<PAGE>
United States
Securities and Exchange Commission
Washington, DC 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-905
PENNSYLVANIA POWER & LIGHT COMPANY
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-0959590
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
TWO NORTH NINTH STREET, ALLENTOWN, PENNSYLVANIA 18101-1179
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 610-774-5151
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Common stock, no par, number of shares outstanding at April 30, 1995
157,300,382 .
<PAGE>
PENNSYLVANIA POWER & LIGHT COMPANY
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1995
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Shareowners'
Common Equity
Financial Notes
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
<TABLE>
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES
Part 1. Financial Information
Item 1. Financial Statements
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(Thousands of Dollars)
<CAPTION>
Three Months
Ended March 31,
1995 1994
<S> <C> <C>
Operating Revenues ................................ $727,485 $769,453
Operating Expenses
Operation
Fuel.......................................... 113,973 144,785
Power purchases............................... 73,607 80,405
Other......................................... 120,220 111,600
Maintenance...................................... 34,885 38,674
Depreciation..................................... 77,453 72,100
Amortized depreciation........................... 9,939 6,564
Income taxes..................................... 82,316 88,795
Taxes, other than income......................... 53,665 57,224
566,058 600,147
Operating Income ................................... 161,427 169,306
Other Income and (Deductions)
Allowance for equity funds used during
construction.................................. 2,272 916
Income tax credits .............................. 342 1,353
Other - net...................................... 591 (1,324)
3,205 945
Income Before Interest Charges...................... 164,632 170,251
Interest Charges
Long-term debt................................... 54,780 54,575
Short-term debt and other........................ 3,800 3,424
Allowance for borrowed funds used during
construction and interest capitalized......... (2,210) (1,414)
56,370 56,585
Net Income.......................................... 108,262 113,666
Dividends on Preferred Stock........................ 6,942 7,578
Earnings Applicable to Common Stock................. $101,320 $106,088
Earnings Per Share of Common Stock (a).............. $0.65 $0.70
Average Number of Shares Outstanding
(thousands)........................................ 156,163 152,132
Dividends Declared Per Share of Common
Stock.............................................. $0.4175 $0.4175
<FN>
(a) Based on average number of shares outstanding.
See accompanying Financial Notes.
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(Thousands of Dollars)
<CAPTION>
Twelve Months
Ended March 31,
1995 1994
<S> <C> <C>
Operating Revenues ................................. $2,683,131 $2,769,070
Operating Expenses
Operation
Fuel.......................................... 428,080 520,384
Power purchases............................... 280,519 294,293
Other......................................... 495,949 461,040
Maintenance...................................... 176,351 190,779
Depreciation..................................... 294,118 274,857
Amortized depreciation........................... 29,632 17,251
Income taxes..................................... 211,749 244,466
Taxes, other than income......................... 197,591 205,361
Voluntary early retirement program............... 75,859
2,189,848 2,208,431
Operating Income ................................... 493,283 560,639
Other Income and (Deductions)
Allowance for equity funds used during
construction.................................. 6,043 6,898
Income tax credits .............................. 37,638 2,666
Write down of coal reserves...................... (73,670)
Other - net...................................... 1,694 4,483
(28,295) 14,047
Income Before Interest Charges...................... 464,988 574,686
Interest Charges
Long-term debt................................... 214,594 220,988
Short-term debt and other........................ 20,643 14,840
Allowance for borrowed funds used during
construction and interest capitalized......... (9,185) (7,184)
226,052 228,644
Net Income.......................................... 238,936 346,042
Dividends on Preferred and Preference Stock......... 27,769 31,919
Earnings Applicable to Common Stock................. $211,167 $314,123
Earnings Per Share of Common Stock (a).............. $1.37 $2.07
Average Number of Shares Outstanding
(thousands)....................................... 154,441 151,961
Dividends Declared Per Share of Common
Stock............................................. $1.67 $1.655
<FN>
(a) Based on average number of shares outstanding.
See accompanying Financial Notes.
</TABLE>
<TABLE>
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
<CAPTION>
March 31, December 31, March 31,
1995 1994 1994
(Unaudited) (Audited) (Unaudited)
<S> <C> <C> <C>
ASSETS
Property, Plant and Equipment
Electric utility plant in service.................... $9,343,363 $9,306,519 $8,945,385
Accumulated depreciation........................... (2,946,306) (2,871,129) (2,746,361)
Deferred depreciation.............................. 246,147 256,021 275,591
6,643,204 6,691,411 6,474,615
Construction work in progress........................ 261,172 211,288 279,749
Nuclear fuel owned and leased - net
of amortization.................................... 141,566 143,591 171,746
Other leased property - net of amortization ......... 82,353 80,385 75,796
Electric utility plant - net....................... 7,128,295 7,126,675 7,001,906
Other property - net of depreciation,
amortization and depletion......................... 65,994 67,850 146,953
7,194,289 7,194,525 7,148,859
Investments
Associated company - at equity....................... 17,082 17,088 17,057
Nuclear plant decommissioning trust fund ............ 92,731 87,490 82,528
Financial investments................................ 122,451 119,632 141,365
Other - at cost or less.............................. 8,577 8,654 7,866
240,841 232,864 248,816
Current Assets
Cash and cash equivalents(a)......................... 7,998 10,079 27,896
Marketable securities................................ 98,714 100,537 59,986
Accounts receivable, less reserve
Customers.......................................... 201,295 189,771 234,655
Interconnection.................................... 1,602 1,610 161
Other.............................................. 16,339 12,861 12,691
Unbilled revenues.................................... 70,558 88,668 102,387
Fuel (coal and oil) - at average cost................ 109,769 125,545 101,515
Materials and supplies - at average cost............. 123,630 125,171
Prepayments ......................................... 75,568 11,015 135,499
Deferred income taxes................................ 29,416 27,572 17,446
Other................................................ 24,717 26,916 23,342
762,003 718,204 840,749
Deferred Debits
Utility plant carrying charges - net
of amortization.................................... 22,879 23,142 23,859
Reacquired debt costs................................ 111,660 113,466 114,408
Assessment for decommissioning uranium
enrichment facilities.............................. 32,835 33,492 33,029
Retired miners' health care benefits................. 14,065 14,536 23,654
Taxes recoverable through future rates............... 999,301 986,292 1,156,365
Postretirement benefits other than pensions.................................. 19,843
Other................................................ 48,305 55,160 84,933
1,229,045 1,226,088 1,456,091
$9,426,178 $9,371,681 $9,694,515
<FN>
(a) Cash equivalents are all highly liquid debt
instruments purchased with original maturities of
three months or less.
See accompanying Financial Notes.
</TABLE>
<TABLE>
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
<CAPTION>
March 31, December 31, March 31,
1995 1994 1994
(Unaudited) (Audited) (Unaudited)
<S> <C> <C> <C>
LIABILITIES
Capitalization
Common equity
Common stock...................................... $1,459,988 $1,440,527 $1,370,783
Capital stock expense and other................... (8,372) (10,186) (9,227)
Earnings reinvested............................... 1,060,117 1,024,127 1,108,123
2,511,733 2,454,468 2,469,679
Preferred stock
With sinking fund requirements.................... 295,000 295,000 395,000
Without sinking fund requirements................. 171,375 171,375 171,375
Long-term debt...................................... 2,941,261 2,940,750 2,739,879
5,919,369 5,861,593 5,775,933
Current Liabilities
Commercial paper.................................... 27,000 64,000 188,000
Bank loans.......................................... 11,105 10,168 52,956
Long-term debt due within one year.............................. 39 39
Capital lease obligations due within one year....... 74,608 73,682 78,656
Accounts payable.................................... 111,011 146,073 111,331
Taxes accrued....................................... 126,570 46,741 137,433
Interest accrued.................................... 66,632 63,958 57,723
Dividends payable................................... 72,271 71,710 70,986
Other............................................... 86,958 101,924 103,963
576,155 578,295 801,087
Deferred Credits and Other Noncurrent Liabilities
Deferred investment tax credits..................... 227,361 230,064 239,254
Deferred income taxes............................... 2,052,365 2,046,861 2,264,820
Capital lease obligations........................... 145,471 151,083 157,578
Unamortized cost of power plant spare parts......... 19,771 26,406 44,205
Accrued nuclear plant decommissioning costs......... 94,994 89,713 84,625
Accrued mine closing costs.......................... 56,328 56,427 55,286
Contract settlement proceeds to be credited
to customers..................................... 30,087 32,931 40,930
Accrued pension costs............................... 165,994 163,487 96,176
Accrued assessment for decommissioning
uranium enrichment facilities.................... 28,895 28,895 31,688
Accrued retired miners' health care benefits........ 30,037 29,568 39,491
Accrued postretirement benefits other than
pensions and postemployment benefits.............. 25,876 21,784 15,892
Other............................................... 53,475 54,574 47,550
2,930,654 2,931,793 3,117,495
Commitments and Contingent Liabilities
(See Note 6)................................................
$9,426,178 $9,371,681 $9,694,515
See accompanying Financial Notes.
</TABLE>
<TABLE>
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
<CAPTION>
Three Months
Ended March 31,
1995 1994
<S> <C> <C>
Cash Flows From Operating Activities
Net income......................................................... $108,262 $113,666
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation.................................................... 87,924 79,242
Amortization of property under capital leases................... 22,919 19,778
Amortization of contract settlement proceeds and
deferred cost of power plant spare parts....................... (10,189) (10,587)
Deferred income taxes and investment tax credits................ (13,077) (4,225)
Equity component of AFUDC....................................... (2,272) (916)
Change in current assets and current liabilities
Accounts receivable....................................... (14,994) (46,641)
Unbilled and refundable electric revenues................. 18,272 17,647
Fuel inventories.......................................... 15,776 (5,813)
Materials and supplies.................................... (2,397) 505
Prepayments .............................................. (64,553) (126,242)
Accounts payable.......................................... (35,062) (45,661)
Accrued interest and taxes................................ 82,503 72,062
Other..................................................... (12,156) 9,276
Other operating activities - net................................ 16,430 (17,640)
Net cash provided by operating activities.................... 197,386 54,451
Cash Flows From Investing Activities
Property, plant and equipment expenditures......................... (102,887) (97,877)
Proceeds from sales of nuclear fuel to trust....................... 10,020 1,584
Purchases of available-for-sale securities......................... (41,244) (32,771)
Sales and maturities of available-for-sale securities.............. 43,144 5,565
Other financial investments........................................ 1,386 209
Other investing activities - net................................... 1,449 17,259
Net cash used in investing activities........................ (88,132) (106,031)
Cash Flows From Financing Activities
Issuance of long-term debt................................................. 603,250
Issuance of common stock........................................... 19,460
Issuance of preferred stock.................................................... 80,000
Retirement of long-term debt................................................... (521,850)
Retirement of preferred stock.................................................. (20,000)
Payments on capital lease obligations.............................. (22,919) (19,778)
Dividends paid..................................................... (71,710) (70,410)
Net increase (decrease) in short-term debt......................... (36,063) 38,696
Costs associated with issuance and retirement of securities........ (64) (18,664)
Other financing activities - net................................... (39) (39)
Net cash provided by (used in) financing activities.......... (111,335) 71,205
Net Increase (Decrease) In Cash and Cash Equivalents (a)............ (2,081) 19,625
Cash and Cash Equivalents at Beginning of Period (a)................ 10,079 8,271
Cash and Cash Equivalents at End of Period (a)...................... $7,998 $27,896
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for
Interest (net of amount capitalized).............................. $50,920 $45,862
Income taxes...................................................... $14,224 $16,981
<FN>
(a) Cash equivalents are all highly liquid debt instruments
purchased with original maturities of three months or less.
See accompanying Financial Notes.
</TABLE>
<TABLE>
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
<CAPTION>
Twelve Months
Ended March 31,
1995 1994
<S> <C> <C>
Cash Flows From Operating Activities
Net income......................................................... $238,936 $346,042
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation.................................................... 325,969 294,623
Amortization of property under capital leases................... 89,412 78,944
Amortization of contract settlement proceeds and
deferred cost of power plant spare parts....................... (37,395) (39,314)
Deferred income taxes and investment tax credits................ (79,188) 15,944
Equity component of AFUDC....................................... (6,043) (6,898)
Voluntary early retirement program.............................. 75,859
Write down of coal reserves..................................... 73,670
Change in current assets and current liabilities
Accounts receivable....................................... 28,271 1,580
Unbilled and refundable electric revenues................. 31,991 (24,264)
Fuel inventories.......................................... (8,254) 33,247
Materials and supplies.................................... (856) 4,429
Prepayments .............................................. 59,931 (68,315)
Accounts payable.......................................... (14,630) (8,553)
Accrued interest and taxes................................ (3,178) (810)
Other..................................................... (15,606) 28,874
Other operating activities - net................................ 95,044 2,605
Net cash provided by operating activities.................... 853,933 658,134
Cash Flows From Investing Activities
Property, plant and equipment expenditures......................... (510,039) (502,222)
Proceeds from sales of nuclear fuel to trust....................... 44,226 62,548
Purchases of available-for-sale securities......................... (212,095) (32,771)
Sales and maturities of available-for-sale securities.............. 185,781 5,565
Other financial investments........................................ 8,839 (8,912)
Other investing activities - net................................... 4,221 23,893
Net cash used in investing activities........................ (479,067) (451,899)
Cash Flows From Financing Activities
Issuance of long-term debt......................................... 315,500 1,153,250
Issuance of common stock........................................... 89,205 6,635
Issuance of preferred stock.................................................... 380,000
Retirement of long-term debt....................................... (115,500) (1,025,850)
Retirement of preferred and preference stock....................... (100,000) (342,837)
Payments on capital lease obligations.............................. (89,412) (78,944)
Dividends paid..................................................... (284,950) (284,496)
Net increase (decrease) in short-term debt......................... (202,851) 61,841
Costs associated with issuance and retirement of securities........ (6,717) (55,841)
Other financing activities - net................................... (39) (39)
Net cash used in financing activities........................ (394,764) (186,281)
Net Increase (Decrease) In Cash and Cash Equivalents (a)............ (19,898) 19,954
Cash and Cash Equivalents at Beginning of Period (a)................ 27,896 7,942
Cash and Cash Equivalents at End of Period (a)...................... $7,998 $27,896
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for
Interest (net of amount capitalized).............................. $205,243 $211,760
Income taxes...................................................... $261,441 $213,561
<FN>
(a) Cash equivalents are all highly liquid debt instruments
purchased with original maturities of three months or less.
See accompanying Financial Notes.
</TABLE>
<PAGE>
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES
FINANCIAL NOTES
1. Interim Financial Statements
Certain information in footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles has been condensed or omitted in this Form 10-Q
pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). These financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's
Annual Report to the Securities and Exchange Commission on Form 10-K for
the year ended December 31, 1994.
Certain amounts in the March 31, 1994 financial statements have been
reclassified to conform to the presentation in the March 31, 1995
statements.
2. Rate Matters
Base Rate Filing with the PUC
In December 1994, Pennsylvania Power & Light Company (the Company)
filed a request with the Pennsylvania Public Utility Commission (PUC) for a
$261 million increase in electric base rates, an 11.7% increase in PUC-
jurisdictional rates. This is the first such request by the Company in ten
years.
Several items included in the rate filing relate to the Susquehanna
station. The Company currently uses a modified sinking fund method of
depreciation for property placed in service at Susquehanna prior to January
1989, which results in substantial increases in annual depreciation expense
each year until 1999. At that time, annual depreciation expense is
scheduled to decline by about $90 million to the amount that would have
been recorded if a straight-line method of depreciation had been in effect
since the in-service dates of the units. The Company is seeking to
levelize this depreciation expense at an annual amount of about $173
million over the period October 1995 through December 1998, which would
eliminate the currently scheduled increases in depreciation during that
time period.
The Company also is seeking recovery, over a ten-year period, of
certain deferred operating and capital costs, net of energy savings,
incurred from the time the Susquehanna units were placed in service until
the effective dates of the rate increases for those units. These costs,
which were deferred in accordance with PUC orders, total about $39 million
including related deferred income taxes.
When the PUC decided the Company's last rate case in 1985, it
determined that the Company had excess generating capacity and disallowed a
return on the common equity investment in Susquehanna Unit 2. The
Company's generating reserves have declined over the past ten years and are
projected to be below the level considered excess by the PUC in 1985.
Accordingly, the rate increase request also reflects a return on the
Company's common equity investment in Susquehanna Unit 2.
Additionally, the Company is requesting an $18 million annual increase
in the amount it collects from customers for the estimated cost to
decommission the Susquehanna station. This increase reflects a site-
specific decommissioning study completed in late 1993 which indicates that
the Company's 90% share of the cost to decommission Susquehanna will be
about $724 million, an amount substantially greater than the amount
currently reflected in rates.
The Company also is requesting to collect about $43 million annually
for the estimated cost of dismantling its fossil-fuel plants at the end of
their expected useful lives.
The rate request also seeks recovery of the full amount of retiree
health care costs being recorded in accordance with Statement of Financial
Accounting Standards (SFAS) 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," including the amount the Company began to
defer as of January 1993 pursuant to a PUC order but subsequently charged
to expense due to a decision by the Commonwealth Court of Pennsylvania that
reversed the PUC order. The charge to expense in 1994 amounted to $22.9
million, which included $10.8 million applicable to 1993.
The filing also requests shortening the depreciation lives of certain
coal-fired generating stations by up to twelve years and lengthening the
depreciation lives of certain transmission, distribution and other
property.
The Company is seeking recovery of the costs related to its voluntary
early retirement program over a five-year period. The rate filing reflects
an estimate of the savings from the early retirement program. To the
extent that the PUC permits recovery of the cost of the program in rates,
the Company will record a credit to income to reverse the recoverable
portion of the charge recorded in the fourth quarter of 1994 which, after
income taxes, reduced net income by $43.4 million or 28 cents per share of
Common Stock.
The Company also has proposed a method of recovering costs currently
being billed to other utilities pursuant to contractual arrangements for
the sale of capacity and related energy to those utilities. These
contracts begin to phase-out in 1996, and the Company has proposed to
recover the costs associated with the returning capacity through the Energy
Cost Rate (ECR) included in PUC jurisdictional rates. Under the proposal,
the ECR would be adjusted automatically each year as capacity is returned
pursuant to the contracts. In this way, customer rates, through ECR
billings, will reflect both the capital-related and operating costs
associated with the returning capacity. PP&L's proposal provides for all
the revenues associated with sales of any returning capacity or related
energy to be flowed through the ECR for the benefit of customers.
Various parties have filed complaints against the rate increase,
including the Office of Consumer Advocate (OCA), the PUC's Office of Trial
Staff (OTS) and a group of industrial customers. In January 1995, the PUC
suspended the request pending an investigation and hearings.
Under Pennsylvania law, in rate proceedings before the PUC, the OCA
and the OTS have advocacy roles. Testimony filed by the OCA and OTS
carries no more weight than testimony filed by any party in the process.
In this regard, the OCA and OTS have filed written testimony with the
Administrative Law Judge (ALJ) assigned by the PUC to hear this case. The
OCA's testimony contends that the Company's base rates should be decreased
by a total of $73 million, while the OTS claims that the Company should be
entitled to an increase of $17.5 million. The Company's rebuttal testimony
is expected to be filed with the ALJ in early May.
A recommended decision from the ALJ is expected at the end of July. A
final rate decision by the PUC is not expected until late September 1995.
The Company is unable to predict the outcome of its base rate proceeding
before the PUC.
Energy Cost Rate Issues
In April 1994, the PUC reduced the Company's 1994-95 ECR claim by
approximately $15.7 million to reflect costs associated with replacement
power during a portion of the period that Unit 1 of the Company's
Susquehanna station was out of service for refueling and repairs. As a
result of the PUC's action, the Company recorded a charge against income in
the first quarter of 1994 for the $15.7 million of unrecovered replacement
power costs which reduced earnings by 6 cents per share of common stock.
The Company filed a complaint with the PUC objecting to the decision
to exclude these replacement power costs from the 1994-95 ECR, and
subsequently reached a settlement with the complainants and the OTS on this
matter.
The PUC approved the settlement agreement on February 24, 1995. As a
result of this PUC action, the Company in the first quarter of 1995
recorded a credit to income of $9.7 million which increased earnings by 4
cents per share of common stock.
In March 1995, the PUC approved the Company's 1995-96 ECR. That ECR,
which is about $2.8 million lower than the previous ECR, reflects the
recovery of the $9.7 million adjustment to the previously disallowed
replacement power costs.
Refund of State Tax Decrease
In June 1994, legislation was enacted that decreased the state
corporate net income tax rate from 12.25% to 11.99% retroactive to January
1, 1994, with further reductions to 10.99%, 10.75% and 9.99% in 1995, 1996
and 1997, respectively. In accordance with the terms of its tariffs, the
Company filed with the PUC a recomputation of its State Tax Adjustment
Surcharge (STAS) to reflect the decreases in state income taxes for 1994
and the first quarter of 1995. The STAS began in July 1994 and reduced
customer bills through March 1995 by about $2.9 million. A revised STAS
for the April 1995 through March 1996 period went into effect in April 1995
and is expected to reduce customer bills through March 1996 by about $9.2
million.
3. Sales to Other Major Electric Utilities
The Company provides Atlantic City Electric Company (Atlantic) with
125,000 kilowatts of capacity (summer rating) and related energy from the
Company's wholly owned coal-fired stations. The agreement with Atlantic
originally provided for sales to continue through September 2000.
On March 20, 1995, Atlantic notified the Company that it will
terminate the agreement on March 20, 1998, pursuant to termination
provisions in the agreement. The Company expects to be able to resell the
capacity and energy at prices approximately equal to that received from
Atlantic. The agreement's termination is not expected to have a material
impact on the Company's revenues or net income. In 1994, the Company
received about $23.1 million in revenues from this agreement.
The Company provides Jersey Central Power and Light Company (JCP&L)
with 945,000 kilowatts of capacity and related energy from all the
Company's generating units. Sales to JCP&L will continue at the 945,000
kilowatt level through 1995, with the amount then declining uniformly each
year until the end of the agreement on December 31, 1999. On April 6,
1995, the Company entered into a new agreement with JCP&L whereby the
Company will provide JCP&L increasing amounts of installed capacity credits
and energy from all of the Company's generating units. Sales to JCP&L
under this agreement will begin in June 1997 and will continue through May
2004. Under this agreement, the Company will provide JCP&L 150,000
kilowatts of capacity credits and energy from June 1997 through May 1998,
200,000 kilowatts from June 1998 through May 1999 and 300,000 kilowatts
from June 1999 through May 2004. Sales to JCP&L under the initial contract
are at a price equal to the Company's cost of providing service, including
a return on the Company's investment in generating capacity. Sales under
the new agreement will be priced based on a pre-determined demand factor
that escalates over time plus an energy component based on the Company's
actual energy-related costs. This agreement with JCP&L must be approved by
the Federal Energy Regulatory Commission and the New Jersey Board of Public
Utilities.
4. Financing Activity
The Company did not issue or redeem any first mortgage bonds or
Preferred and Preference Stock in the first quarter of 1995.
In the first quarter of 1995, the Company issued 994,789 shares of
common stock ($19.4 million) through the Dividend Reinvestment Plan to
shareowners who reinvest their dividends or remit optional cash payments.
At March 31, 1995, the Company had 156,476,751 shares of common stock
outstanding.
In April 1995, the Company issued 823,631 shares of common stock
($16.1 million) through the Dividend Reinvestment Plan.
5. Credit Arrangements
The Company issues commercial paper and, from time to time, borrows
from banks to provide short-term funds required for general corporate
purposes. In addition, certain subsidiaries also borrow from banks to
obtain short-term funds. Bank borrowings generally bear interest at rates
negotiated at the time of the borrowing. The Company's weighted average
interest rate on short-term borrowings was 6.2% at March 31, 1995.
The Company has credit arrangements that produce a total of $295
million of lines of credit to provide back-up with banks for the Company's
commercial paper and short-term borrowings of certain subsidiaries. No
borrowings were outstanding at March 31, 1995 under these credit
arrangements.
The Company leases its nuclear fuel from a trust funded by sales of
commercial paper. The maximum financing capacity of the trust under
existing credit arrangements is $200 million.
6. New Accounting Standard
In March 1995, the Financial Accounting Standards Board adopted SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." This statement requires a company to review
certain assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If
an asset is determined to be impaired, an impairment loss is recognized.
SFAS 121 is effective for financial statements for fiscal years beginning
after December 15, 1995.
The Company is currently reviewing the provisions of SFAS 121, but
does not expect the adoption of SFAS 121 to have a material effect on the
Company's net income.
7. Commitments and Contingent Liabilities
There have been no material changes related to the Company's
commitments and contingent liabilities since the Company filed its 1994
Form 10-K, except for the discussion below regarding the denial of
plaintiff's motion for class certification in the Fuel Oil Dealers'
Litigation.
For discussion pertaining to the Company's financing matters, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations under the caption "Financial Condition - Financing Programs."
Nuclear Operations
The Company is a member of certain insurance programs which provide
coverage for property damage to members' nuclear generating stations.
Facilities at the Susquehanna station are insured against property damage
losses up to $3.6 billion under these programs. The Company 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, the Company could be assessed retrospective premiums in
the event of the insurers' adverse loss experience. The maximum amount the
Company could be assessed under these programs at March 31, 1995 was about
$41.9 million.
Nuclear Regulatory Commission regulations require that in the event of
an accident, where the estimated cost of stabilization and decontamination
exceeds $100 million, proceeds of property damage insurance be segregated
and used, first, to place and maintain the reactor in a safe and stable
condition and, second, to complete required decontamination operations
before any insurance proceeds would be made available to the Company or the
trustee under the Mortgage. The Company's on-site property damage
insurance policies for the Susquehanna station conform to these
regulations.
The Company's public liability for claims resulting from a nuclear
incident at the Susquehanna station is limited to about $8.9 billion under
provisions of The Price Anderson Amendments Act of 1988 (the Act). The
Company is protected against this liability by a combination of commercial
insurance and an industry assessment program. A utility's liability under
the assessment program will be indexed not less than once during each five-
year period for inflation and will be subject to an additional surcharge of
5% in the event the total amount of public claims and costs exceeds the
basic assessment. In the event of a nuclear incident at any of the
reactors covered by the Act, the Company could be assessed up to $151
million per incident, payable at a rate of $20 million per year, plus the
additional 5% surcharge, if applicable.
Fuel Oil Dealers' Litigation
In August 1991, a group of fuel oil dealers in the Company's service
area filed a complaint against the Company in United States District Court
for the Eastern District of Pennsylvania (District Court) alleging that
certain of the Company's marketing activities had violated and continue to
violate the federal antitrust laws. The complaint requested judgment
against the Company for a sum in excess of $10 million for the alleged
antitrust violations, treble the damages alleged to have been sustained by
the plaintiffs. In addition, the complaint requested a permanent
injunction against all activities found to be illegal.
In April 1992, another fuel oil dealer in the Company's service area
filed a class action complaint against the Company in the District Court
alleging, as did the August 1991 complaint, that certain of the Company's
marketing activities had violated and continue to violate the federal
antitrust laws. The complaint also alleged that the Company engaged in a
civil conspiracy and unfair competition in violation of Pennsylvania law.
The plaintiff sought to represent as a class all fuel oil dealers in
the Company's service area. The complaint requested a permanent injunction
against all activities found to be illegal and treble the damages alleged
to have been sustained by the class. No specific damage amount was set
forth in the complaint. This second antitrust complaint was consolidated
with the August 1991 complaint for pre-trial purposes. In April 1995, the
District Court denied plaintiff's motion for class certification.
The Company has been granted summary judgment on many of these claims.
Still pending before the District Court are the plaintiffs' claims
regarding the Company's alleged agreements with developers that their
developments consist of only electrically heated units (all-electric
agreements), and the state law claims related to such agreements.
In addition, in June 1994 plaintiffs filed an amended complaint in
District Court alleging that the Company's former residential conversion
program -- under which cash grants were offered to contractors and
homeowners to convert from fossil fuel heating systems to electric systems
- - - - -- also violated the federal antitrust laws.
The Company cannot predict the outcome of this litigation.
Clean Air Legislation and Other Environmental Matters
The Federal Clean Air Act Amendments of 1990 deal, in part, with acid
rain under Title IV, attainment of federal ambient ozone standards under
Title I, and toxic air emissions under Title III. The acid rain provisions
specify Phase I sulfur dioxide emission limits for about 55% of the
Company's coal-fired generating capacity by January 1995, and more
stringent Phase II sulfur dioxide emission limits for all of the Company's
fossil-fueled generating units by January 2000.
The Company's capital costs of compliance with the Phase I
requirements under Title IV are included in the table of "Capital
Expenditure Requirements" on page 35 of the Company's 1994 Form 10-K. The
Company may also incur operating expenses not reflected therein, and may
choose to limit the generation of certain units and to bank or trade
emission allowances among its generating units or with other utilities, to
the extent permitted by the legislation.
To meet the Phase II acid rain sulfur dioxide emission standards, the
Company may install flue gas desulfurization equipment (FGD) on up to 60%
of its coal-fired generating capacity, purchase lower sulfur coal, and bank
or trade emission allowances among its generating units or with other
utilities to the extent permitted by the legislation. The exact mix of
lower sulfur fuel, emission allowance purchases, sales or trades, and the
amount and timing of FGD will be based on FGD installation costs, fuel cost
and availability and emission allowance prices.
The ambient ozone attainment provisions contained in Title I of the
legislation require all major stationary sources within the Northeast Ozone
Transport Region (which includes all of Pennsylvania) to install reasonably
available control technology (RACT) for nitrogen oxides emissions by May
1995. The Company has complied with this requirement. The associated
capital costs are included in the table of "Capital Expenditure
Requirements" on page 35 of the Company's 1994 Form 10-K.
Further ozone reductions may be required as a result of modeling of
nitrogen oxides and volatile organic compounds emissions in the Northeast
Ozone Transport Region. A two-phase nitrogen oxides reduction from pre-
Clean Air Act levels has been proposed for the area where the Company's
plants are located -- a 55% reduction by May 1999 and a 75% reduction by
2003 -- unless scientific studies to be completed by 1997 indicate a
different reduction. The reductions would be required during a five-month
ozone season from May through September.
In addition to acid rain and ambient ozone attainment provisions, the
legislation requires the Environmental Protection Agency (EPA) to conduct a
study of hazardous air emissions from power plants. EPA is also studying
the health effects of fine particulates which are emitted from power plants
and other sources. Adverse findings from either study could cause the EPA
to mandate additional ultra high efficiency particulate removal baghouses
or specialized flue gas scrubbing to remove certain vaporous trace metals
and certain gaseous emissions.
In addition to the "Capital Expenditure Requirements" shown on page 35
of the Company's 1994 Form 10-K, the Company currently estimates that
additional capital expenditures and operating costs for environmental
compliance will be incurred beyond 1997. Capital expenditures that may be
required and the additional revenue required to recover these costs, based
on 1994 revenues, are as follows:
Capital Cost Revenue
($ millions) Requirement
Phase II acid rain
1998-2005 $300-500 3.0%
Nitrogen oxides and
ambient ozone by:
1999 80 0.5%
2003 150 1.3%
Hazardous air emissions by 2000 310 1.8%
Collectively, these costs represent a potential capital exposure of up
to $1.0 billion beyond 1997, as well as additional operating costs in
amounts which are not now determinable but could be material.
The Pennsylvania Air Pollution Control Act implements the Federal
Clean Air Act Amendments of 1990. The state legislation essentially
requires that new state air emission standards be no more stringent than
federal standards. This legislation has no effect on the Company's plans
for compliance with the Federal Clean Air Act Amendments of 1990.
The PUC's policy regarding the trading and usage of, and the
ratemaking treatment for, emission allowances by Pennsylvania electric
utilities provides, among other things, that the PUC will not require
approval of specific transactions and the cost of allowances will be
recognized as energy-related power production expenses and recoverable
through the ECR.
The Pennsylvania Department of Environmental Resources (DER)
regulations governing the handling and disposal of industrial (or residual)
solid waste require the Company to submit detailed information on waste
generation, minimization and disposal practices. They also require the
Company to upgrade and repermit existing ash basins at all of its coal-
fired generating stations by applying updated standards for waste disposal.
Ash basins that cannot be repermitted are required to close by July 1997.
Any groundwater contamination caused by the basins must also be addressed.
Any new ash disposal facility must meet the rigid site and design standards
set forth in the regulations. In addition, the siting of future facilities
at Company facilities could be affected.
To address the DER regulations, the Company plans to install dry fly
ash handling systems at the Brunner Island, Sunbury and Holtwood stations.
The Company, with siting assistance from a public advisory group, has
chosen mine sites at which to use the dry fly ash from the Sunbury and
Holtwood stations for reclamation. In addition, the Company is exploring
opportunities to beneficially use coal ash from Brunner Island in various
roadway construction projects in the vicinity of the plant that may delay
or preclude the need for a new disposal facility.
Groundwater degradation related to fuel oil leakage from underground
facilities and seepage from coal refuse disposal areas and coal storage
piles has been identified at several Company generating stations. Many
requirements of the DER regulations address these groundwater degradation
issues. The Company has reviewed its remedial action plans with the DER.
Remedial work is substantially completed at one generating station, and
remedial work may be required at others.
The DER regulations to implement the toxic control provisions of the
Federal Water Quality Act of 1987 and to advance Pennsylvania's toxic
control program authorize the DER to use both biomonitoring and a water
quality based chemical-specific approach in the National Pollutant
Discharge Elimination System (NPDES) permits to control toxics. In 1993,
the Company received new NPDES permits for the Montour and Holtwood
stations. The Montour permit contains very stringent limits for certain
toxic metals and increased monitoring requirements. More toxic reduction
studies will be conducted at Montour before the permit limits become
effective. Additional water treatment facilities may be needed at Montour,
depending on the results of the studies.
At Holtwood, toxics are required to be monitored at the fly ash basin
until its closure in 1997. No limits have been set at this time. The
Company will therefore comply with an implementation schedule for such
closure and for construction of a new dry fly ash handling system at
Holtwood. The closure of the Holtwood fly ash basin will require changes
to the facility's existing waste water treatment system. Improvements and
upgrades are being planned for the Sunbury and Brunner Island waste water
treatment systems to meet the anticipated permit requirements.
Capital expenditures through 1997, to comply with the residual waste
regulations, correct groundwater degradation at fossil-fueled generating
stations and address waste water control at Company facilities, are
included in the "Capital Expenditure Requirements" on page 35 of the
Company's 1994 Form 10-K. The Company currently estimates that about $77
million of additional capital expenditures could be required beyond 1997.
Actions taken to correct groundwater degradation, to comply with the DER's
regulations and to address waste water control are also expected to result
in increased operating costs in amounts which are not now determinable but
could be material.
The Company has signed a Consent Order with the DER to address a
number of sites where the Company may be liable for remediation of
contamination. This may include potential polychlorinated biphenyl (PCB)
contamination at certain of the Company's substations and pole sites;
potential contamination at a number of coal gas manufacturing facilities
formerly owned and operated by the Company; and oil or other contamination
which may exist at some of the Company's former generating facilities. As
a current or past owner or operator of these sites, the Company may be
liable under the Federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended (Superfund), or other laws for the
costs associated with addressing any hazardous substances at these sites.
These sites will be prioritized based upon a number of factors,
including any potential human health or environmental risk posed by the
site, the public's interest in the site, and the Company's plans for the
site. Under the Consent Order, the Company will not be required by DER to
spend more than $5 million per year on investigation and remediation at
those sites covered by the Consent Order.
At March 31, 1995, the Company had accrued $11.0 million, representing
the amount the Company 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. The Company
is involved in several other sites where it may be required, along with
other parties, to contribute to such remediation. Some of these sites have
been listed by the Environmental Protection Agency (EPA) under Superfund,
and others may be candidates for listing at a future date. Future cleanup
or remediation work at sites currently under review, or at sites currently
unknown, may result in material additional operating costs which the
Company 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
DER, to seek compensation from the responsible parties for the lost value
of damaged natural resources. The EPA and the DER may file such
compensation claims against the parties, including the Company, held
responsible for cleanup of such sites. Such natural resource damage claims
against the Company could result in material additional liabilities.
Concerns have been expressed by some members of the scientific
community and others regarding the potential health effects of electric and
magnetic fields (EMF). These fields are emitted by all devices carrying
electricity, including electric transmission and distribution lines and
substation equipment. Federal, state and local officials are focusing
increased attention on this issue. The Company is actively participating
in the current research effort to determine whether or not EMF causes any
human health problems and is taking steps to reduce EMF, where practical,
in the design of new transmission and distribution facilities. The Company
is unable to predict what effect the EMF issue might have on Company
operations and facilities and the associated cost.
In complying with statutes, regulations and actions by regulatory
bodies involving environmental matters, including the areas of water and
air quality, hazardous and solid waste handling and disposal and toxic
substances, the Company may be required to modify, replace or cease
operating certain of its facilities. The Company may also incur material
capital expenditures and operating expenses in amounts which are not now
determinable.
<PAGE>
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
This discussion explains material changes in results of operations as
reflected on the Consolidated Statement of Income and also focuses on
recent trends and events affecting the Company's financial condition. This
discussion should be read in conjunction with the section entitled "Review
of the Company's Financial Condition and Results of Operations" in the
Company's Annual Report to the Securities and Exchange Commission on Form
10-K for the year ended December 31, 1994.
Results of Operations
The following explains material changes in principal items on the
Consolidated Statement of Income comparing the three months and twelve
months ended March 31, 1995 to the comparable periods ended March 31, 1994.
The Consolidated Statement of Income reflects the results of past
operations and is not intended as any representation of the results of
future operations. Future results of operations will necessarily be
affected by various and diverse factors and developments. Because results
for interim periods can be disproportionately influenced by various factors
and developments and by seasonal variations, the results of operations for
interim periods are not necessarily indicative of results or trends for the
year.
Earnings
Earnings per share of common stock for the first quarter of 1995 were
65 cents, a decrease of 5 cents per share from the 70 cents earned during
the first quarter of 1994. Under normal weather conditions, earnings per
share for the quarter ended March 31, 1995 would have been 5 cents higher
and earnings per share for the comparable period in 1994 would have been 9
cents lower. Excluding weather and one-time adjustments, earnings were 66
and 67 cents per share for the quarters ended March 31, 1995 and 1994,
respectively.
Earnings for the first quarters of 1995 and 1994 were affected by
adjustments for replacement power costs. The quarter ended March 31, 1994
was adversely affected by a charge to income of $15.7 million, or 6 cents
per share, due to the disallowance by the Pennsylvania Public Utility
Commission (PUC) of the recovery of replacement power costs through the
Company's 1994-95 Energy Cost Rate (ECR). The quarter ended March 31, 1995
was favorably affected with a credit to income of $9.7 million, or 4 cents
per share, as a result of the PUC's approval of a settlement agreement on
this issue.
For the twelve months ended March 31, 1995, earnings per share of
common stock were $1.37, a decrease of 70 cents per share from the
comparable period in 1994. Under normal weather conditions earnings per
share for the twelve month period ended March 31, 1995 would have been 8
cents higher and earnings per share for the comparable period in 1994 would
have been 14 cents lower. Excluding weather and one-time adjustments,
earnings per share were $1.96 and $2.11 for the twelve months ended March
31, 1995 and 1994, respectively. Of this reduction in earnings, 12 cents
per share is due to an increase in depreciation which reflects the annual
increase associated with the method of depreciating the Susquehanna station
and the depreciation of new property placed in service.
Earnings for the twelve months ended March 31, 1995 were affected by
several one-time adjustments to income. These adjustments, which decreased
after tax net income by $79.6 million, or 51 cents per share, were related
to: (i) a voluntary early retirement program net of costs recovered under
contractual sales to other major utilities; (ii) a write down in the
carrying value of a subsidiary's investment in undeveloped coal reserves;
(iii) a decision of the Commonwealth Court of Pennsylvania which reversed a
PUC order that permitted the deferral of the cost of postretirement
benefits other than pensions; and (iv) a settlement agreement for the
recovery of previously disallowed replacement power costs in the Company's
1994-95 ECR.
For the twelve months ended March 31, 1994, the Company recorded
charges against income that, in the aggregate, adversely affected after tax
net income by about $26.9 million, or 18 cents per share, related to (i) a
settlement agreement with complainants against the Company's 1990-91
through 1993-94 ECR; (ii) the write off of certain deferred retiree benefit
costs; (iii) the adoption of Statement of Financial Accounting Standards
(SFAS) 112, "Employers' Accounting for Postemployment Benefits"; and (iv)
the disallowance by the PUC of the recovery of replacement power costs
through the ECR.
Electric Energy Sales
System, or service area, sales were approximately 9 billion kwh for
the three months ended March 31, 1995, a decrease of 589 million kwh, or
6.2%, from the comparable period in 1994. Mild weather in the first
quarter of 1995, compared to extreme cold weather in the first quarter of
1994, was the primary reason for the decrease in system sales. Sales in
all major customer categories, with the exception of industrial customers,
were lower in the first quarter of 1995 than in the first quarter of 1994.
Industrial sales, which are not affected by weather conditions, increased
in the first quarter of 1995 and each quarter of 1994. Industrial sales
are an important indicator of the economic health of the Company's service
area.
The Company currently anticipates weather-normalized system sales of
approximately 32.5 billion kwh for 1995. This represents an increase of
419 million kwh, or 1.3%, over 1994 weather-normalized sales. Weather-
normalized system sales totaled 32.1 billion kwh for the twelve months
ended March 31, 1995. This represents an increase of 1.0 billion kwh, or
3.3%, over the same period in 1994.
Contractual sales to other major utilities were 1.9 billion kwh for
the first quarter of 1995, or 20.9% higher than the first quarter of 1994.
This was primarily due to lower system sales and higher output from the
Susquehanna station. See Financial Note 3 for a discussion on future
changes to the Company's long-term contracts with other major utilities.
Sales to the Pennsylvania-New Jersey-Maryland Interconnection Associa-
tion (PJM) for the first quarter ending March 31, 1995, were 632 million
kwh, or 43.3%, over the comparable period in 1994. This increase was
primarily due to weather-related lower system sales and higher output from
the Susquehanna station. Lower output from the Susquehanna station in the
first quarter of 1994 resulted from an outage of one unit at the station
through late January 1994 and an outage of the second unit starting in mid-
March 1994.
For the twelve months ended March 31, 1995, system sales and total
electric energy sales, which include contractual sales to other major
utilities and energy sales to PJM utilities, were essentially unchanged
from the twelve months ended March 31, 1994.
Rate Matters
In December 1994, the Company filed a request with the PUC for a $261
million increase in electric base rates, an 11.7% increase in PUC-
jurisdictional rates. In January 1995, the PUC suspended the request
pending investigation and hearings. A recommended decision from the
Administrative Law Judge is expected at the end of July. A final rate
decision is not expected until late September 1995.
Since the Company's last base case decision in 1985, the average price
of electricity for all customers has gone up less than one-half of one
percent due primarily to changes in energy costs (associated principally
with fuel costs and the purchase of output from non-utility generators).
Even if the Company is granted the full amount of the proposed increase,
the price its customers pay for electricity will have increased at a rate
considerably below the rate of inflation since 1985.
Various parties have filed written testimony challenging the Company's
proposals and opposing its request for a $261 million increase. In this
testimony, the Office of Consumer Advocate has recommended a $73 million
rate decrease and the PUC's Office of Trial Staff has recommended a $17
million rate increase. Early in May, the Company will file written
rebuttal testimony responding in detail to each of the complainants'
contentions.
See Financial Note 2 for detailed information about the Company's base
rate filing with the PUC as well as information about other rate matters.
Operating Revenues
Total operating revenues for the three months ended March 31, 1995,
decreased $42.0 million, or 5.5%, from the comparable period in 1994. This
decrease was primarily due to a $70 million decrease in revenues from
system sales as a result of milder weather in the first quarter of 1995
compared to the extreme cold weather in the first quarter of 1994 and lower
energy revenues for the three months ended March 31, 1995. This decrease
is partially offset by a $25.4 million difference in revenues due to
replacement power costs, resulting from a $15.7 million reduction to
revenues in March 1994 for unrecovered replacement power costs and a $9.7
million increase in revenues in February 1995 as a result of the partial
recovery of these replacement power costs. See Financial Note 2 for more
details on "Rate Matters".
Operating revenues for the twelve months ended March 31, 1995,
decreased $86 million, or 3.1% from the comparable period in 1994. This
decrease was primarily due to: (i) a decrease of $99.9 million in revenues
from system sales due to milder weather in the first quarter of 1995 and
lower energy revenues for the twelve months ended March 31, 1995; (ii) a
decrease of $6.5 million from sales to other major utilities; and (iii) a
$9.2 million decrease in PJM revenue. The decrease in revenues is
partially offset by a $25.4 million difference in revenues due to
replacement power costs explained above.
Fuel Expense
Fuel expense for the three months ended March 31, 1995 decreased by
$30.8 million from the comparable period in 1994. Total generation for the
two periods was essentially unchanged, primarily due to milder weather in
the first quarter of 1995 offset by higher off system sales. However, fuel
costs decreased due to higher nuclear generation and lower oil-fired
generation as well as lower unit fuel costs for both nuclear and coal-fired
generation.
Fuel expense for the twelve months ended March 31, 1995 decreased by
$77.7 million from the comparable period in 1994. This decrease excludes
the write off of $11 million of deferred retired miners' health care
benefits in December 1993 and a related credit to expense of $3.6 million
in December 1994. While total generation for the two periods remained
essentially unchanged, fuel costs decreased due to higher nuclear
generation and lower coal-fired and oil-fired generation as well as lower
unit fuel costs for both nuclear and coal-fired generation.
Other Operation, Maintenance and Depreciation Expenses
For the three and twelve months ended March 31, 1995, other operating
expense increased $8.6 million and $34.9 million, respectively, from
comparable periods in 1994. This was primarily the result of a
Commonwealth Court of Pennsylvania decision that reversed a PUC order and
ruled that the Company could not defer the increase in retiree benefits
costs arising from the adoption of SFAS 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions". The amount of retiree
benefits costs charged to expense increased from $0.3 million and $5.8
million for the three and twelve months ended March 31, 1994, respectively,
to $3.1 million and $30.1 million (which includes $10.8 million of costs
previously deferred in 1993) for the three and twelve months ended March
31, 1995, respectively. In addition, in the first quarter of 1995, the
Company recorded $3.3 million of environmental remediation costs for
several sites. This is a $2.7 million increase over the comparable period
in 1994.
Maintenance expense decreased $3.8 million and $14.4 million,
respectively, for the three and twelve months ended March 31, 1995 from the
comparable periods in 1994. The twelve months ended March 31, 1994
reflects a $6.9 million write off of obsolete and excess materials and
supplies at the Company's fossil-fueled steam generating stations. The
remainder of the decrease is primarily due to the continued emphasis on
reducing costs and the deferral of overhauls at selected fossil plants.
The Company plans refueling outages for both units at the Susquehanna
station during 1995.
Depreciation increased $8.7 million and $31.6 million, respectively,
for the three and twelve months ended March 31, 1995 from the comparable
periods in 1994. The higher depreciation expense reflects the annual
increase associated with the method of depreciating the Susquehanna station
and the depreciation of new property, plant and equipment placed in
service.
Income Taxes
Income tax expense, for the three months ended March 31, 1995,
decreased $5.5 million, or 6.3%, from the comparable period in 1994. This
was primarily due to the decrease in pre-tax book income for the first
quarter 1995. Income tax expense decreased $67.7 million, or 28.0%, for
the twelve months ended March 31, 1995 as compared to the twelve months
ended March 31, 1994. This decrease was primarily due to a decrease in
pre-tax book income and a one-time charge to income of $73.7 million, or
$33.7 million decrease to income taxes, as a result of the write down of
coal reserves at a subsidiary of the Company.
For discussion on the State Tax Adjustment Surcharge see Financial
Note 2.
Financial Condition
Financing Programs
The Company expects to raise $180 million of common equity in 1995
through a public offering of common stock by its parent company, PP&L
Resources, Inc. (Resources), and the issuance of common stock under the
Dividend Reinvestment Plan. The public offering of common stock will
depend on market conditions. From January through April 1995, the Company
obtained $35.5 million of common equity through the Dividend Reinvestment
Plan. In addition, the Company expects to arrange for the refinancing of
$55 million of higher cost tax-exempt securities issued to provide
pollution control and solid waste disposal facilities at the Company's
generating stations.
The Company's ability to issue securities during the 1995-1997 period
is not expected to be limited by earnings or other issuance tests. To
enhance financing flexibility, a $250 million revolving credit arrangement
is maintained with a group of banks and is used principally as a back-up
for the Company's commercial paper; and $45 million in credit arrangements
are maintained with a group of banks to provide back-up for the Company's
commercial paper and short-term borrowings of certain subsidiaries. No
borrowings were outstanding at March 31, 1995 under these arrangements.
Financial Indicators
Due to one-time adjustments to income for the twelve months ended
March 31, 1995, several financial indicators decreased from the comparable
period in 1994. The Company earned an 8.49% return on average common
equity for the 12 months ended March 31, 1995, down from the 12.96% earned
in the comparable period in 1994. The ratio of the Company's pre-tax
income to interest charges decreased from 3.4 for the twelve months ended
March 31, 1994 to 2.7 for the comparable period in 1995. Excluding the
one-time adjustments to income, the return on average common equity and the
ratio of pre-tax income to interest charges for the twelve months ended
March 31, 1995 would have been 11.69% and 3.0, respectively. The Company's
annual per share rate of dividends on common stock remained unchanged at
$1.67 per share. The ratio of the market price to book value of common
stock was 122% at March 31, 1995 compared with 142% at March 31, 1994
reflecting, in part, the general decline in electric utility common stock
prices, including the Company's stock, over the past twelve months.
Clean Air Legislation and Other Environmental Matters
See Financial Note 7, "Commitments and Contingent Liabilities", for
information concerning federal clean air legislation enacted in 1990,
groundwater degradation and waste water control at Company facilities, the
Department of Environmental Resources' (DER) solid waste disposal
regulations, a Consent Order with DER regarding remediation at certain
sites, and the issue of electric and magnetic fields.
Increasing Competition
Regulatory Developments
In May 1994, the PUC ordered an investigation to examine the role of
competition in Pennsylvania's electric utility industry. The investigation
will allow the PUC to solicit input regarding the potential impact of
competition on the state's electric utilities and their customers. The
investigation, which will gather and analyze data at both the wholesale and
retail levels of the electric utility industry, will be a paper proceeding
conducted over approximately one year. Interested parties have the
opportunity to file written comments addressing the following specific
topics: wheeling - issues and impact, consumer issues, safety and
reliability, the impact of market structure changes and legal issues. The
Company has submitted comments in response to the PUC order.
In March 1995, the Federal Regulatory Energy Commission (FERC) issued
a major Notice of Proposed Rulemaking (NOPR) primarily dealing with open
access to transmission lines and recovery of stranded costs. The NOPR
would require all utilities to file open access tariffs available to all
wholesale sellers and buyers of electricity. The tariffs must offer point-
to-point and network services, as well as ancillary services. A utility
would have to offer these services to all eligible customers on a basis
comparable to the services the utility provides to itself. A utility must
take service under its transmission access tariff for its own wholesale
sales and purchases. The NOPR would not affect existing transmission
agreements.
The NOPR also provides that utilities are entitled to recover all
"legitimate and verifiable stranded costs" incurred in rendering
transmission services pursuant to their tariffs. The FERC proposes to
provide recovery mechanisms for wholesale stranded costs, including
stranded costs resulting from municipalization. The NOPR contains filing
requirements for utilities to seek recovery of wholesale stranded costs.
Wholesale contracts signed after July 11, 1994 must contain explicit
provisions authorizing recovery of stranded costs. For contracts signed
before this date, a utility may seek recovery if it can show that it had a
reasonable expectation of continuing to serve the customer after the
contract term and that it has made reasonable efforts to mitigate any
stranded costs. The Company's contracts with its 18 FERC wholesale
customers were signed before July 11, 1994.
The states have responsibility for adopting policies concerning
recovery of stranded costs resulting from retail wheeling transactions.
Under the NOPR, the FERC will assert jurisdiction over such costs only if
the states lack authority to deal with stranded costs.
Initial comments on the open access and stranded cost recovery
portions of the NOPR are due by August 7, 1995. The Company is currently
assessing the potential impact of the NOPR.
Restructuring
The Company continues its ongoing department-level re-engineering
efforts, which are expected to impact the size of the Company's workforce.
Although no specific targets have been set, the Company currently expects
that the present level of 6,896 full time employees may decline to 6,000 or
fewer employees over the next three years. The Company does not expect
significant additional costs as a result of these workforce reductions.
New Markets
The Company's strategic initiatives also include an assessment of
entering power-related businesses outside of the Company's service
territory, both domestically and in foreign countries. Any expansion by
the Company into these areas would be methodical and deliberate. To take
advantage of these new business opportunities, the Company has formed a
holding company structure, effective April 27, 1995, after receiving all
necessary regulatory approvals and shareowner approval at its 1995 annual
meeting. As a result of this restructuring, the Company became a direct
subsidiary of Resources.
In March 1994, the Company incorporated a new subsidiary, Power
Markets Development Company (PMD), and made an initial investment of
$50 million in this new subsidiary. PMD will focus on new opportunities in
the building and operation of power plants in North America and elsewhere.
Effective April 27, 1995, PMD became a direct subsidiary of Resources.
Other subsidiaries may be formed to take advantage of new business
opportunities.
<PAGE>
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 2 to Financial Statements for information
concerning rate matters.
Reference is made to Note 7 to Financial Statements for information
concerning two complaints filed against the Company by fuel oil dealers
alleging that the Company's promotion of electric heat pumps and off-peak
storage systems had violated and continues to violate the federal antitrust
laws.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
Report dated January 3, 1995
Item 5. Other Events
Information regarding the Company's filing of a request with the
Pennsylvania Public Utility Commission for an increase in electric base
rates.
Report dated February 1, 1995
Item 4. Changes in Registrant's Certifying Accountants
Information regarding the Company's decision to no longer retain Deloitte &
Touche LLP as the Company's independent auditors for 1995.
Report dated February 27, 1995
Item 4. Changes in Registrant's Certifying Accountants
Information regarding the Company's appointment of Price Waterhouse LLP to
serve as the Company's independent auditors for the year ended December 31,
1995.
Report dated April 27, 1995
Item 5. Other Events
Information regarding PP&L Resources, Inc. becoming the parent holding
company of Pennsylvania Power & Light Company and Power Markets Development
Company.
<PAGE>
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES
In the opinion of the Company, the accompanying interim
consolidated financial statements contain all adjustments (consisting of
only normal recurring accruals, except for the adjustments to account for
unrecovered replacement power costs, as described in Note 2; costs of
postretirement benefits other than pensions; a voluntary early retirement
program; and the write down in the carrying value of a subsidiary's
investment in undeveloped coal reserves) necessary to present fairly the
financial position, the results of operations and changes in cash flows for
the periods presented.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Pennsylvania Power & Light Company
(Registrant)
Date: May 4, 1995 /s/ R. E. Hill
R. E. Hill
Senior Vice President-Financial
(Principal Financial Officer)
/s/ J. J. McCabe
J. J. McCabe
Controller
(Chief Accounting Officer)
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME, CONSOLIDATED BALANCE SHEET, CONSOLIDATED
STATEMENT OF CASH FLOWS FOR THE FORM 10-Q DATED MARCH 31, 1995 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> PENNSYLVANIA POWER & LIGHT COMPANY
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