are the classes of Electric Utility Plant in Service, with
associated accumulated depreciation reserves, at December 31, 1998 and
December 31, 1997 (millions of dollars):
Electric
Transmission General Utility
& & Plant In
Distribution Generation Intangible Service
------------ ---------- ---------- --------
December 31, 1998:
Original Cost.................... $ 3,395 $ 6,351 $ 383 $10,129
Accumulated Depreciation Reserve. (1,216) (4,750) (160) (6,126)
------- ------- ----- -------
$ 2,179 $ 1,601 $ 223 $ 4,003
======= ======= ===== =======
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
December 31, 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.
For financial statement purposes, depreciation is being provided over the
estimated useful lives of property using a straight-line method. Certain
property at the Susquehanna Station was depreciated at an annual rate of $173
million from October 1995 through December 1998, at which point this certain
property was fully depreciated. Provisions for depreciation, as a percent of
average depreciable property, approximated 3.7% in 1998, and 3.8% in 1997 and
1996.
Nuclear Decommissioning and Fuel Disposal
An annual provision for PP&L's share of the future cost to decommission the
Susquehanna station, equal to the amount allowed for ratemaking purposes, is
charged to depreciation expense. Such amounts are invested in external trust
funds which can be used only for future decommissioning costs. See Note 6.
The DOE is responsible for the permanent storage and disposal of spent
nuclear fuel removed from nuclear reactors. PP&L pays the DOE a fee for future
disposal services and recovers such costs in customer rates. PP&L has joined
other utilities in a federal lawsuit to suspend payments to the DOE and to
place the fees in escrow unless that department begins accepting nuclear fuel
as agreed to in its contract with the utilities.
B-29
Financial Investments
Securities subject to the requirements of SFAS 115 "Accounting for Certain
Investments in Debt and Equity Securities" are carried at fair value,
determined at the balance sheet date. Net unrealized gains on available-for-
sale securities are included in common equity. Net unrealized gains and losses
on trading securities are included in income. Net unrealized gains and losses
on securities that are not available for unrestricted use due to regulatory or
legal reasons are reflected in the related asset and liability accounts.
Realized gains and losses on the sale of securities are recognized utilizing
the specific cost identification method.
Premium on Reacquired Long-Term Debt
In accordance with SFAS 71, PP&L deferred the premiums and expenses to
redeem long-term debt and amortized these costs over the life of the new debt.
If no new debt was issued to refinance the retired debt, these costs were
amortized over the remaining life of the retired debt. Effective June 30,
1998, losses on reacquired debt attributable to the generation portion of
PP&L's business are being expensed as incurred in accordance with SFAS 4,
"Reporting Gains and Losses from Extinguishment of Debt."
Accounting for Price Risk Management
PP&L engages in price risk management activities for both energy trading and
non-trading activities as defined by EITF 98-10, "Accounting for Contracts
Involved in Energy Trading and Risk Management Activities." During 1998, the
commodity instruments used were forward and option contracts that require
physical delivery of the commodity. These instruments were reflected in the
financial statements using the accrual method of accounting. As of January 1,
1999, PP&L adopted mark-to-market accounting for energy trading contracts, in
accordance with EITF 98-10, and gains and losses from changes in market prices
will be reflected in Energy Purchases on the Consolidated Statement of Income.
PP&L will continue to use accrual accounting for physical commodity
instruments that qualify as hedges of non-trading activities until it adopts
SFAS 133 "Accounting for Derivative Instruments and Hedging Activities" on
January 1, 2000. Commodity instruments that qualify as hedges manage exposure
to market fluctuations in the price of electricity and fuels needed to produce
electricity. In order to qualify as a hedge, the price movements in the
commodity derivatives must be highly correlated with the price movements of
the underlying hedged commodity. When a hedge relationship is terminated, the
gains accrued to date will be included in Energy Purchases when the underlying
hedged physical transaction closes; losses accrued will be recognized
immediately in Energy Purchases.
In 1999, PP&L expects to expand its use of commodity instruments to include
futures, swaps and financial options. These instruments, which will permit
cash settlement, will be recorded at fair value on the Consolidated Balance
Sheet. Gains and losses on instruments that qualify as hedges will be
recognized in income when the underlying hedged physical transaction closes
and will be included in Energy Purchases. Gains and losses related to these
transactions, to the extent they are not yet settled in cash, will be reported
as Current Assets or Liabilities, in the Consolidated Balance Sheet until
recognized in income, until PP&L adopts SFAS 133 on January 1, 2000. Gains and
losses on instruments considered trading activities will be recognized
currently in Energy Purchases.
PP&L has utilized a written call option to manage the interest rate on a
portion of its outstanding debt. The premium received is being amortized
against interest expense over the expected life of the debt.
Capital Leases
Leased property of PP&L capitalized on the Consolidated Balance Sheet
consists solely of nuclear fuel. Future lease payments for nuclear fuel are
based on the quantity of electricity produced at the Susquehanna Station. The
maximum amount of nuclear fuel available for lease under current arrangements
is $200 million.
Revenues--Electric and Gas Operations
Electric revenues are recorded based on the amount of electricity delivered
to retail customers through the end of each calendar month. This includes
amounts customers will be billed for electricity delivered from the time
meters were last read to the end of the month.
B-30
During 1998, PP&L's STAS was zero. This mechanism can be used in the future
if needed. The SBRCA expired effective July 1, 1997. The ECR was terminated
effective January 1, 1997, and was rolled into base rates. In 1997 and 1998,
the PUC authorized PP&L to record undercollected energy costs as a regulatory
asset. This regulatory asset was recovered during the restructuring
proceeding. See Notes 2 and 3.
Income Taxes
PP&L and its wholly-owned subsidiaries file a consolidated federal income
tax return with PP&L Resources.
The provision for PP&L's deferred income taxes for regulated assets is based
upon the ratemaking principles reflected in rates established by the PUC and
FERC. The difference in the provision for deferred income taxes for regulated
assets and the amount that otherwise would be recorded under generally
accepted accounting principles is deferred and included in taxes recoverable
through future rates on the Consolidated Balance Sheet. See Note 5.
Investment tax credits were deferred when utilized and are amortized over
the average lives of the related assets.
Pension Plan and Other Postretirement and Postemployment Benefits
PP&L has a noncontributory pension plan covering substantially all
employees. Subsidiary companies of PP&L formerly engaged in coal mining have a
noncontributory pension plan for substantially all non-bargaining, full-time
employees. Funding is based upon actuarially determined computations that take
into account the amount deductible for income tax purposes and the minimum
contribution required under the Employee Retirement Income Security Act of
1974.
For information on other postretirement and postemployment benefits, see
Note 9.
Cash Equivalents
All highly liquid debt instruments purchased with original maturities of
three months or less are considered to be cash equivalents.
Comprehensive Income
In 1997 the FASB issued SFAS 130, "Reporting Comprehensive Income." This
statement required disclosure of "comprehensive income," defined as changes in
equity other than from transactions with shareowners. Comprehensive income
consists of net income, as well as holding gains and losses of certain assets
(such as available-for-sale securities), foreign currency translation
adjustments and pensions liability adjustments. The comprehensive income of
PP&L is not materially different from net income for the years ended December
31, 1998, 1997 and 1996.
2. PUC Restructuring Proceeding
In August 1998, the PUC entered a Final Order approving a "Joint Petition
for Full Settlement of PP&L'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 electric
rates to reflect separate prices for the transmission and distribution
charges, the CTC (and, if applicable, the ITC), and a "shopping credit" for
customers choosing an alternate electric supplier. These shopping credits
vary among customer classes and will increase over the transition period to
reflect decreases in the CTC.
B-31
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.
B-32
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.
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 prior to June 1, 1999 (increasing to
$22.41 per kilowatt-year from June 1, 1999 through December 31, 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.
3. 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
B-33
has deferred certain costs pursuant to rate actions of the PUC and the FERC
and is recovering, or expects to recover, such costs in electric rates charged
to customers.
The 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 came to a consensus on
Issue 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 performed in accordance with 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 had 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.
B-34
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 December 31, 1998, $311 million of regulatory assets, other
than the recoverable transition costs, remain on PP&L's books. These
regulatory assets will continue to be recovered through regulated transmission
and distribution rates over periods ranging from one to 31 years.
4. 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 provided 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.
PP&L provides BG&E with 129,000 kilowatts, or 6.6%, of its share of capacity
and related energy from the Susquehanna station. Sales to BG&E will continue
through May 2001.
5. Income and Other Taxes
For 1998, 1997 and 1996, the corporate federal income tax rate was 35%, and
the Pa. CNI rate was 9.99%.
The tax effects of significant temporary differences comprising PP&L net
deferred income tax liability were as follows (millions of dollars):
1998 1997
------ ------
Deferred tax assets
Deferred investment tax credits.............................. $ 59 $ 82
Non-utility generation contracts over market price &
buybacks.................................................... 389
Accrued pension costs........................................ 99 77
Contribution in aid of construction.......................... 22 19
Other........................................................ 159 45
Valuation allowance.......................................... (4) (4)
------ ------
724 219
====== ======
Deferred tax liabilities
Electric utility plant--net.................................. 719 1,755
Restructuring--CTC........................................... 1,169
Taxes recoverable through Future rates....................... 100 377
Reacquired debt costs........................................ 13 43
Other........................................................ 66 44
------ ------
2,067 2,219
------ ------
Net deferred tax liability..................................... $1,343 $2,000
====== ======
B-35
Details of the components of income tax expense, a reconciliation of federal
income taxes derived from statutory tax rates applied to income from
continuing operations for accounting purposes, and details of taxes, other
than income are as follows (millions of dollars):
1998 1997 1996
---- ---- ----
Income Tax Expense
Provision--Federal........................................... $198 $170 $191
State............................................. 64 58 65
---- ---- ----
262 228 256
==== ==== ====
Deferred--Federal............................................ 18 20 3
State.............................................. 3 9 6
---- ---- ----
21 29 9
==== ==== ====
Investment tax credit, net--Federal.......................... (10) (10) (10)
---- ---- ----
273 247 255
==== ==== ====
Total income tax Expense--Federal............................ 206 180 184
State.............................. 67 67 71
---- ---- ----
$273 $247 $255
==== ==== ====
Reconciliation of Income Tax Expense
Indicated federal income tax on pre-tax income before
extraordinary item at statutory tax rate--35%............... $230 $209 $214
Increase (decrease) due to:
State income taxes......................................... 43 40 44
Flow through of depreciation differences not previously
normalized................................................ 9 22 20
Amortization of investment tax credit...................... (10) (10) (10)
Research & experimentation income tax credits.............. (1) (1) (5)
Other...................................................... 2 (13) (8)
---- ---- ----
43 38 41
---- ---- ----
Total income tax expense..................................... $273 $247 $255
==== ==== ====
Effective income tax rate.................................... 40.0% 41.5% 41.7%
Taxes, Other Than Income
State gross receipts....................................... $104 $104 $105
State utility realty....................................... 41 46 44
State capital stock........................................ 17 34 34
Social security and other.................................. 23 20 20
---- ---- ----
$185 $204 $203
==== ==== ====
6. Nuclear Decommissioning Costs
PP&L's most recent estimate of the cost to decommission the Susquehanna
station was completed in 1993 and was a site-specific study, based on
immediate dismantlement and decommissioning of each unit following final
shutdown. The study indicates that PP&L's 90% share of the total estimated
cost of decommissioning the Susquehanna station is approximately $724 million
in 1993 dollars. The estimated cost includes decommissioning the radiological
portions of the station and the cost of removal of nonradiological structures
and materials. The operating licenses for Units 1 and 2 expire in 2022 and
2024, respectively.
Decommissioning costs have been historically charged to operating expense
and have been based upon amounts included in customer rates. Beginning in
1998, decommissioning costs have been reclassified as a component of
depreciation expense. Decommissioning charges were $12 million in each of the
last three years. Beginning in January 1999, in accordance with the PUC's
Restructuring Decision, decommissioning costs will be recovered from customers
through the CTC over the 11 year life of the CTC rather than the remaining
life of Susquehanna. The recovery will include a return on unamortized
decommissioning costs.
B-36
Amounts collected from customers for decommissioning, less applicable taxes,
are deposited in external trust funds for investment and can be used only for
future decommissioning costs. The market value of securities held and accrued
income in the trust funds at December 31, 1998 and 1997 aggregated
approximately $206 million and $163 million, respectively. The trust funds
experienced, on a fair market value basis, a $31 million net gain in 1998,
which includes net unrealized appreciation of $26 million, and a net gain in
1997 of $24 million, which includes net unrealized appreciation of $18
million. The trust fund activity is reflected in the nuclear plant
decommissioning trust fund and in other noncurrent liabilities on the
Consolidated Balance Sheet. Accrued nuclear decommissioning costs were $209
million and $166 million at December 31, 1998 and 1997, respectively.
The FASB issued an exposure draft on the accounting for liabilities related
to closure and removal of long-lived assets, including decommissioning of
nuclear power plants. As a result, current industry accounting practices for
decommissioning may change, including the possibility that the estimated cost
for decommissioning could be recorded as a liability at the present value of
the estimated future cash outflows that will be required to satisfy those
obligations. Due to the FASB's recognition that these issues intertwine with
other unresolved accounting issues, the FASB has not yet determined when it
will issue another exposure draft or a final statement.
7. Financial Instruments
The carrying amount shown on the Consolidated Balance Sheet and the
estimated fair value of PP&L's financial instruments are as follows (millions
of dollars):
December 31, December 31,
1998 1997
--------------- ---------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ -------- ------
Assets
Nuclear plant decommissioning trust fund (a)... $ 206 $ 206 $ 163 $ 163
Financial investments (a)...................... 1 1 58 62
Other investments.............................. 12 12 13 13
Cash and cash equivalents...................... 31 31 15 15
Other financial instruments included in other
current assets................................ 5 5 3 3
Liabilities
Preferred stock with sinking fund requirements
(b)........................................... 295 312 295 308
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts
holding solely company debentures (b)......... 250 259 250 256
Long-term debt (b)............................. 2,569 2,761 2,633 2,793
Commercial paper and bank loans................ 80 80 45 45
- -------
(a) The carrying value of these financial instruments generally is based on
established market prices and approximates fair value.
(b) The fair value generally is based on quoted market prices for the
securities where available and estimates based on current rates offered to
PP&L where quoted market prices are not available.
8. Credit Arrangements & Financing Activities
PP&L issues commercial paper and, from time to time, borrows from banks to
provide short-term funds for PP&L's general corporate purposes. Bank
borrowings generally bear interest at rates negotiated at the time of the
borrowing. At December 31, 1998, PP&L had $80 million of commercial paper
outstanding.
The weighted average interest rate on short-term borrowings was 6.1% and
6.6% at December 31, 1998 and 1997, respectively, for PP&L.
In order to ensure liquidity, PP&L and PP&L Capital Funding, whose purpose
is to provide debt financing for PP&L Resources and its subsidiaries other
than PP&L, share a joint facility with a group of banks. This joint facility
is comprised of a 364-day revolving credit agreement and a five-year revolving
credit agreement. In March 1998, the existing 364-day revolving credit
agreement was increased from $150 million to $350 million. This increase, when
added to the $300 million five-year revolving credit agreement, brought to
$650 million the total
B-37
amount of revolving credit available to PP&L and PP&L Capital Funding under
the joint agreement. In November 1998, PP&L, PP&L Capital Funding and PP&L
Resources replaced the existing 364-day facility with an amended and restated
364-day revolving credit agreement terminating in November 1999. The five-year
revolving credit agreement expires in 2002. As of December 31, 1998, no
borrowings were outstanding under any revolving credit agreements.
In April 1998, PP&L retired $150 million principal amount of First Mortgage
Bonds, 5 1/2% Series that matured at that time.
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.
PP&L leases its nuclear fuel from a trust. The maximum financing capacity of
the trust under existing credit arrangements is $200 million. As of December
31, 1998, the trust had issued $188 million of commercial paper to support
nuclear fuel purchases.
Under the PUC restructuring order of August 27, 1998, PP&L is permitted to
issue transition bonds to securitize up to $2.85 billion of its stranded
costs. PP&L is planning to pursue such securitization later in 1999. The
proceeds are expected to be used by PP&L to retire outstanding debt and to
repurchase common stock from PP&L Resources.
9. Pension Plan and Other Postretirement and Postemployment Benefits
Pension Plan
PP&L has a funded, noncontributory defined benefit pension plan covering
substantially all employees. Benefits are based upon a participant's earnings
and length of participation in the plan, subject to meeting certain minimum
requirements.
PP&L has an unfunded, supplemental retirement plan for certain management
employees. Benefit payments pursuant to this supplemental plan are made
directly by PP&L. PP&L recently terminated a similar nonqualified retirement
plan for the benefit of its directors. At December 31, 1998, the projected
benefit obligation of these supplemental plans was approximately $29 million.
The components of PP&L's net periodic pension cost for the three plans were
(millions of dollars):
1998 1997 1996
---- ---- ----
Service cost-benefits earned during the period................ $ 35 $ 32 $ 32
Interest cost................................................. 67 64 61
Expected return on plan assets................................ (86) (77) (71)
Net amortization and deferral................................. (13) (11) (7)
---- ---- ----
Net periodic pension cost..................................... $ 3 $ 8 $ 15
==== ==== ====
B-38
The net periodic pension cost charged to operating expenses was $2 million
in 1998, $5 million in 1997 and $9 million in 1996. The balance was charged to
construction and other accounts. The funded status of PP&L's Plan at December
31 was (millions of dollars):
1998 1997
------ ------
Change in Plan Assets:
Fair value of plan assets at beginning of year............... $1,396 $1,187
Actual return on plan assets................................. 240 254
Actual expense paid.......................................... (3) (3)
Net benefits paid............................................ (42) (42)
------ ------
Fair value of plan at end of year............................ 1,591 1,396
------ ------
Change in Benefit Obligation
Net benefit obligation at beginning of year.................. 962 887
Service cost................................................. 35 32
Interest cost................................................ 66 63
Plan amendments.............................................. 66
Actuarial loss............................................... 70 25
Special termination benefits................................. 9
Actual expense paid.......................................... (3) (3)
Net benefits paid............................................ (42) (42)
------ ------
Net benefit obligation at end of year.......................... 1,163 962
------ ------
Plan assets in excess of projected benefit obligation.......... 428 434
Unrecognized transition assets (being amortized over 23 years). (50) (54)
Unrecognized prior service cost................................ 115 52
Unrecognized net gain.......................................... (707) (636)
------ ------
Accrued expense................................................ $ (214) $ (204)
====== ======
The weighted average discount rate used in determining the actuarial present
value of projected benefit obligations was 6.25% and 6.75% on December 31,
1998 and 1997, respectively. The rate of increase in future compensation used
in determining the actuarial present value of projected benefit obligations
was 5.0% on December 31, 1998 and 1997. The assumed long-term rates of return
on assets used in determining pension cost in 1998 and 1997 was 8.0%. Plan
assets consist primarily of common stocks, government and corporate bonds and
temporary cash investments.
PP&L's subsidiaries formerly engaged in coal mining have a noncontributory
defined benefit pension plan covering substantially all non-bargaining unit,
full-time employees, which is fully funded and in a separate account managed
by an insurance company. This plan was amended to freeze benefit accruals and
benefit increases effective June 1996. In addition, the companies are liable
under federal and state laws to pay black lung benefits to claimants and
dependents with respect to approved claims, and are members of a trust which
was established to facilitate payment of such liabilities. Such costs were not
material in 1998, 1997 and 1996.
Postretirement Benefits Other Than Pensions
Substantially all employees of PP&L and its subsidiaries will become
eligible for certain health care and life insurance benefits upon retirement.
PP&L sponsors four health and welfare benefit plans that cover substantially
all management and bargaining unit employees upon retirement. One plan
provides for retiree health care benefits to certain management employees,
another plan provides retiree health care benefits to bargaining unit
employees, a third plan provides retiree life insurance benefits to certain
management employees up to a specified amount and a fourth plan provides
retiree life insurance benefits to bargaining unit employees.
Dollar limits have been established for the amount PP&L will contribute
annually toward the cost of retiree health care for employees retiring after
March 1993.
The PUC Decision in 1995 permitted recovery of the PUC-jurisdictional amount
of retiree health care costs resulting from the adoption of SFAS 106. The PUC
Decision permitted PP&L to recover, over a period of about 17 years, the
amount of SFAS 106 costs deferred. In June 1998, the generation-related
portion of these costs were written off as part of the PUC restructuring
proceeding and the FERC settlement with 16 small utilities.
B-39
In December 1993, PP&L established a separate VEBA for each of the four
health and welfare benefit plans for retirees. After making initial
contributions, additional funding of the trusts was deferred pending
resolution of PP&L's ability to recover the costs of the plans in rates.
Continued funding of these trusts was subject to the resolution of the OCA
appeal of the PUC Decision. In 1997, the Pennsylvania Supreme Court ruled that
the Commonwealth Court's decision to uphold the PUC Decision was final. In
1998, PP&L contributed an additional $25 million to these VEBAs.
The following table sets forth the plans' combined funded status reconciled
with the amount shown on PP&L's Consolidated Balance Sheet as of December 31
(millions of dollars):
1998 1997
----- -----
Change in Benefit Obligation:
Net benefit obligation at beginning of year.................... $ 237 $ 249
Service cost................................................... 4 4
Interest cost.................................................. 16 17
Plan amendments................................................ 10
Actuarial (gain) loss.......................................... 42 (22)
Net benefits paid.............................................. (13) (11)
----- -----
Net benefit obligation at end of year.......................... 296 237
----- -----
Change in Plan Assets:
Fair value of plan assets at beginning of year................. 64 31
Actual return on plan assets................................... 13 2
Employer contributions......................................... 37 42
Net benefits paid.............................................. (13) (11)
----- -----
Fair value of plan assets at end of year......................... 101 64
----- -----
Accumulated postretirement benefit obligation in excess of plan
assets.......................................................... 195 173
Unrecognized prior service costs................................. (14) (4)
Unrecognized net loss............................................ (44) (11)
Unrecognized transition obligation (being amortized over 20
years).......................................................... (122) (131)
----- -----
Accrued postretirement benefit cost.............................. $ 15 $ 27
===== =====
The net periodic postretirement benefit cost included the following
components (millions of dollars):
1998 1997 1996
---- ---- ----
Service cost--benefits attributed to service during the period... $ 4 $ 4 $ 4
Interest cost on accumulated postretirement benefit obligation. 16 17 15
Actual return on plan assets..................................... (4) (2) (1)
Net amortization and deferral.................................... 9 10 9
--- --- ---
Net periodic postretirement benefit cost......................... $25 $29 $27
=== === ===
Retiree health and benefits costs charged to operating expenses were
approximately $19 million in 1998, $23 million in 1997, and $20 million in
1996. Costs in excess of the amount charged to expense were charged to
construction and other accounts.
For measurement purposes, an 7.75% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1999; the rate was
assumed to decrease gradually to 6% by 2006 and remain at that level
thereafter. Increasing the assumed health care cost trend rates by 1% in each
year would increase the accumulated postretirement benefit obligation as of
December 31, 1998, by about $13 million and the aggregate of the service and
interest cost components of net periodic postretirement benefit cost for the
year then ended by about $1 million.
In determining the accumulated postretirement benefit obligation, the
weighted average discount rate used was 6.25% and 6.75% on December 31, 1998
and 1997, respectively. The trusts that are holding the plan assets, except
for retiree health care benefits to certain management employees, are tax-
exempt. The expected long-term rate of return on plan assets for the tax-
exempt trusts was 6.35% and 6.5% on December 31, 1998 and 1997, respectively.
B-40
PP&L and its subsidiaries formerly engaged in coal mining accrued an
additional liability for the cost of health care of retired miners previously
employed by them. The liability, based on the present value of future
benefits, was estimated at $50 million and $51 million as of December 1998 and
1997, respectively. In December 1997, PP&L contributed $25 million to a VEBA
to partially fund these health care costs. There were no funding contributions
made in 1998.
Postemployment Benefits
PP&L provides health and life insurance benefits to disabled employees and
income benefits to eligible spouses of deceased employees. Postemployment
benefits charged to operating expenses were not material.
10. Jointly Owned Facilities
At December 31, 1998, PP&L or its subsidiary owned undivided interests in
the following facilities (millions of dollars):
Generating Stations Merrill
------------------------------ Creek
Susquehanna Keystone Conemaugh Reservoir
----------- -------- --------- ---------
Ownership interest..................... 90.00% 12.34% 11.39% 8.37%
Electric utility plant in service...... $4,085 $ 68 $ 103
Other property......................... $ 22
Accumulated depreciation............... 3,388 39 45 10
Construction work in progress.......... 53 1
Each participant in these facilities provides its own financing. PP&L
receives a portion of the total output of the generating stations equal to its
percentage ownership. PP&L's share of fuel and other operating costs
associated with the stations is reflected on the PP&L Consolidated Statement
of Income. The Merrill Creek Reservoir provides water during periods of low
river flow to replace water from the Delaware River used by PP&L and other
utilities in the production of electricity.
11. Commitments and Contingent Liabilities
Construction Expenditures
PP&L's construction expenditures for the period 1999-2003 are estimated to
aggregate $1.8 billion, including AFUDC and capitalized interest. For
discussion pertaining to construction expenditures, see Review of Financial
Condition and Results of Operations under the caption "Financial Condition--
Capital Expenditure Requirements."
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 December 31, 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 $9.7 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.
B-41
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 SO/2/ 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. EPA is now seeking mercury and chlorine
sampling and other data from electric generating units including PP&L's. 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. 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.
B-42
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 2003 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 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 2003 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 December
31, 1998, PP&L has completed work on slightly more than half of the sites
included in the consent order.
At December 31, 1998, PP&L had accrued approximately $6 million,
representing the amount PP&L can reasonably estimate it will have to spend to
remediate sites involving the removal of hazardous or toxic substances,
including those covered by the consent order mentioned above. Future cleanup
or remediation work at sites currently under review, or at sites not currently
identified, may result in material additional operating costs which PP&L
cannot estimate at this time. In addition, certain federal and state statutes,
including Superfund and the Pennsylvania Hazardous Sites Cleanup Act, empower
certain governmental agencies, such as the EPA and the DEP, to seek
compensation from the responsible parties for the lost value of damaged
natural resources. The EPA and the DEP may file such compensation claims
against the parties, including PP&L, held responsible for cleanup of such
sites. Such natural resource damage claims against PP&L could result in
material additional liabilities.
General
Due to the environmental issues discussed above or other environmental
matters, PP&L may be required to modify, replace or cease operating certain
facilities to comply with statutes, regulations and actions by regulatory
bodies or courts. In this regard, PP&L also may incur capital expenditures,
operating expenses and other costs in amounts which are not now determinable
but which could be material.
Loan Guarantees of Affiliated Companies
At December 31, 1998, PP&L provided a guarantee in the amount of $12 million
in support of one of its subsidiaries.
Source of Labor Supply
As of December 31, 1998, PP&L had 6,344 full-time employees. Approximately
65 percent of these full-time employees are represented by the IBEW. PP&L
reached a new labor agreement with the IBEW in 1998. This agreement expires in
May 2002.
12. 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 did
not have a material impact on PP&L's financial statements.
B-43
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. SFAS 133 also expanded the definition of a
derivative to include most commodity contracts that require physical delivery.
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 and its
subsidiaries 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 is not yet
determinable but may be material.
In November 1998, the EITF reached a consensus on EITF Issue 98-10
"Accounting for Contracts Involved in Energy Trading and Risk Management
Activities." For purposes of Issue 98-10, energy trading activities refer to
energy contracts entered into with the objective of generating profits on or
from exposure to shifts or changes in market prices, and risk management
activities refer to energy contracts that are designated as, and effective as,
hedges of nontrading activities. Effective January 1, 1999, EITF Issue 98-10
requires that companies "mark to market" (that is, record the fair value of
the contracts on the balance sheet, with gains and losses reflected in
earnings) energy contracts that constitute energy trading activities. Energy
contracts that are hedges of nontrading activities should continue to be
accounted for in accordance with a company's existing hedge accounting
policies. PP&L will continue, until the adoption of SFAS 133, to use accrual
accounting for contracts that are hedges of nontrading activities. PP&L
adopted EITF 98-10 on January 1, 1999 and expects to recognize an after-tax
credit to income of approximately $6.0 million, as an offset to energy
purchases.
B-44
SELECTED FINANCIAL AND OPERATING DATA
PP&L, Inc.
1998 (a) 1997 (a) 1996 1995 (a) 1994 (a)
-------- -------- ------ -------- --------
Income Items--millions
Operating revenues............... $3,643 $3,049 $2,911 $2,752 $2,725
Operating income (f)............. 801 790 809 836 719
Earnings (Loss) available to PP&L
Resources, Inc.................. (587) 308 329 324 215 (d)
Balance Sheet Items--millions (b)
Property, plant and equipment,
net............................. 4,331 6,820 6,960 6,970 7,195
Recoverable transition costs..... 2,819
Total assets..................... 8,838 9,472 9,405 9,424 9,321
Long-term debt................... 2,569 2,633 2,832 2,859 2,941
Company-obligated mandatorily
redeemable preferred securities
of subsidiary trusts holding
solely company debentures....... 250 250
Preferred stock
With sinking fund requirements. 295 295 295 295 295
Without sinking fund
requirements.................. 171 171 171 171 171
Common equity.................... 1,730 2,612 2,617 2,528 2,404
Short-term debt.................. 80 45 10 89 74
Total capital provided by
investors....................... 5,095 6,006 5,925 5,942 5,885
Capital lease obligations........ 168 171 247 220 225
Financial Ratios
Return on average common equity--
% (e)........................... 13.61 11.75 12.95 13.10 8.83
Embedded cost rates (b)
Long-term debt--%.............. 7.56 7.91 7.89 7.95 8.07
Preferred stock--%............. 6.09 6.90 6.09 6.09 6.07
Preferred securities (pre-
tax)--%....................... 8.43 8.43
Times interest earned before
income taxes (e)................ 4.22 3.67 3.62 3.58 2.73
Ratio of earnings to fixed
charges--total enterprise basis
(c)............................. 3.93 3.47 3.50 3.48 2.70
Ratio of earnings to fixed
charges and dividends on
preferred stock--total
enterprise basis (c)............ 3.04 2.77 2.93 2.92 2.26
Revenue Data
Average price per kWh billed for
service area sales--cents....... 7.26 7.36 7.38 7.21 7.24
Sales Data
Customers (thousands)(b)......... 1,257 1,247 1,236 1,226 1,213
Electric energy sales delivered--
millions of kWh
Residential.................... 11,156 11,434 11,849 11,300 11,444
Commercial..................... 10,597 10,309 10,288 9,948 9,715
Industrial..................... 10,220 10,078 10,016 9,845 9,536
Other.......................... 164 143 154 188 236
------ ------ ------ ------ ------
Service area sales........... 32,137 31,964 32,307 31,281 30,931
Wholesale energy sales....... 36,706 21,454 14,341 11,424 10,848
------ ------ ------ ------ ------
Total electric energy sales
delivered................... 68,843 53,418 46,648 42,705 41,779
------ ------ ------ ------ ------
Number of Full-Time Employees
(b)............................. 6,344 6,343 6,428 6,661 7,431
- -------
(a) Earnings for 1998, 1997, 1995 and 1994 were affected by several one-time
adjustments. Results for 1998 also include the impact of extraordinary
items. This affected earnings available to PP&L and certain items in
Financial Ratios. See Financial Note 3.
(b) At year-end.
(c) Computed using earnings and fixed charges of PP&L and its subsidiaries.
Fixed charges consist of interest on short- and long-term debt, other
interest charges, interest on capital lease obligations and the estimated
interest component of other rentals. (Extraordinary items excluded from
1998 calculations.)
(d) Results for 1994 restated to reflect formation of the holding company.
(e) Results for 1998 based on earnings excluding extraordinary items.
(f) Operating income of 1997 and earlier years restated to conform to the
current presentation.
Note: See Results of Operations--"Financial Indicators" for selected ratios
for 1996, 1997 and 1998 based on fully-adjusted earnings.
B-45
EXECUTIVE OFFICERS OF PP&L, INC.
Officers of PP&L are elected annually by the Board of Directors to serve at
the pleasure of the Board. There are no family relationships among any of the
executive officers, or any arrangement or understanding between any executive
officer and any other person pursuant to which the officer was selected.
There have been no events under any bankruptcy act, no criminal proceedings
and no judgments or injunctions material to the evaluation of the ability and
integrity of any executive officer during the past five years.
Listed below are the executive officers of PP&L as of December 31, 1998:
Effective Date of
Election to
Name Age Position Present Position
---- --- -------- -----------------
William F. Hecht........ 55 Chairman, President and Chief Executive Officer January 1, 1993
Frank A. Long........... 58 Executive Vice President and Chief Operating Officer January 1, 1993
Robert G. Byram......... 53 Senior Vice President--Generation and Chief Nuclear Officer April 1, 1997
John R. Biggar.......... 54 Senior Vice President and Chief Financial Officer November 1, 1998
Robert J. Grey.......... 48 Senior Vice President, General Counsel and Secretary March 1, 1996
Terry H. Hunt........... 50 Senior Vice President--Strategic Planning October 1, 1998
Joseph J. McCabe........ 48 Vice President and Controller August 1, 1995
Each of the above officers, with the exception of Messrs. Grey, Hunt, and
McCabe, has been employed by PP&L for more than five years as of December 31,
1998. Mr. McCabe joined PP&L in May 1994 and was previously a partner of
Deloitte & Touche LLP. Mr. Grey joined PP&L in March 1995. He had been General
Counsel of Long Island Lighting Company since 1992. Mr. Hunt joined PP&L in
October 1998. He is also the President and CEO of Penn Fuel Gas and its
subsidiaries.
Prior to their election to the positions shown above, the following
executive officers held other positions within PP&L since January 1, 1994: Mr.
Byram was Senior Vice President--Nuclear; Mr. Biggar was Vice President--
Finance, Vice President--Finance and Treasurer and Senior Vice President--
Financial; Mr. Grey was Vice President, General Counsel and Secretary; and Mr.
McCabe was Controller.
B-46
SHAREOWNER AND INVESTOR INFORMATION
Annual Meetings: The annual meeting of shareowners is held each year on the
fourth Friday of April. The 1999 annual meeting will be held on Friday, April
23, 1999, at Lehigh University's Stabler Arena, at the Goodman Campus Complex
located in Lower Saucon Township, outside Bethlehem, PA.
Proxy Material: A proxy statement and notice of PP&L's annual meeting are
mailed to all shareowners of record as of February 26, 1999.
Dividends: The 1999 dates for consideration of the declaration of dividends
on PP&L preferred stock by the board of directors or its finance committee are
February 26, May 28, August 27 and November 19. Subject to the declaration,
dividends are paid on the first day of April, July, October and January.
Dividend checks are mailed in advance of those dates with the intention that
they arrive as close as possible to the payment dates. The 1999 record dates
for dividends are expected to be the 10th day of March, June, September and
December.
Direct Deposit of Dividends: Shareowners may choose to have their dividend
checks deposited directly into their checking or savings account. Quarterly
dividend payments are electronically credited on the dividend date, or the
first business day thereafter.
Dividend Reinvestment Plan: Shareowners may choose to have dividends on
their PP&L preferred stock reinvested in PP&L Resources common stock instead
of receiving the dividend by check.
Certificate Safekeeping: Shareowners participating in the Dividend
Reinvestment Plan may choose to have their common stock certificates forwarded
to PP&L for safekeeping.
Lost Dividend or Interest Checks: Dividend or interest checks lost by
investors, or those that may be lost in the mail, will be replaced if the
check has not been located by the 10th business day following the payment
date.
Transfer of Stock or Bonds: Stock or bonds may be transferred from one name
to another or to a new account in the name of another person. Please contact
Investor Services regarding transfer instructions.
Bondholder Information: Much of the information and many of the procedures
detailed here for shareowners also apply to bondholders. Questions related to
bondholder accounts should be directed to Investor Services.
Lost Stock or Bond Certificates: Please contact Investor Services for an
explanation of the procedure to replace lost stock or bond certificates.
Shareowner News: An easy-to-read newsletter containing current items of
interest to shareowners--published and mailed at the beginning of each
quarter.
Periodic Mailings: Letters regarding new investor programs, special items of
interest, or other pertinent information are mailed on a non-scheduled basis
as necessary.
Duplicate Mailings: The PP&L Resources summary annual report and other
investor publications are mailed to each investor account. If you have more
than one account, or if there is more than one investor in your household, you
may contact Investor Services to request that only one publication be
delivered to your address. Please provide account numbers for all duplicate
mailings.
Shareowner Information Line: Shareowners can get detailed corporate and
financial information 24 hours a day using the Shareowner Information Line.
They can hear timely recorded messages about earnings, dividends and other
company news releases; request information by fax; and request printed
materials in the mail.
The toll-free Shareowner Information Line is 1-800-345-3085.
Other PP&L publications, such as the annual and quarterly reports to the
Securities and Exchange Commission (Forms 10-K and 10-Q) will be mailed upon
request.
B-47
Another part of this service is an enhanced Internet home page
(www.pplresources.com). Shareowners can access PP&L's Securities and Exchange
Commission filings, stock quotes and historical performance. Visitors to our
website can provide their E-mail address and indicate their desire to receive
future earnings or news releases automatically.
Investor Services: For any questions you have or additional information you
require about PP&L and its subsidiaries, please call the Shareowner Information
Line, or write to:
George I. Kline
Manager-Investor Services
PP&L Resources, Inc.
Two North Ninth Street
Allentown, PA 18101
Internet Access: For updated information throughout the year, check out our
home page at http://www.pplresources.com. You may also contact Investor
Services via E-mail at invserv@papl.com.
Listed Securities: Fiscal Agents:
New York Stock Exchange Stock Transfer Agents and
PP&L Resources, Inc.: Registrars
Common Stock (Code: PPL) Norwest Bank Minnesota, N.A.
PP&L, Inc.: Shareowner Services
4 1/2% Preferred Stock 161 North Concord Exchange
(Code: PPLPRB) South St. Paul, MN 55075
4.40% Series Preferred Stock PP&L, Inc.
(Code: PPLPRA) Investor Services Department
Dividend Disbursing Office and
PP&L Capital Trust: Dividend Reinvestment Plan Agent
8.20% Preferred Securities PP&L, Inc.
(Code: PPLPRC)
Investor Services Department
PP&L Capital Trust II: Mortgage Bond Trustee
8.10% Preferred Securities Bankers Trust Co.
(Code: PPLPRD) Attn: Security Transfer Unit
Philadelphia Stock Exchange P.O. Box 291569
Nashville, TN 37229
PP&L Resources, Inc.:
Common Stock Bond Interest Paying Agent
PP&L, Inc.
PP&L, Inc. Investor Services Department
4 1/2% Preferred Stock
3.35% Series Preferred Stock
4.40% Series Preferred Stock
4.60% Series Preferred Stock
B-48
QUARTERLY FINANCIAL DATA (Unaudited)
PP&L, Inc. and Subsidiaries
(Millions of Dollars)
For the Quarters Ended (a)
---------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
1998
Operating revenues............................ $861 $818 $1,131 $833
Operating income.............................. 231 143 259 168
Net income before extraordinary items......... 109 63 137 100
Net income.................................... 109 (885) 137 100
Earnings available to PP&L Resources.......... 97 (897) 125 88
1997
Operating revenues............................ $785 $686 $ 778 $800
Operating income.............................. 258 163 191 178
Net income before extraordinary items......... 120 70 81 77
Net income.................................... 120 70 81 77
Earnings available to PP&L Resources.......... 113 61 69 65
- -------
(a) PP&L's electric utility business is seasonal in nature with peak sales
periods generally occurring in the winter months. Accordingly, comparisons
among quarters of a year may not be indicative of overall trends and
changes in operations. In addition, PP&L's second quarter results of 1998
include an after-tax charge of $948 million. See Note 3.
B-49
For any questions you may have or additional information you may require
about your account, change in stock ownership, dividend payments and the
reinvestment of dividends, please call the Shareowner Information Line, or
write to:
George Kline, Manager
Investor Services Department
PP&L, Inc.
Two North Ninth Street, Allentown, PA 18101
Shareowner Information Line: 800-345-3085
PP&L and PP&L Resources file a joint Form 10-K Report and Form 10-Q Report
with the Securities and Exchange Commission. The Form 10-K Report for 1998 and
the Form 10-Q Report for the quarter ending March 31, 1999 are available
without charge by writing to the Investor Services Department at the address
printed above, or by calling the toll-free number.
---------------
IMPORTANT
PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY TODAY IN THE POSTAGE-
PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL
MEETING.
IF YOU HAVE ANY QUESTIONS, OR NEED ASSISTANCE IN VOTING YOUR SHARES, PLEASE
CONTACT
THE FIRM ASSISTING US IN THE SOLICITATION OF PROXIES:
INNISFREE M&A INCORPORATED
TOLL-FREE: (888) 750-5834
---------------
For the latest information on PP&L Resources or PP&L, Inc.,
visit our location on the Internet at
http:// www.pplresources.com