<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
[X] Definitive Proxy Statement RULE 14C-5(D)(2))
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
Pennsylvania Power & Light Company
------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-
6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
Notes:
<PAGE>
[LOGO OF PP&L APPEARS HERE]
Pennsylvania Power & Light Company
Notice of Annual Meeting
April 24, 1996
and
Proxy Statement
(including appended 1995 Annual Report to Shareowners)
<PAGE>
NOTICE OF ANNUAL MEETING
OF SHAREOWNERS
APRIL 24, 1996
The Annual Meeting of Shareowners of Pennsylvania Power & Light Company
("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 Wednesday, April 24, 1996, at 1:00 p.m., 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.
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.
After reading the Proxy Statement, please mark, sign, date and return your
Proxy as soon as possible, to assure your representation at the meeting. Only
Shareowners of record at the close of business on Wednesday, February 28,
1996, will be entitled to vote at the Annual Meeting or any adjournments
thereof. 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 15, 1996
<PAGE>
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 15, 1996.
OUTSTANDING STOCK AND VOTING RIGHTS
The Board of Directors has established Wednesday, February 28, 1996, 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 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 Common Shares (all owned by PP&L Resources, Inc.)
("Resources"), 530,189 shares of 4 1/2% Preferred Stock and 4,133,556 shares
of Series Preferred Stock.
As of February 15, 1996, the following are the only entities known by the
Company to own more than five percent of any class or series of stock entitled
to vote at the Annual Meeting.
<TABLE>
<CAPTION>
NAME AND NUMBER OF
ADDRESS OF SHARES PERCENT OF
TITLE BENEFICIAL OWNER BENEFICIALLY OWNED CLASS OR SERIES
- ----- ----------------------------------- ------------------ ---------------
<S> <C> <C> <C>
6.33% Series Chancellor Capital Management, Inc. 85,000(a) 8.5%
Preferred Stock and Chancellor Trust Company
1166 Avenue of the Americas
New York, New York 10036
6.75% Series Wellington Management Company 85,000(b) 10%
Preferred Stock 75 State Street
Boston, MA 02109
</TABLE>
- -------
(a) Chancellor Capital Management, Inc. and Chancellor Trust Company, as
investment advisers for various fiduciary accounts, have sole power to
vote or to direct the vote, and sole power to dispose of or to direct the
disposal of, all of the indicated shares.
(b) Number of shares beneficially owned includes shares for which Wellington
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. Abstentions and
broker non-votes are not counted as either "yes" or "no" votes.
To preserve voter confidentiality, the Company voluntarily limits access to
Shareowner voting records to a few designated employees. These employees sign
a confidentiality agreement which prohibits them from disclosing the manner in
which a Shareowner has voted to any PP&L employee or to any other person
(except the person in whose name the shares are registered), unless otherwise
required by law.
With respect to 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.
1
<PAGE>
PROPOSAL 1: ELECTION OF DIRECTORS
PP&L has a classified Board of Directors, currently consisting of fifteen
directors divided into three classes. These classes consist of six directors
whose terms will expire at the 1996 Annual Meeting, four directors whose terms
will expire at the 1997 Annual Meeting, and five directors whose terms will
expire at the 1998 Annual Meeting. The directors of PP&L also serve as the
directors of Resources.
The nominees this year are William J. Flood, William F. Hecht and Frank A.
Long. All of the nominees are currently serving as directors and were elected
by the Shareowners at the 1993 Annual Meeting. If elected by the Shareowners,
the above nominees will serve until the 1999 Annual Meeting and until their
successors shall be elected and qualified. Resources plans to vote all shares
of Common Stock for these nominees. Following their election and the
retirement of certain directors as discussed below, there will be eleven
members of the Board of Directors, consisting of the following classes: four
directors whose terms will expire at the 1997 Annual Meeting, four directors
whose terms will expire at the 1998 Annual Meeting, and three directors whose
terms will expire at the 1999 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.
THE BOARD OF DIRECTORS
RECOMMENDS THAT SHAREOWNERS VOTE FOR PROPOSAL 1
NOMINEES FOR DIRECTORS:
- ---------------- WILLIAM J. FLOOD, 60, is Secretary-Treasurer of Highway
Equipment & Supply Co. (HESCO), Harrisburg, Pa., supplier of
heavy equipment for highway construction, industry and
[PHOTO OF general contractors. Mr. Flood received a B.A. from Dartmouth
WILLIAM J. FLOOD College and joined HESCO in 1960. He is a director of HESCO,
APPEARS HERE] Geisinger Foundation, Hescorp, Inc. and PNC Bank (Northeast
PA). A member of the Audit and Nominating Committees, Mr.
Flood has been a director since 1990.
- ----------------
- ---------------- WILLIAM F. HECHT, 52, is Chairman, President and Chief
Executive Officer of both Resources and PP&L. Mr. Hecht
received a B.S. and M.S. in Electrical Engineering from
[PHOTO OF Lehigh University. Employed since 1964, he was elected
WILLIAM F. HECHT President and Chief Operating Officer in 1991, was named to
APPEARS HERE] his present PP&L position in 1993, and to his 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 the Board and of the Corporate
Leadership Council, an internal committee comprised of the
senior officers of Resources. He has been a director since
1990.
- ---------------- FRANK A. LONG, 55, is Executive Vice President of Resources
and Executive Vice President and Chief Operating Officer of
PP&L. Mr. Long received a B.S. in Electrical Engineering from
[PHOTO OF Northeastern University, and joined PP&L in 1963. He was
FRANK A. LONG elected Senior Vice President -- System Power & Engineering
APPEARS HERE] in 1990, was named to his present PP&L position in 1993, and
to his Resources position in February 1995. Mr. Long is a
member of the Executive Committee of the Pennsylvania
- ---------------- Electric Association, a trustee of the North American
Electric Reliability Council, and a director of the
Homemaker/Home Health Aide Services of Lehigh County. He has
been a director since 1993.
2
<PAGE>
DIRECTORS CONTINUING IN OFFICE:
- ---------------- E. ALLEN DEAVER, 60, is Executive Vice President, a member of
the President's Office, and a director of Armstrong World
Industries, Inc., Lancaster, Pa., a manufacturer of interior
[PHOTO OF furnishings and specialty products. He graduated from the
E. ALLEN DEAVER University of Tennessee with a B.S. in Mechanical Engineering
APPEARS HERE] and joined Armstrong in 1960. Mr. Deaver has served as
Executive Vice President and a director of Armstrong since
1988. He is a director of the National Association of
- ---------------- Manufacturers, the Pennsylvania Economy League, the
Pennsylvania Chamber of Business and Industry, and
Internacional de Ceramica S.A. (Mexico). Mr. Deaver, chair of
the Management Development and Compensation Committees and a
member of the Unregulated Businesses Oversight Committee, has
been a director since 1991; his term ends in 1997.
- ---------------- NANCE K. DICCIANI, 48, is Vice President and Business
Director, Petroleum Chemicals Division, Rohm and Haas
Company, Philadelphia, Pa. Dr. Dicciani received a B.S. from
[PHOTO OF Villanova University, an M.S. from the University of
NANCE K. Virginia, an M.B.A. from the Wharton School of Business and a
DICCIANI Ph.D. from the University of Pennsylvania. Prior to joining
APPEARS HERE] Rohm and Haas in 1991 as Business Unit Director, Petroleum
Chemicals, Dr. Dicciani had been named General Manager,
Business Development and Technology (Chemicals group), at Air
- ---------------- Products and Chemicals, Inc. in 1990. She is a director of
the World Affairs Council and Villanova University. Dr.
Dicciani, a member of the Unregulated Businesses Oversight
Committee and chair of the Nuclear Oversight Committee, has
been a director since 1994; her term ends in 1997.
- ---------------- ELMER D. GATES, 66, is Vice Chairman of Fuller Company,
Bethlehem, Pa., a company involved in the design and
manufacture of plants, machinery and equipment used in the
[PHOTO OF cement, paper, power and processing industries. He has a B.S.
ELMER D. GATES in Mechanical Engineering from Clarkson College. Prior to
APPEARS HERE] joining Fuller Company as President in 1982, Mr. Gates spent
thirty-one years at General Electric Company. Mr. Gates
assumed his present position at Fuller Company in 1990. Mr.
- ---------------- Gates is vice chairman and a director of Ambassador Bank and
president of the Lehigh Valley Partnership. He is also
Chairman, Chief Executive Officer and a director of Birdsboro
Ferrocast, Inc., a steel foundry located in Birdsboro, Pa. In
1992, Birdsboro Ferrocast filed a voluntary petition under
Chapter 11 of the Bankruptcy Code. Mr. Gates, chair of the
Unregulated Businesses Oversight Committee and a member of
the Management Development and Compensation Committees, has
been a director since 1989; his term ends in 1997.
- ---------------- DEREK C. HATHAWAY, 51, is Chairman, President and Chief
Executive Officer of Harsco Corporation, Camp Hill, Pa., a
diversified multi-national manufacturing company. In 1966,
[PHOTO OF Mr. Hathaway founded Dartmouth Investments Ltd. in the United
DEREK C. Kingdom and built a group of engineering businesses into a
HATHAWAY public corporation, which was acquired by Harsco in 1979.
APPEARS HERE] After coming to the U.S. in 1984, Mr. Hathaway became a
citizen in 1991. Mr. Hathaway served as Senior Vice
President -- Operations of Harsco's Engineered Products Group
- ---------------- from 1986 until 1991, when he became President and Chief
Operating Officer. He was elected to his present position in
1994. Mr. Hathaway is a director of Harsco, Dauphin Deposit
Corporation and a number of civic and charitable
organizations, including the National Association of
Manufacturers, the Pennsylvania Business Roundtable, the
Pennsylvania Chamber of Business and Industry, and the
Polyclinic Medical Center. Mr. Hathaway, a member of the
Audit and Unregulated Businesses Oversight Committees, has
been a director since April 1995; his term ends in 1998.
- ---------------- STUART HEYDT, 56, is President and Chief Executive Officer of
Geisinger Health System, Danville, Pa. Dr. Heydt, who
specializes in maxillofacial surgery, attended Dartmouth
[PHOTO OF College and received an M.D. from the University of Nebraska.
STUART HEYDT He had been President and Chief Executive Officer of
APPEARS HERE] Geisinger Medical Center since May 1990, and then was
President and Chief Operating Officer of Geisinger Foundation
until being appointed to his present position in December
- ---------------- 1991. He is past president of the American College of
Physician Executives and a director of Bucknell University,
Wilkes University, PNC Bank (Northeast PA) and PNC Bank, N.A.
A member of the Management Development and Compensation and
Nominating Committees, Dr. Heydt has been a director since
1991; his term ends in 1998.
3
<PAGE>
- ---------------- CLIFFORD L. JONES, 68, served as President of the Capital
Region Economic Development Corporation, Camp Hill, Pa., from
1992 until 1994. Prior to that, he served as President of the
[PHOTO OF Pennsylvania Chamber of Business and Industry from 1983 until
CLIFFORD L. his retirement in 1991. Mr. Jones received a B.A. from
JONES Westminster College. He served from 1981 to 1983 as a member,
APPEARS HERE] and then as Chairman, of the Pennsylvania Public Utility
Commission. From 1979 until his appointment to the PUC, Mr.
Jones was Secretary of the Pennsylvania Department of
- ---------------- Environmental Resources. He is also a director of U.S. Radio,
Inc. and Mercom, Inc., a Michigan-based cable television
company. A member of the Corporate Responsibility and
Nominating Committees, Mr. Jones has been a director since
1989; his term ends in 1998.
- ---------------- RUTH LEVENTHAL, 55, is Professor of Biology at the Milton S.
Hershey Medical College of Penn State University. She
previously had served as Provost and Dean of Penn State
[PHOTO OF Harrisburg, a position which she held from 1984 through 1994.
RUTH LEVENTHAL Dr. Leventhal earned a B.S. in Medical Technology, a Ph.D. in
APPEARS HERE] Parasitology and an M.B.A. from the University of
Pennsylvania. From 1981 until 1984, Dr. Leventhal was Dean of
the School of Health Sciences and Professor of Medical
- ---------------- Laboratory Sciences at Hunter College of The City University
of New York. She previously served four years as Acting Dean
of The School of Allied Medical Professions at the University
of Pennsylvania. Dr. Leventhal is a director of Mellon Bank
(Commonwealth region) and founding chair of the Council for
Public Education. She is active in a number of charitable,
civic and professional organizations. Dr. Leventhal, a member
of the Audit and Nuclear Oversight Committees, has been a
director since 1988; her term ends in 1998.
- ---------------- NORMAN ROBERTSON, 68, retired as Senior Vice President and
Chief Economist of Mellon Bank N.A., Pittsburgh, Pa. in 1992.
Mr. Robertson received a B.S. in Economics from the
[PHOTO OF University of London, England, and attended the London School
NORMAN ROBERTSON of Economics. He joined Mellon Bank in 1963 and advanced to
APPEARS HERE] Vice President and Chief Economist in 1970 and Senior Vice
President and Chief Economist in 1973. Mr. Robertson is a
director of Mellon Bank (Maryland) and Economics America--
- ---------------- Pennsylvania Council on Economic Education. He is also an
Adjunct Professor of Economics at Carnegie Mellon University.
Mr. Robertson, chair of the Nominating Commitee and a member
of the Executive and Management Development and Compensation
Committees, has been a director since 1969; his term ends in
1997.
DIRECTORS RETIRING AS OF THE 1996 ANNUAL MEETING:
The Company wishes to acknowledge with gratitude the many years of service
provided by the following directors who will retire as of the 1996 Annual
Meeting. In addition to serving as a director for many years, John Kauffman
was also an employee of the Company for 41 years, beginning his employment
with Pennsylvania Water & Power Co. at the Holtwood hydroelectric station in
1950. Each of the following directors has provided valued advice and
leadership to the Company, and we wish them well in their retirements and
future endeavors.
- ---------------- DANIEL G. GAMBET is President of Allentown College of St.
Francis de Sales, Center Valley, Pa. Father Gambet received a
Ph.D. in Classical Studies from the University of
[PHOTO OF Pennsylvania. He joined Allentown College in 1965 as Academic
DANIEL G. GAMBET Dean, became Vice President in 1970 and President in 1978. He
APPEARS HERE] is a director of a number of civic and charitable
organizations, including Lehigh Valley Hospital and Health
Network, Inc. and the Better Business Bureau of Eastern
- ---------------- Pennsylvania. A director since 1986, Father Gambet has served
as a member of the Executive Committees and chair of the
Corporate Responsibility Committee.
- ---------------- JOHN T. KAUFFMAN was Chairman and Chief Executive Officer of
PP&L from October 1991 until his retirement on December 31,
1992. He had served as PP&L Chairman, President and Chief
[PHOTO OF Executive Officer from 1990 to October 1991. Mr. Kauffman
JOHN T. KAUFFMAN earned a B.S. in Mechanical Engineering from Purdue
APPEARS HERE] University and a B.S. in Marine Engineering from the U.S.
Merchant Marine Academy. He is past chairman of the
Pennsylvania Electric Association, chairman of Lehigh Valley
- ---------------- 2000: Business-Education Partnerships and a director of
Conestoga Title Insurance Company, Alliance for the
Chesapeake Bay, the Eastern Pennsylvania Chapter of The
Nature Conservancy, the AMERICA 2000 Coalition and the Center
for Workforce Preparation and Quality Education, an affiliate
of the U.S. Chamber of Commerce. Mr. Kauffman has served in
recent years as a member of the Executive Committees and of
the Nuclear Oversight Committee. A director since 1978, Mr.
Kauffman provided valuable leadership to the Company
throughout this period of industry change.
4
<PAGE>
- ---------------- VICE ADMIRAL ROBERT Y. KAUFMAN, USN (RET.) is Chairman and
President of Yogi, Inc., a consulting firm located in
Potomac, Md. Admiral Kaufman received a B.S. at the U.S.
[PHOTO OF Naval Academy and an M.S. in International Affairs at George
VICE ADMIRAL Washington University. Admiral Kaufman participated in the
ROBERT Y. early planning, development and operation of nuclear
KAUFMAN, USN submarines, including Polaris, Trident and the newest attack
(RET.) submarines. He served as a Navy representative to the Atomic
APPEARS HERE] Energy Commission. Before retiring from the U.S. Navy in
1980, he was director of Command, Control & Communications,
Office of Chief of Naval Operations. A noted wildlife and
- ---------------- nature photographer, Admiral Kaufman has also served as a
technical adviser for the Discovery Channel on cable
television. A director since 1992, Admiral Kaufman has served
as a member of the Corporate Responsibility Committee and was
a charter member of the Nuclear Oversight Committee.
- ---------------- DAVID L. TRESSLER is Executive Director of the Northeast
Pennsylvania Physicians' Organization in Clarks Summit, Pa.
From 1991 through 1995 he had been Executive Director of the
[PHOTO OF Center for Public Initiatives at the University of Scranton,
DAVID L. and President, Chief Executive Officer and a director of the
TRESSLER Northeast Regional Cancer Institute in Scranton. Mr. Tressler
APPEARS HERE] is a graduate of The Pennsylvania State University, the
University of Pittsburgh and Stonier Graduate School of
Banking (Rutgers University). He had served as Chairman and
- ---------------- Chief Executive Officer of Northeastern Bank of Pennsylvania
from 1982 to 1991. Mr. Tressler is past president of
Economics America -- Pennsylvania Council on Economic
Education, and a trustee of Lackawanna Industrial Fund
Enterprises. He is a director of the Pennsylvania Industrial
Development Authority and PHICO Insurance Company. A director
since 1981, Mr. Tressler has served as chair of the Audit
Committee and a member of the Executive Committees.
FORMER DIRECTOR:
- ---------------- RICHARD S. BARTON, a Corporate Vice President of Xerox
Corporation, Rochester, New York, and a Stanford University
Sloan Fellow, resigned from the Board effective September 25,
[PHOTO OF 1995, due to conflicting professional time commitments. Mr.
RICHARD S. Barton earned his B.A. from Adelphi University and completed
BARTON the Wharton Executive Development Program at the University
APPEARS HERE] of Pennsylvania. He previously held the position of Chairman,
President and Chief Executive Officer of Xerox Canada Inc.
From 1989 to 1991, he was Vice President, North American
- ---------------- Systems Sales, for the Xerox Integrated Systems Operations,
and was elected to his current position in 1993. Mr. Barton
serves on the boards of Avon Products, Inc. and the American
Management Association. Mr. Barton was a member of the
Corporate Responsibility and Management Development and
Compensation Committees of the Board. A director since
January 1994, Mr. Barton provided a business perspective
which we valued highly.
GENERAL INFORMATION REGARDING DIRECTORS AND EXECUTIVE OFFICERS
DIRECTOR ATTENDANCE AT BOARD MEETINGS
The Board of Directors held eleven meetings during 1995. Each incumbent
director attended more than 75% of the meetings held by the Board and the
Committees during the year. The average attendance of incumbent directors at
Board and Committee meetings held during 1995 was 96%.
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 $20,500 per year, of which a
minimum of $2,500 is allocated to a deferred stock account; a fee of $750 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 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 Resources and PP&L.
Non-employee directors may elect to defer all or any part of the retainer
and fees, together with applicable interest, pursuant to the Directors
Deferred Compensation Plan ("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.
5
<PAGE>
In addition, the Company has established a Retirement Plan for non-employee
directors. Upon completion of at least three years of service on the Board,
these directors are eligible for a retirement benefit payable at age 65, or
the date of retirement, whichever is later. This benefit cannot exceed 50% of
the annual retainer in effect during the last year of their service on the
Board and is payable for ten years.
STOCK OWNERSHIP
As noted above, all the common stock of PP&L is owned by Resources. No
directors or executive officers own any PP&L preferred stock.
BOARD COMMITTEES
The Board of Directors has four standing committees -- the Executive,
Corporate Responsibility, Management Development and Compensation and Nuclear
Oversight Committees. Each non-employee director usually serves on two or more
of these and Resources' committees. (The Resources committees include the
Executive, Audit, Management Development and Compensation, Nominating and
Unregulated Business Oversight Committees.) All but the Executive Committee
are composed entirely of directors who are not Company employees. (The audit
and nominating functions are performed by Resources' committees.)
Nominees for directors may be proposed by Shareowners in accordance with the
procedures set forth in the Bylaws. Recommendations for the 1997 Annual
Meeting must be received by November 15, 1996. Shareowners interested in
recommending nominees for directors should submit their recommendations in
writing to the Chair of the Resources' Nominating Committee, c/o Secretary,
Two North Ninth Street, Allentown, Pennsylvania 18101.
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 or change the Bylaws. The Executive Committee met five times in
1995. The members of the Executive Committee are Mr. Hecht (chair), Fr.
Gambet, and Messrs. Kauffman, Robertson and Tressler.
CORPORATE RESPONSIBILITY COMMITTEE. The principal functions of the Corporate
Responsibility Committee are to review various policies and practices of
management in the areas of corporate governance and corporate citizenship, and
to review PP&L's response to actions, investigations, sanctions or warnings by
governmental and regulatory authorities. The Corporate Responsibility
Committee met twice in 1995. The members of the Corporate Responsibility
Committee are Fr. Gambet (chair), Mr. Jones and Admiral Kaufman.
MANAGEMENT DEVELOPMENT AND COMPENSATION COMMITTEE. The principal functions
of the Management Development and Compensation Committee are to review and
evaluate at least annually the performance of the chief executive officer and
other senior officers of Resources and its subsidiaries, 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 Resources and PP&L, the Management Development and
Compensation Committees of both companies act jointly to set remuneration for
services to both companies. The Management Development and Compensation
Committee of the Company met four times in 1995. The members of the Management
Development and Compensation Committee for both Resources and PP&L are Mr.
Deaver (chair), Messrs. Gates and Robertson and Dr. Heydt.
NUCLEAR OVERSIGHT COMMITTEE. The principal function of the Nuclear Oversight
Committee is to oversee management systems and processes which assure (1)
safety of the public, (2) regulatory compliance, (3) preservation of nuclear
plant assets, and (4) fulfillment of operational and financial objectives.
Committee reviews focus on issues critical to the long-term, safe, reliable
and economic operation of the nuclear plant. Industry experts are retained to
provide technical advice and assistance to committee members. The Nuclear
Oversight Committee met three times in 1995. The members of the Nuclear
Oversight Committee are Dr. Dicciani (chair), Mr. Kauffman, Admiral Kaufman
and Dr. Leventhal.
6
<PAGE>
RETIREMENT PLANS FOR EXECUTIVE OFFICERS
Executive officers who retire from the Company are eligible for benefits
under Resources' 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
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION 15 YEARS 20 YEARS 25 YEARS 30 YEARS
------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
$200,000 66,024 93,024 103,024 113,024
250,000 86,274 120,024 132,524 145,024
300,000 106,524 147,024 162,024 177,024
350,000 126,774 174,024 191,524 209,024
400,000 147,024 201,024 221,024 241,024
450,000 167,274 228,024 250,524 273,024
500,000 187,524 255,024 280,024 305,024
550,000 207,774 282,024 309,524 337,024
600,000 228,024 309,024 339,024 369,024
650,000 248,274 336,024 368,524 401,024
</TABLE>
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.
Long deferred $39,860, $32,094, and $26,000 of compensation for the years
1993, 1994 and 1995, respectively. For 1995, Mr. Hecht deferred $52,000 of
compensation, and Mr. Grey deferred $10,800.) 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 the time of
retirement and, in some cases, by pensions received from prior employment; and
are reduced for retirement prior to age 60.
As of January 1, 1996, the years of credited service under the Retirement
Plan for Messrs. Hecht, Long, Byram, Hill and Grey were 25.8, 28.4, 19.3, 26.4
and 0.7, 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 under the SERP).
In the event of certain changes in control and termination of service,
executive officers would be eligible for benefits under the Resources'
Executive Retirement Security Plan ("ERSP"). For purposes of this Plan,
compensation and years of credited service are the same as under the SERP,
except that, under this Plan, benefits become immediately vested for
participants, salary levels used to determine benefits are based on earnings
for the twelve consecutive month period of the highest earnings in the final
60 consecutive months immediately preceding termination and the penalties for
early retirement are eliminated. Under the Plan, executive officers terminated
by the Company within 36 months after such change in control for reasons other
than cause or disability are entitled to the greater of the actuarial
equivalent of (a) the sum of three times the executive's annual base salary
and incentive compensation; or (b) the benefit payable under the SERP formula
unreduced for early retirement. The Plan provides that benefits payable
thereunder will be reduced to the extent necessary so that no such benefits
will be subject to an excise tax under Section 4999 of the Internal Revenue
Code, unless absent such reduction, the participant would receive a higher
aggregate benefit.
In addition, in the event of a change in control or certain circumstances
that may lead to a change in control, the Management Development and
Compensation 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.
7
<PAGE>
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 Resources. Compensation
amounts for these officers are the same as those shown in the Resources' proxy
statement; they are not additive. Messrs. Hecht and Long also served as
directors but received no separate remuneration in that capacity.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------------------------------
OTHER ANNUAL RESTRICTED ALL OTHER
SALARY/1/ BONUS/1/ COMPENSATION/2/ STOCK AWARD/3/ COMPENSATION/4/
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) ($)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
William F. Hecht 1995 489,024 0/5/ 0 413,920 4,149
Chairman, President and 1994 440,374 0/6/ 0 0/6/ 4,042
Chief Executive Officer 1993 375,000 45,000 0 71,070 3,346
Frank A. Long 1995 344,041 0/5/ 13,654 237,318 4,187
Executive Vice President and 1994 295,434 24,375 7,050 42,525 4,078
Chief Operating Officer 1993 231,000 27,720 1,000 43,775 3,134
Robert G. Byram 1995 232,717 0/5/ 4,616 134,640 3,496
Senior Vice President--
Nuclear 1994 206,434 16,500 0 28,755 3,423
1993 165,831 20,076 0 31,673 1,031
Ronald E. Hill 1995 199,315 0/5/ 8,808 113,883 3,936
Senior Vice President--
Financial 1994 171,950 12,975 1,100 22,680 3,840
1993 144,200 11,611 0 16,480 2,481
Robert J. Grey 1995 173,471 25,000/5/ 0 60,958 140,547
Senior Vice President, 1994 0 0 0 0 0
General Counsel and
Secretary 1993 0 0 0 0 0
</TABLE>
/1/ Salary and bonus data include deferred compensation. Bonus data include one-
time employment bonus of $25,000 for Mr. Grey, who joined the Company in
March 1995 as Vice President, General Counsel and Secretary. Effective March
1, 1996, Mr. Grey became Senior Vice President, General Counsel and
Secretary of the Company and Resources.
/2/ Includes longevity pay (which is compensation for vacation earned, but not
taken) and fees earned by certain officers for serving as directors of Safe
Harbor, an affiliate of PP&L. The Safe Harbor fees earned are as follows:
Mr. Long -- $1,000 in 1993 and $800 in 1994; and Mr. Hill -- $1,100 in 1994,
and $1,000 in 1995.
/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, 1995, the officers listed in this
table held the following number of shares of restricted common stock, with
the following values: Mr. Hecht -- 5,400 shares ($135,000); Mr. Long --5,390
shares ($134,750); Mr. Byram -- 3,312 shares ($82,800); Mr. Hill --2,368
shares ($59,200); and Mr. Grey -- 0 shares ($0). These year-end data do not
include awards made in January 1996 for 1995 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; also includes relocation expenses paid to Mr. Grey in
1995.
/5/ Although the incentive program provides that the short-term award be paid in
cash, the Management Development and Compensation Committee instead made the
award in restricted stock based upon comments received from the senior
officers who felt that they should have greater personal investment in the
Company and thus should receive their short-term awards in Resources stock
rather than in cash.
/6/ Mr. Hecht requested to forgo his incentive award for 1994.
8
<PAGE>
EMPLOYMENT AGREEMENT
Mr. Grey has an employment agreement with the Company which provides for a
base annual salary in his first year of employment of $220,000, guaranteed for
one year unless terminated for cause. In addition, Mr. Grey as an officer of
the Company participates in the Short-Term and Long-Term Incentive Plans; his
contract guarantees that his first-year Short-Term award will be at least
8.75% of salary (or $19,250). Under the agreement, Mr. Grey also participates
in the SERP and ERSP described above.
JOINT REPORT OF THE MANAGEMENT DEVELOPMENT AND COMPENSATION COMMITTEES
REGARDING EXECUTIVE COMPENSATION
GENERALLY
PP&L Resources, Inc. (the "Company") is the parent holding company of
Pennsylvania Power & Light Company ("PP&L"), and PP&L is its principal
subsidiary. The members of the Company's Management Development and
Compensation Committee -- all independent outside directors -- and Board of
Directors also serve in the same capacity for PP&L. Certain senior officers of
the Company are also senior officers of PP&L. 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 and discussions
of their compensation include compensation earned for services to both the
Company and PP&L.
During 1995, 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. These officers include: William F. Hecht, Chairman, President and Chief
Executive Officer of the Company; Frank A. Long, Executive Vice President of
the Company; Ronald E. Hill, Senior Vice President-Financial and Treasurer of
the Company; Robert G. Byram, Senior Vice President-Nuclear of PP&L; and
Robert D. Fagan, President of Power Markets Development Company (an
unregulated subsidiary of the Company created to pursue worldwide energy-
related business opportunities) ("PMDC"). Except for Mr. Fagan, these
individuals are also senior officers of PP&L./1/
The Company has in place two major components of executive compensation for
the senior officers and other officers of the Company and its subsidiaries --
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 variations in individual performance.
Incentive compensation is awarded based on corporate performance and
shareowner value. The incentive program has two separate components. A short-
term incentive plan makes cash awards available to the senior officers based
on the achievement of key corporate goals, as well as individual goals for the
other officers. A long-term incentive plan grants restricted Company stock
and/or stock options to officers based on the Company's return on common stock
equity. Both plans and their associated goals and performance targets were
developed by the Committee.
BASE SALARIES
In general, the Committee's objective is to provide salary levels that are
sufficiently competitive with comparable electric utilities 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 July 1994, the Committee established a goal to bring executive
compensation in line with comparable companies. At that time, PP&L's average
base pay for senior officers was 25.3% below average and total compensation
was 52.5% below average. In assessing the senior officer salaries, the
Committee also reviews the internal salary structure of PP&L and seeks to
maintain equity within the Company.
In January 1995, the Committee reviewed salary ranges for Messrs. Hecht,
Long, Hill and Byram by comparing these salary levels with levels for similar
positions of responsibility at 12 comparable electric utilities./2/ All of the
comparison companies were included in the EEI (Edison Electric Institute) 100
Index of Investor-owned
- -------
/1/ Mr. Fagan has no position with PP&L, but is a member of the Corporate
Leadership Council and a "senior officer" of Resources by virtue of his
position as President of PMDC. The other member of the Company's Corporate
Leadership Council is Robert J. Grey, Vice President, General Counsel and
Secretary of the Company and PP&L. (Effective March 1, 1996, Mr. Grey became
Senior Vice President, General Counsel and Secretary of the Company and
PP&L.)
/2/ The 1995 base salary for Mr. Fagan -- who joined the Company in November
1994 -- was established under a contract reviewed and approved by the
Committee, based on levels for similar positions at other companies.
9
<PAGE>
Electric Utilities. The electric utilities used for comparison purposes in
1995 were selected based on their similarity to PP&L in terms of annual
revenues, service territory characteristics or economic conditions.
After reviewing salary data for similar positions in the 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 set the 1995 salaries of the
senior officers. As of January 1995, Mr. Hecht's total compensation was about
34% 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 28% less than the average paid to their
counterparts at these companies. Considering this information and individual
performance, a salary increase was given to Mr. Hecht effective in August
1995, Messrs. Long and Byram effective in May 1995, and Mr. Hill effective in
February 1995. It is anticipated that the revised short- and long-term
incentive plans established at the beginning of 1995 will contribute to
bringing the Company's overall senior pay levels up to the average for the
marketplace.
Regarding the base salaries of other corporate officers, the Board of
Directors has delegated the authority to review and set the salaries of these
officers to the senior officers. This enables the senior officers to establish
the salaries of the officers who report to them./3/ As a result, officers'
salaries closely reflect their individual performance and contribution to the
achievement of corporate goals.
INCENTIVE AWARDS
In establishing the second component of executive compensation -- incentive
awards -- the Committee reviews annually the Company's performance in relation
to specific corporate objectives and the Company's overall return on common
equity. This component of compensation is intended to relate executive
compensation directly to corporate performance and shareowner value.
Based on the Committee's recommendation, effective for calendar year 1995
the Company established a new executive compensation incentive award program.
The program has two separate components: a Short-Term Incentive Plan and a
Long-Term Incentive Plan.
SHORT-TERM INCENTIVE PLAN
In establishing the Short-Term Incentive Plan, the Board of Directors and
the Committee concluded that basing a larger portion of officer compensation
on the achievement of key corporate goals was appropriate in the increasingly
competitive industry marketplace. The Short-Term Incentive Plan achieves this
objective by providing the opportunity to base approximately 20% of the
officer group's total compensation on the achievement of such annual goals. It
also is simpler in design than the prior plan, tracks far fewer but more
independent variables and more appropriately correlates compensation to the
particular accountabilities of the various officers.
The Short-Term Incentive Plan makes cash awards available to officers for
the achievement of specific, independent goals established for each calendar
year. Annual award targets based on accountability level are established for
each officer according to the following table:
<TABLE>
<CAPTION>
SHORT-TERM INCENTIVE PLAN
PERCENT OF BASE SALARY TARGET
-----------------------------
<S> <C>
Chief Executive Officer 40 %
Executive Vice President 35 %
Sr. Vice President 30 %
Vice President 17.5%
</TABLE>
Annual awards are determined by applying these target percentages to the
percentage of short-term 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.
- -------
/3/ The 1995 base salary for Mr. Grey -- who joined the Company in March 1995 --
was established by contract based on levels for similar positions at other
companies.
10
<PAGE>
The following are the goal categories for 1995:
I. FINANCIAL -- based on net income and total return on common stock.
II. OPERATIONAL -- based on customer satisfaction indices, power plant
performance, minimizing work-related accidents, environmental performance
and affirmative action results.
III. CORPORATE STRATEGY -- based on achievement of the holding company
restructuring and development of business plans for PMDC.
In addition to these goals for senior officers, specific individual goals
are set for each of the other officers who then establish goals for
subordinates.
The weightings for each of these general categories vary 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
<TABLE>
<CAPTION>
OFFICER LEVEL FINANCIAL OPERATIONAL STRATEGIC INDIVIDUAL
------------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Chief Executive Officer 50% 25% 25% 0%
Executive Vice President 30 50 20 0
Sr. Vice President 25 60 15 0
Vice President 20 40 0 40
</TABLE>
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.
LONG-TERM INCENTIVE PLAN
Also effective for 1995, the Company amended its existing Incentive
Compensation Plan to establish a Long-Term Incentive Plan which focuses solely
on increasing shareowner value. A major purpose of this component of
compensation is to encourage long-term decision-making by senior management.
The Plan establishes objectives for return on common equity (ROE) that require
the Company to compare favorably with a peer group of companies and also to
maintain appropriate levels of absolute ROE performance. Greater emphasis is
placed on the Company's relative ROE performance than on absolute ROE
performance. The logic for this approach is that relative ROE performance is
more closely correlated to the performance of Company management, whereas
external factors such as long-term interest rates have a major impact on
absolute ROE performance.
Awards are granted annually based on a review of the Company's average ROE
performance over the prior three calendar years. Each year, a new three-year
average ROE is calculated for comparative purposes. This three-year average
avoids the excessive impact of short-term fluctuations in Company or peer
group performance that may not reflect long-term achievement.
The annual award compensation target for individual officers covered by the
Long-Term Incentive Plan varies by accountability levels, as follows:
<TABLE>
<CAPTION>
LONG-TERM INCENTIVE AWARD
PERCENT OF BASE SALARY TARGET
-----------------------------
<S> <C>
Chief Executive Officer 40 %
Executive Vice President 35 %
Sr. Vice President 30 %
Vice President 17.5%
</TABLE>
Under the Long-Term Incentive Plan, awards are made in the form of
restricted stock and/or stock options equivalent to the dollar value of the
percentage applied to base pay in effect at the end of the year. This stock
award encourages 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 Long-Term Incentive 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.
11
<PAGE>
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. No awards of stock options have ever
been made under this plan.
The Committee based the senior officers' incentive awards for 1995 solely on
the corporate goals and return on common equity achieved. In January 1996, the
Committee reviewed performance achieved during 1995 for each of the corporate
goals under the Short-Term Incentive Plan. During 1995, the Company achieved
100% of the financial goals, 65% of the operational goals and 100% of the
corporate strategy goals. As a result of the weighting system described above,
the senior officers received the following Short-Term Incentive Plan awards as
a percent of base salary: Mr. Hecht -- 36.4%; Mr. Long -- 29.1%; Mr. Byram --
23.7%; and Mr. Hill -- 23.7%. Although the incentive program provides that
this short-term award be paid in cash, the Committee instead made this award
in restricted stock based upon comments received from the senior officers who
felt that they should have greater personal investment in the Company and thus
should receive their Short-Term Incentive Plan awards in Company stock rather
than in cash.
In January 1996, the Committee also reviewed the Company's ROE performance
for the Long-Term Incentive Plan. During 1995, the Company achieved an ROE of
12.78%, resulting in a three-year average ROE of 11.58%. The peer group of
comparable companies achieved an average ROE of 12.30% and a three-year
average of 10.62%. Applying the formula for comparative and absolute ROE
performance adopted by the Committee in January 1995, the senior officers
received the following Long-Term Incentive Plan awards as a percent of base
salary: Mr. Hecht -- 43.2%; Mr. Long -- 37.8%; Mr. Byram -- 32.4%; and Mr.
Hill -- 32.4%./4/
The 1995 incentive awards made to the five most highly compensated executive
officers are shown in the Summary Compensation Table./5/
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
In establishing Mr. Hecht's 1995 salary, in January 1995 the Committee
reviewed the salaries of the chief executive officers of the 12 comparison
electric utilities referenced above. In conducting this review, the Committee
concluded that Mr. Hecht's 1994 salary was lower than 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 1995 salary at $520,000, effective August 1, 1995. This salary level is
still below the average paid to incumbents in comparable positions.
Based on the Company's performance in 1995 on the specific corporate goals
under the Short-Term Incentive Plan, Mr. Hecht received a Short-Term Incentive
Plan award of restricted stock equal to approximately 36.4% of his year-end
salary. Based on the Company's three-year return on common equity through
1995, Mr. Hecht received a Long-Term Incentive Plan award of restricted stock
equal to approximately 43.2% of his year-end salary.
The Management Development
and Compensation Committee
E. Allen Deaver, Chair
Elmer D. Gates
Stuart Heydt
Norman Robertson/6/
- -------
/4/ As a Vice President of the Company and PP&L, Mr. Grey received a Short-Term
Incentive Plan award of 12.0% of base salary, and a Long-Term Incentive Plan
award of 15.8% of base salary. As with the senior officers, Mr. Grey
received his entire incentive award in restricted stock.
/5/ Mr. Fagan's 1995 short-term incentive award of 44.4% of base salary ( 1/3 in
cash and 2/3 in restricted stock) was not based on the Company's general
incentive award program but, under the terms of his employment contract, on
the following separate goals approved by the Committee related to the
startup of PMDC operations: the development of financial controls and
investment guidelines; the establishment of a marketing plan; the
preparation of a financial plan; and adequate executive and professional
staffing. In addition, the Committee granted Mr. Fagan a long-term incentive
award equal to 30.5% of his base salary ( 1/3 in cash and 2/3 in restricted
stock).
/6/ Effective September 25, 1995, Mr. Richard S. Barton resigned from the
Company's Board of Directors. Mr. Robertson replaced Mr. Barton on the
Committee.
12
<PAGE>
INDEPENDENT AUDITORS
Upon the recommendation of Resources' Audit Committee, which is composed of
directors who are not Company employees, the Board of Directors of Resources
appointed Price Waterhouse LLP to serve as independent auditors for the year
ending December 31, 1996, for 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 Resources.
Deloitte & Touche LLP ("Deloitte") served as independent auditors of the
Company for the year ended December 31, 1994. Based upon a recommendation of
its Audit Committee, the Board of Directors of the Company decided on January
25, 1995 that Deloitte would not be retained as the Company's independent
auditors for the year ended December 31, 1995. Deloitte's reports on the
Company's financial statements for the fiscal years ended December 31, 1993
and 1994, did not contain any adverse opinion of disclaimer of opinion, nor
were the reports modified or qualified in any manner. During the period of
such two fiscal years and during the period from December 31, 1994 through
January 25, 1995, there were no disagreements with Deloitte on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure. During such periods, there were no "reportable events" as
that term is defined in Item 304(a)(1)(v) of Regulation S-K promulgated by the
Securities and Exchange Commission.
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.
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. 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 1997 ANNUAL MEETING
To be included in the proxy material for the 1997 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, 1996.
ANNUAL FINANCIAL STATEMENTS
The Company's annual financial statements and related management discussion
are appended to this document.
By Order of the Board of Directors.
Robert J. Grey
Secretary
March 15, 1996
13
<PAGE>
[LOGO OF PP&L APPEARS HERE]
PENNSYLVANIA POWER & LIGHT COMPANY
1995 ANNUAL REPORT
TO SHAREOWNERS
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... A- 1
Independent Auditors' Report.............................................. A-12
Management's Report on Responsibility for Financial Statements............ A-13
Consolidated Statement of Income.......................................... A-14
Consolidated Statement of Cash Flows...................................... A-15
Consolidated Balance Sheet................................................ A-16
Consolidated Statement of Shareowner's Common Equity...................... A-18
Consolidated Statement of Preferred and Preference Stock.................. A-18
Consolidated Statement of Long-Term Debt.................................. A-20
Notes to Financial Statements............................................. A-21
Selected Financial and Operating Data..................................... A-38
Executive Officers of PP&L................................................ A-39
Shareowner and Investor Information....................................... A-40
Quarterly Financial Data.................................................. A-42
Glossary.................................................................. A-43
</TABLE>
<PAGE>
REVIEW OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PENNSYLVANIA
POWER & LIGHT COMPANY
Terms and abbreviations appearing in the Review of the Financial Condition
and Results of Operations are explained in the glossary on pages A-43-A-44.
In 1995, Resources, which had been a wholly owned subsidiary of PP&L, became
the parent holding company of PP&L. At that time, the holders of PP&L common
stock became holders of Resources common stock and the stock certificates
representing PP&L common stock now represent Resources common stock. At the
same time, PMDC, a subsidiary of PP&L, was transferred as a dividend in the
amount of $50.9 million from PP&L to become a direct subsidiary of Resources.
In the accompanying financial statements, for comparability purposes, the
dividend of PMDC was reported retroactive to March 1994 when PMDC was formed
as a subsidiary.
RESULTS OF OPERATIONS
EARNINGS
Earnings available to Resources were $324 million in 1995, $215 million in
1994 and $314 million in 1993. The following table highlights the major items
that impacted earnings for each of the years (millions of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Earnings--excluding costs of workforce reduction programs and
one-time adjustments........................................ $282 $308 $332
Workforce reduction programs:
Voluntary early retirement program......................... 38 (43)
Other...................................................... (20)
One-time adjustments:
Postretirement benefits other than pensions................ 16 (6)
Disallowance-Susquehanna Unit No. 1 deferred costs......... (20)
ECR purchased power costs.................................. 6 (9)
Gain/(loss) on subsidiary coal reserves.................... 20 (40)
ECR settlement............................................. (9)
Rate reduction--FERC....................................... (6)
Other...................................................... 2 5 (3)
---- ---- ----
Earnings--reported........................................... $324 $215 $314
==== ==== ====
</TABLE>
The decline in earnings excluding the cost of workforce reduction programs
and one-time adjustments for 1995 was primarily due to increases in other
operating costs, depreciation for the Susquehanna station and costs billed to
PP&L by Resources that were associated with the review of PECO's proposals to
acquire Resources. The decline in earnings excluding workforce reduction
programs and one-time adjustments for 1994 was primarily due to the increase
in depreciation for the Susquehanna station and for postretirement benefits
other than pensions.
Several key initiatives have been put in place to improve financial
performance. These initiatives include:
. A $671 million reduction in PP&L's construction expenditures over the
five-year period 1996-2000, including reductions of $93 million and $220
million for 1996 and 1997, respectively. These reductions reflect, among
other things, a decision to not install FGD at PP&L's Montour station;
. A planned $50-$60 million (about 8%) reduction in PP&L's operation and
maintenance costs from previously budgeted amounts by the year 2000;
. Marketing and economic development activities to achieve an average
compound annual growth rate of about 2% in sales to PP&L's service area
customers through the year 2000; and
. Except for capital to be provided to PP&L by Resources through sales of
Resources' common stock under the DRIP and PP&L's ESOP, PP&L expects to
meet all of its construction expenditures and debt maturities through
internally generated funds during the five-year period 1996-2000.
PP&L believes that the PUC Decision and the above initiatives will permit
PP&L to increase shareowner value, including growth in earnings, over the long
term. Actual sales growth and improvement in earnings and
A-1
<PAGE>
financial performance will depend upon economic conditions, energy
consumption, the impact of increasing competition in the electric utility
industry, the effects of regulation and other factors. Additionally, PP&L
remains committed to a corporate objective of keeping its prices as stable as
possible and maintaining customer rates that compare favorably with those of
neighboring utilities.
ELECTRIC ENERGY SALES
Changes in PP&L's electric energy sales were as follows:
<TABLE>
<CAPTION>
1995 1994
VS VS
1994 1993
-------- --------
(MILLIONS OF KWH)
<S> <C> <C>
Electric energy sales
Residential............................................... (144) 401
Commercial................................................ 232 342
Industrial................................................ 309 437
Other (including UGI)..................................... (40) 84
-------- --------
System sales............................................ 357 1,264
Sales to other major utilities............................ 1,368 (835)
PJM energy sales.......................................... (800) (983)
-------- --------
925 (554)
======== ========
</TABLE>
System, or service area, sales were 32.7 billion kwh in 1995, an increase of
357 million kwh, or 1.1%, over 1994. This increase was primarily due to
increased economic activity in central eastern Pennsylvania in 1995. If normal
weather had been experienced in both 1995 and 1994, system sales for 1995
would have increased by about 529 million kwh, or 1.7%, over 1994.
Actual sales to residential customers in 1995 decreased 144 million kwh, or
1.3%, from 1994, while actual sales to residential customers in 1994 increased
401 million kwh, or 3.6%, from 1993. The change in residential sales for both
periods was primarily due to the extreme cold weather in early 1994. Under
normal weather conditions in both 1995 and 1994, residential sales would have
remained essentially unchanged.
For the period 1992-1995, industrial sales have increased in each quarter as
compared to the same quarter in the prior year. Industrial sales are an
important indicator of the economic health of PP&L's service area.
See "Operating Revenues" for more information.
RATE MATTERS
Base Rate Filing with the PUC
On September 27, 1995, the PUC issued a final order with respect to the base
rate case filed by PP&L on December 30, 1994.
PP&L's request sought to increase PUC-jurisdictional revenues by $261.6
million, or about 11.7%. The PUC Decision in the rate case granted PP&L a $107
million increase in base rates based on test year conditions. At the same
time, PP&L's ECR was reduced by $22 million related to capacity credit sales
resulting in a net increase of $85 million, or about 3.8%, in PUC-
jurisdictional revenues effective September 28, 1995. A detailed discussion of
the PUC Decision is presented in Financial Note 3.
Energy Cost Rate Issues
As a result of the PUC Decision, a new ECR, which reflects the roll-in of
all test year energy costs into base rates, became effective as of September
28, 1995.
In April 1994, the PUC reduced PP&L's 1994-95 ECR claim by approximately
$15.7 million to reflect costs associated with replacement power during a
portion of the time that Unit 1 of the PP&L Susquehanna station was out of
service for refueling and repairs. As a result of the PUC's action, PP&L
recorded a charge against income
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in the first quarter of 1994 for the $15.7 million of unrecovered replacement
power costs. This charge adversely affected net income by about $9.0 million.
PP&L 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 OTS and other parties to the proceeding on this matter
which reduced the disallowed costs by $9.7 million.
The PUC approved the settlement agreement and in the first quarter of 1995,
PP&L recorded a credit to income of $9.7 million.
Proposed Buyout of Power Purchase Contract
In February 1996, PP&L signed agreements with Continental to terminate the
1985 power purchase contract under which PP&L purchases up to 100 MW of power
from Continental's cogeneration project. The Continental project is a
qualifying facility from which PP&L has been required to purchase power under
PURPA. In 1985, the PUC approved ECR recovery of the amounts paid to
Continental under the power purchase contract. In 1994, Continental filed for
protection from creditors under Chapter 11 of the U.S. Bankruptcy Code. Under
the February agreements, PP&L would pay Continental $91.2 million over five
years to cancel the power purchase contract. Also, Continental agrees to waive
its rights under PURPA or similar legislation or regulations to require PP&L
to purchase power from the plant in the future.
The agreements are conditioned upon PUC approval of full recovery of the
buyout cost through the ECR and approval of the agreements by the Bankruptcy
Court. PP&L will file a petition with the PUC seeking such ECR recovery of the
$91.2 million buyout cost over a five-year period. PP&L's request for recovery
will state that the buyout would save retail customers approximately $113.6
million over the next 13 years by eliminating the need to buy this power from
Continental. At the same time, Continental will file with the Bankruptcy Court
for approval of the agreements.
FERC-Major Utilities' Rates
In October 1995, the FERC approved PP&L's request to recover postretirement
benefits other than pensions through its contractual agreements with other
major electric utilities, subject to refund after FERC review. PP&L is billing
these utilities their share of postretirement costs other than pensions
incurred since January 1993. See Financial Notes 3 and 4 for more details on
these contracts.
In an October 1995 order, the FERC also ordered hearings to evaluate the
justness and reasonableness of PP&L's rates in its contractual agreements with
JCP&L, Atlantic, BG&E and UGI.
In January 1996, PP&L filed a request with the FERC to incorporate a change
in the method of calculating depreciation in several of its contractual
agreements with other major utilities. PP&L also requested to increase its
decommissioning rate to reflect the projected cost of decommissioning the
Susquehanna station and fossil plants.
PP&L cannot predict the outcome of these proceedings.
OPERATING REVENUES
Changes in PP&L's total operating revenues were attributable to the
following:
<TABLE>
<CAPTION>
1995 1994
VS VS
1994 1993
---------- ----------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Sales volume & sales mix............................... $ 34.5 $ 31.3
Weather................................................ (8.4) 10.8
Energy revenues........................................ 3.6 1.4
Rate increase.......................................... 21.0
Reduction in Pa. CNI rate.............................. (11.9) (13.6)
Sales to other major utilities & PJM................... (5.0) (34.4)
Other.................................................. (7.1) 2.6
---------- ----------
$ 26.7 $ (1.9)
========== ==========
</TABLE>
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Energy revenues increased $3.6 million in 1995. This increase is the net
effect of lower energy revenues of $21.8 million and the effects of regulatory
action regarding recovery of certain replacement power costs during 1994 and
1995. See "Rate Matters--Energy Cost Rate Issues" for more details.
The decrease in 1995 revenues from sales to other major utilities and PJM
was due to declining market prices resulting from improved availability of
lower cost PJM generation.
Other revenues in 1995 were lower than 1994 due to the expiration of a long-
term contract for capacity credit sales.
The increase in energy revenues of $1.4 million in 1994 was the net effect
of higher energy revenues partially offset by unrecovered replacement power
costs. See "Rate Matters--Energy Cost Rate Issues" for more details.
The decrease in 1994 revenues from sales to other major utilities and PJM
was primarily due to lower availability of PP&L's coal-fired units in 1994.
Tariffs subject to PUC jurisdiction accounted for approximately 84% of
PP&L's revenues from energy sales in 1995. The remaining 16% of such revenues
resulted from sales regulated by the FERC and PP&L's PJM energy sales.
FUEL EXPENSE
Fuel expense for 1995 and 1994 decreased by $24.3 million and $33.3 million,
respectively, from the prior year. These decreases exclude the write-off of
$11 million of deferred retired miners' health care benefits in 1993 and a
related credit to expense of $3.6 million in 1994. The decreases in fuel
expense were due to:
<TABLE>
<CAPTION>
1995 1994
VS VS
1994 1993
---------- ----------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Decrease due to change in fuel prices.................. $ (19.7) $ (4.8)
Decrease due to fuel mix............................... (4.6) (28.5)
---------- ----------
$ (24.3) $ (33.3)
========== ==========
</TABLE>
The decrease in 1995 was attributable to lower use of oil-fired generation
due to increased nuclear and coal-fired generation and lower unit fuel costs
for nuclear generation. Fuel costs decreased in 1994 due to a 3.5% decrease in
total generation primarily due to lower availability of coal-fired generation
which resulted in lower sales to PJM and other utilities. Lower fuel costs for
off-system sales were partially offset by higher cost oil-fired generation for
base load during the first quarter of 1994.
TAXES
Income tax expense increased $107 million, or 60%, from 1994. This was
primarily due to an increase in pre-tax book income of $216 million and a
charge of $12 million applicable to the disallowance of Susquehanna Unit No. 1
deferred operating and capital costs. Partially offsetting these increases was
an $8.1 million decrease resulting from the reduction of the Pa. CNI rate from
11.99% for 1994 to 9.99% for 1995. See Financial Note 3--"Refund of State Tax
Decrease".
OTHER OPERATION, MAINTENANCE AND DEPRECIATION
Other operating costs increased $30.0 million in 1995 and $26.9 million in
1994. Both periods were impacted by the regulatory effects of accounting for
postretirement benefits costs. Excluding these effects, other operating
expenses increased $73.8 and $6.6 million, respectively, for 1995 and 1994.
The increase in 1995 was primarily due to: $31.3 million for PP&L's
workforce reductions; $18.4 million for increased efforts for computer support
that will increase productivity; $7.9 million due to an increase in the
reserve for uncollectible accounts; and $6.2 million of increased leasing
costs. See Financial Note 12--"Workforce Reductions" for further information.
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Maintenance expense increased $5.6 million in 1995 and decreased $13.2
million in 1994. In 1995, PP&L incurred a charge of $19.2 million for obsolete
and excess inventory at its fossil-fueled and nuclear generating stations.
Excluding this write-off, maintenance expense decreased $13.6 million in 1995.
The decrease in maintenance expense for 1995 was primarily due to PP&L's
continued efforts to reduce costs and achieve longer operating cycles at its
generating stations. The decrease in 1994 was the net result of lower costs
associated with maintaining PP&L's generating stations in 1994 and a $6.9
million write-off of obsolete and excess inventory at its fossil-fueled
generating stations in 1993.
Depreciation expense increased $34.2 million in 1995 and $29.4 million in
1994. Higher depreciation expense reflected increases associated with the
Susquehanna station and the depreciation of new property, plant and equipment
placed in service. As a result of the PUC Decision, Susquehanna depreciation
applicable to property placed in service prior to January 1, 1989, will be
recorded at an annual level of $173 million through 1998 at which time
depreciation is scheduled to decline by about $71 million.
PP&L is continuing its ongoing re-engineering and cost reduction efforts,
which are expected to impact the size of its workforce. As a result of these
efforts, PP&L announced in the fourth quarter of 1995 that about 300
bargaining unit positions will be eliminated. Although no specific targets
have been set, PP&L currently expects that the year-end 1995 level of 6,661
full-time employees will decline to 6,000 or fewer employees over the next few
years. As the workforce declines, additional costs may be incurred due to the
reductions, in amounts that are not currently determinable.
VOLUNTARY EARLY RETIREMENT PROGRAM
As part of its continuing efforts to reduce costs, PP&L offered a VERP to
851 employees who were age 55 or older by December 31, 1994. A total of 640
employees elected to retire under the program, at a total cost of $75.9
million. The VERP provided for a lump sum payment based on an employee's years
of service, no reduction in retirement benefits for age, and supplemental
monthly payments. PP&L recorded the cost of the program as a charge against
income in the fourth quarter of 1994, which reduced net income by $43.4
million.
As a result of the PUC Decision, PP&L was allowed to recover through
customer rates the PUC-jurisdictional amount, $65.7 million, of the cost of
its VERP over a period of five years. Consequently, PP&L recorded a $37.8
million after-tax credit to income in the third quarter of 1995 to reverse the
PUC-jurisdictional portion of the charge for this program that was recorded in
the fourth quarter of 1994. The estimated annual savings of $35 million from
the program also are included in rates.
SUBSIDIARY COAL RESERVES
In connection with a 1994 review by PP&L of its non-core business assets, a
subsidiary of PP&L initiated an evaluation of the carrying value of its $83.5
million investment in undeveloped coal reserves in western Pennsylvania.
Outside appraisal firms completed the evaluation and indicated that due to
changing market conditions an impairment of these assets had occurred.
Accordingly, the carrying value of this investment was written down to its
estimated net realizable value of $9.8 million. This write-down resulted in an
after-tax charge to income of $40 million in 1994.
These reserves were acquired in 1974 with the intention of supplying future
coal-fired generating stations. PP&L concluded that it would not develop these
reserves. In November 1995, the coal reserves were sold for $52 million, which
resulted in a $41.7 million gain, or $20.3 million after-tax.
OTHER INCOME AND DEDUCTIONS--OTHER--NET
"Other--net" decreased $15.3 million in 1995 and $9.6 million in 1994. The
decrease in 1995 was primarily due to $14.5 million of costs billed to PP&L
from Resources associated with evaluating and responding to PECO's unsolicited
proposals to acquire Resources and an $8.9 million write-off of the
Susquehanna Unit No. 1 deferred operating and capital costs that were
disallowed in the PUC Decision. The decrease in 1994 was primarily due to a
decrease in the income from passive financial investments.
FINANCING COSTS
In 1995, PP&L continued to take advantage of opportunities to reduce its
financing costs by retiring long-term debt with the proceeds from the sales of
securities at a lower cost. Interest on long-term debt and dividends on
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preferred and preference stock decreased from $281 million in 1992 to $241
million in 1995, for a total decrease of $40 million.
FINANCIAL CONDITION
REDUCTION IN CAPITAL EXPENDITURE REQUIREMENTS
The following schedule shows PP&L's current capital expenditure projections
for the years 1996-2000 and reflects a $671 million reduction in capital
expenditures from previously budgeted amounts over the period 1996 through
2000.
CAPITAL EXPENDITURE REQUIREMENTS (A)
<TABLE>
<CAPTION>
PROJECTED
ACTUAL ------------------------
1995 1996 1997 1998 1999 2000
------ ---- ---- ---- ---- ----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Construction expenditures
Generating facilities......................... $100 $ 80 $ 63 $ 68 $ 56 $ 61
Transmission and distribution facilities...... 166 146 140 142 145 150
Environmental................................. 34 33 25 33 25 3
Other......................................... 55 49 30 22 18 17
---- ---- ---- ---- ---- ----
355 308 258 265 244 231
Nuclear fuel owned and leased................... 46 88 62 62 63 64
Other leased property........................... 28 7 7 7 8 8
---- ---- ---- ---- ---- ----
Total....................................... $429 $403 $327 $334 $315 $303
==== ==== ==== ==== ==== ====
</TABLE>
- -------
(a) Construction expenditures include AFUDC which is expected to be less than
$20 million in each of the years 1996-2000.
A significant portion of the reduction in construction expenditures from the
amounts projected in 1995 reflects PP&L's decision to not install FGD--at an
estimated capital cost of $413 million--on the two generating units at the
Montour station. Instead of relying on the FGD to achieve compliance with the
Phase II requirements of the Clean Air Act, PP&L plans to purchase low sulfur
coal, utilize banked emission allowances and purchase additional emission
allowances.
PP&L also has reduced its projected construction expenditures for
transmission and distribution facilities during this period by about $120
million and reduced its expenditures for capital improvements at fossil-fueled
and hydro generating stations by $78 million from the previous estimate.
FINANCING AND LIQUIDITY
Net cash provided by operating activities for 1995 was essentially unchanged
and decreased $59.6 million in 1994. The decrease in 1994 was primarily due to
lower earnings, increases in income tax payments, higher fuel inventories and
a reduction in accounts payable.
Net cash used in investing activities was $146.5 million lower in 1995 than
1994. This decrease was due primarily to lower construction expenditures and
the proceeds from the sale of coal reserves. Net cash used in investing
activities was $28.8 million higher in 1994 than 1993 due to higher
construction expenditures.
For the years 1993-1995, PP&L issued $1.8 billion of long-term debt and $380
million of preferred stock. For the same period, PP&L received a total of $137
million from issuing common stock or receiving capital contributions from
Resources. Proceeds from security sales and capital contributions were used to
retire $1.6 billion of long-term debt and $463 million of preferred and
preference stock to lower PP&L's financing costs, reduce short-term debt and
finance construction expenditures. During the years 1993-1995, PP&L also
incurred $220 million of obligations under capital leases (primarily nuclear
fuel). In 1995, PP&L sold $55 million principal amount of first mortgage
bonds, issued $36 million of common stock, and received $25 million in capital
contributions from Resources. Of the $25 million, $18 million was applicable
to proceeds received through its DRIP and the remaining $7 million issued to
PP&L's ESOP. During the year, PP&L retired $140 million of long-term debt.
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PP&L anticipates the issuance of $116 million of unsecured notes in early
1996 in order to redeem higher-cost bonds through the maintenance and
replacement fund provisions of PP&L's Mortgage.
PP&L expects to receive capital contributions from Resources related to
PP&L's ESOP through about 2000, with expected proceeds of about $8 million
annually. Other capital contributions from Resources are dependent on the
amount of common equity capital obtained by Resources and its allocation of
that capital to all of its subsidiaries.
Except for capital contributions received from Resources, PP&L expects that
internally generated funds (after provision for dividends and capital lease
payments) will be adequate to meet its capital requirements and its $415
million of debt maturities for the years 1996-2000. PP&L has no preferred
stock sinking fund requirements during 1996-2000.
To enhance financing flexibility, a $250 million revolving credit
arrangement is maintained with a group of banks and is used principally as a
back-up for PP&L's commercial paper. In addition, $45 million in credit
arrangements are maintained with a group of banks to provide back-up for
PP&L's commercial paper and short-term borrowings of certain of its
subsidiaries. No borrowings were outstanding at December 31, 1995 under these
arrangements. See Financial Note 10 for further information.
FINANCIAL INDICATORS
PP&L earned a 13.10% return on average common equity during 1995, an
increase from the 8.83% earned in 1994. The ratio of PP&L pre-tax income to
interest charges increased from 2.7 in 1994 to 3.6 in 1995.
ENVIRONMENTAL MATTERS
Air
The Clean Air Act deals, 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 specified Phase I sulfur dioxide
emission limits for about 55% of PP&L's coal-fired generating capacity by
January 1995, and more stringent Phase II sulfur dioxide emission limits for
all of PP&L's fossil-fueled generating units by January 2000. PP&L has
complied with the Phase I acid rain provisions under Title IV. To meet the
Phase II limits, PP&L plans to purchase lower sulfur coal, utilize banked
emission allowances and purchase additional emission allowances instead of
relying on FGD. PP&L's decision not to install FGD, with an estimated capital
cost of $413 million, on the two generating units at the Montour station
represents a significant reduction in previously planned capital expenditures.
PP&L filed applications for Phase II permits for its fossil-fuel fired plants
in December 1995. The permit applications state that PP&L will comply with
applicable requirements and obtain emission allowances for each ton of sulfur
dioxide emitted.
PP&L has met the initial requirements under Title I to install reasonably
available control technology to reduce nitrogen oxide emissions. An additional
two-phase reduction in nitrogen oxides from pre-Clean Air Act levels has been
proposed for the area where PP&L's plants are located, a 55% reduction by May
1999 and a 75% reduction by 2003, unless scientific studies expected to be
completed by 1997 indicate a different reduction is appropriate. The
reductions would be required during a five-month ozone season from May through
September. Expenditures to meet the 1999 requirements are included in the
table of projected construction expenditures in "Financial Condition--
Reduction in Capital Expenditure Requirements".
In addition to acid rain and ambient ozone attainment provisions, the clean
air legislation requires the 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.
PP&L currently estimates that additional capital expenditures and operating
costs for environmental compliance under the Clean Air Act will be incurred
beyond 2000 in amounts which are not now determinable but could be material.
The Pennsylvania Air Pollution Control Act implements the Clean Air Act. The
state legislation essentially requires that new state air emission standards
be no more stringent than federal standards. This legislation is not expected
to significantly affect PP&L's plans for compliance with the Clean Air Act.
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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 that the cost of allowances will be recognized as
energy-related power production expenses and recoverable through the ECR.
Water and Residual Waste
The DEP regulations governing the handling and disposal of industrial (or
residual) solid waste require PP&L 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 siting and design
standards set forth in the regulations. In addition, the siting of future
facilities could be affected.
To address the DEP regulations, PP&L is moving forward with its plan to
install dry fly ash handling systems at the Brunner Island, Sunbury and
Holtwood stations similar to Montour's facilities. Dry fly ash handling
provides new opportunities for its beneficial use as opposed to disposing of
it on-site.
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. Many requirements of
the DEP regulations address these groundwater degradation issues. PP&L has
reviewed its remedial action plans with the DEP. Remedial work is
substantially completed at two generating stations. At this time, there is no
indication that remedial work will be required at other PP&L generating
stations.
The DEP 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 DEP to use both biomonitoring and a water quality-based
chemical-specific approach in the NPDES permits to control toxics. The current
Montour station NPDES permit contains stringent limits for certain toxic
metals and increased monitoring requirements. Toxic reduction studies are
being conducted at the Montour station before the permit limits become
effective. Depending on the results of the studies, additional water treatment
facilities may be needed at the Montour station. Improvements and upgrades are
being planned for the Sunbury, Brunner Island and Holtwood stations' waste
water treatment systems to meet the anticipated NPDES permit requirements.
Capital expenditures through 2000 to comply with the residual waste
regulations, correct groundwater degradation at fossil-fueled generating
stations and address waste water control at PP&L facilities, are included in
the table of construction expenditures in "Financial Condition--Reduction in
Capital Expenditure Requirements". PP&L currently estimates that about $68
million of additional capital expenditures could be required in 2000 and
beyond. Actions taken to correct groundwater degradation, to comply with the
DEP's regulations and to address waste water control are also expected to
result in increased operating costs in amounts which are not now determinable
but could be material.
Superfund and Other Remediation
PP&L has signed a consent order with the DEP to address a number of sites
where PP&L may be liable for remediation of contamination. This may include
potential PCB contamination at certain of PP&L's substations and pole sites;
potential contamination at a number of coal gas manufacturing facilities
formerly owned and operated by PP&L; and oil or other contamination which may
exist at some of PP&L's former generating facilities. As a current or past
owner or operator of these sites, PP&L may be liable under Superfund or other
laws for the costs associated with addressing any hazardous substances at
these sites.
These sites have been 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 PP&L's plans for the site. Under the
consent order, PP&L will not be required to spend more than $5 million per
year on investigation and remediation at those sites covered by the consent
order. PP&L will not be required to spend additional money under the consent
order in any year that its total remediation costs for sites both within and
outside the scope of the consent order exceeds $5 million.
At December 31, 1995, PP&L had accrued $11.2 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
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those covered by the consent order mentioned above. PP&L 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
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 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.
Electric and Magnetic Fields
Concerns have been expressed by some members of the scientific community and
others regarding the potential health effects of EMFs. 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. PP&L is actively
participating in the current research effort to determine whether EMFs cause
any human health problems and is taking steps to reduce EMFs, where practical,
in the design of new transmission and distribution facilities. PP&L is unable
to predict what effect the EMF issue might have on PP&L operations and
facilities and the associated cost.
Subsidiary Issues
In June 1995, the DEP ordered a subsidiary to abate seepage allegedly
discharged from a mine formerly operated by that subsidiary. The subsidiary
currently does not believe that it is responsible for this seepage and has
appealed the order to DEP's Environmental Hearing Board, which has scheduled
evidentiary hearings on the matter. A consultant has been hired to perform
additional testing to determine the source of the seepage. If no connection
exists between the mine water and the seepage, no abatement is required.
However, if abatement ultimately is required, the subsidiary may be
responsible for an extensive and protracted program to pump water from the
mine at a cost which could be material.
Other Environmental Matters
In addition to the issues discussed above, PP&L may be required to modify,
replace or cease operating certain of its facilities to comply with other
statutes, regulations and actions by regulatory bodies involving environmental
matters, including the areas of water and air quality, hazardous and solid
waste handling and disposal and toxic substances. As a result, PP&L may also
incur material capital expenditures and operating expenses in amounts which
are not now determinable.
URANIUM ENRICHMENT DECONTAMINATION AND DECOMMISSIONING FUND
The Energy Act established the D&D Fund and provides for an assessment on
domestic utilities with nuclear power operations, including PP&L. Assessments
are based on the amount of uranium a utility had processed for enrichment
prior to enactment of the Energy Act and the assessments are expected to be
paid to the D&D Fund by such utilities over a 15-year period. Amounts paid to
the D&D Fund are to be used for the ultimate decontamination and
decommissioning of the DOE's uranium enrichment facilities. The Energy Act
states that the assessment shall be deemed a necessary and reasonable current
cost of fuel and shall be fully recoverable in rates in all jurisdictions in
the same manner as the utility's other fuel costs.
As of December 31, 1995, PP&L's recorded liability for its total assessment
amounted to about $29.7 million. The liability is subject to adjustment for
inflation. The corresponding charge to expense was deferred because PP&L
includes its annual payments to the D&D Fund in the ECR which is in PP&L's PUC
tariffs and in the fuel adjustment clause which is in PP&L's FERC tariffs. As
a result, the assessment does not affect net income.
NEW ACCOUNTING STANDARDS
Effective January 1, 1996, PP&L adopted SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
SFAS 121 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
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be recoverable. If an asset is determined to be impaired, an impairment loss
is recognized. PP&L does not anticipate any impairment as a result of adopting
SFAS 121.
Also effective January 1, 1996, PP&L adopted SFAS 123, "Accounting for
Stock-Based Compensation." SFAS 123 addresses the recommended accounting and
required disclosures for stock-based employee compensation plans, which
include all arrangements by which employees receive shares of stock or other
equity instruments of the employer or the employer incurs liabilities to
employees in amounts based on the price of the employer's stock. PP&L's
current accounting for restricted stock awards conforms to the requirements as
defined in SFAS 123.
The adoption of SFAS 121 and 123 will not have a significant impact on net
income.
INCREASING COMPETITION
The electric utility industry, including PP&L, has experienced and will
continue to experience a significant increase in the level of competition in
the energy supply market. The Energy Act amended the Public Utility Holding
Company Act of 1935 to create a new class of independent power producers, and
amended the Federal Power Act to provide open access to electric transmission
systems for wholesale transactions. In response to this increased competition,
PP&L has undertaken strategic initiatives to improve financial performance and
enhance its competitive position. See "Earnings" for a discussion of these
initiatives.
PUC Investigation on Competition
In May 1994, the PUC ordered a generic investigation to examine the role of
competition in Pennsylvania's electric utility industry. The purpose of the
investigation is to solicit input regarding the potential impact of
competition on the state's electric utilities and their customers. The first
phase of the investigation gathered and analyzed data at both the wholesale
and retail levels of the electric utility industry. Interested parties filed
written comments addressing the following specific topics: issues and impact
of wheeling, consumer issues, safety and reliability, the impact of market
structure changes and legal issues. PP&L submitted comments in response to the
PUC order.
The second phase of the investigation involves hearings to accept testimony
from interested parties. These hearings, which began in December 1995, are
presided over by the PUC Commissioners and an Administrative Law Judge. In
January 1996, PP&L testified before this panel to express support for full
customer choice of their energy supplier for all customer classes. PP&L will
be involved in efforts to encourage a smooth transition to full competition.
PP&L believes that this transition to full competition should allow for the
recovery of a utility's stranded investments, which are those costs incurred
by a utility because of federal or state regulatory requirements and, also,
any portion of prudent investments made in generating facilities which would
not be recoverable in a competitive market.
Open Access and Stranded Costs
In March 1995, the FERC issued a NOPR, primarily dealing with open access to
transmission lines and recovery of stranded costs. If adopted as proposed, 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 wholesale customers on a basis
comparable to the services the utility provides to itself. A utility must take
service under its transmission access tariff for its own wholesale sales and
purchases. The NOPR would not affect existing transmission agreements.
The NOPR also provides that utilities are entitled to recover all
"legitimate, prudent and verifiable stranded costs" incurred as a result of
rendering transmission services pursuant to their tariffs. The FERC proposes
to provide recovery mechanisms for wholesale stranded costs, including
stranded costs resulting from municipalization. The 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. PP&L's
contracts with its 18 FERC wholesale customers were signed before July 11,
1994.
A-10
<PAGE>
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 were due in August 1995. PP&L filed comments on the NOPR. The FERC is
expected to issue a final ruling on the NOPR in 1996.
PJM Proposed Restructuring Plan
In November 1995, all but one PJM company supported the plan that PJM
presented to the FERC to increase competition in the region. The other company
presented a separate plan. The PJM plan would offer to all generators and
wholesale buyers of electricity a PJM Pool-wide energy market and open access
to Pool-wide high-voltage transmission lines.
The PJM plan contains a number of key components, including: 1) new Pool-
wide transmission tariffs to provide open access, comparable service to all
wholesale customers; 2) implementation of a regional energy market with price-
based dispatch, open to all wholesale bulk power buyers and sellers; and 3) an
Independent System Operator to administer Pool operations and transmission
service, and to operate the regional energy market.
The PJM plan is designed to further develop a truly competitive wholesale
market with broader participation. The PJM companies propose to submit a
comprehensive filing to the FERC for approval in May 1996, with implementation
of the new structure by the end of 1996.
PROPOSED ACQUISITION BY PECO ENERGY COMPANY
In August 1995, PECO publicly announced a proposal to acquire Resources. In
September 1995, Resources' Board of Directors, after due consideration and
review of the proposal, unanimously voted to reject the proposal. The Board
concluded that the proposal was not in the best interests of Resources, its
shareowners, customers, employees or the communities it serves.
In October 1995, PECO made a revised acquisition proposal for consideration
by Resources' Board. PECO stated that the revised proposal was its "final
offer." On November 1, 1995, Resources' Board, after a comprehensive analysis,
unanimously voted to reject the revised proposal. The Board concluded that the
revised proposal was not in the best interests of Resources and its
shareowners, customers, employees or the communities it serves. Later that
same day, PECO withdrew its proposal to acquire Resources and stated that it
would take no further action to pursue such a transaction.
A-11
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareowners and Board of Directors
of Pennsylvania Power & Light Company
In our opinion, the accompanying consolidated balance sheet and consolidated
statements of preferred and preference stock and long-term debt as of December
31, 1995, and the related consolidated statements of income, cash flows and
shareowner's common equity for the year ended December 31, 1995 present
fairly, in all material respects, the consolidated financial position of
Pennsylvania Power & Light Company and its subsidiaries, and their
consolidated results of operations and cash flows 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 audit. We conducted our
audit 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 audit provides a reasonable basis for the opinion expressed above. The
consolidated financial statements of Pennsylvania Power & Light Company for
the years ended December 31, 1994 and 1993, prior to restatement (not
presented separately herein), were audited by other independent accountants
whose report dated February 3, 1995 expressed an unqualified opinion on those
financial statements.
As discussed in Note 1 to the consolidated financial statements, effective
April 27, 1995, PP&L Resources, Inc., which had been a wholly-owned subsidiary
of the Company, became the parent holding company of the Company. The
accompanying consolidated financial statements reflect this reorganization on
a retroactive basis. We have audited the adjustments that were applied to
restate the Company's 1994 and 1993 consolidated financial statements. In our
opinion, such adjustments are appropriate and have been properly applied to
the Company's 1994 and 1993 consolidated financial statements.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Philadelphia, Pennsylvania
February 1, 1996
A-12
<PAGE>
MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Pennsylvania Power & Light Company 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 Price
Waterhouse LLP (Price Waterhouse), independent certified public accountants,
whose report with respect to the financial statements appears on page A-12.
Price Waterhouse's appointment as auditors was previously ratified by the
shareowners. Management has made available to Price Waterhouse 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
Price Waterhouse 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 Price Waterhouse's 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 Resources' Audit Committee, oversees
management's responsibilities in the preparation of the financial statements.
In performing this function, the Audit 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 Resources' Audit 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 Standards of Integrity, which is
publicized throughout PP&L. The Standards of Integrity addresses: 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. PP&L maintains a systematic program to assess
compliance with these policies.
/s/ William F. Hecht
William F. Hecht
Chairman, President and Chief Executive Officer
/s/ R. E. Hill
R. E. Hill
Senior Vice President--Financial
A-13
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1995 1994(A) 1993
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING REVENUES (NOTES 1, 2, 3 AND 4)... $2,751,798 $2,725,099 $2,727,002
---------- ---------- ----------
OPERATING EXPENSES
Operation
Fuel..................................... 438,229 458,932 506,900
Power purchases.......................... 290,940 287,316 278,800
Other.................................... 517,461 487,431 460,482
Maintenance................................ 185,555 179,992 193,242
Depreciation (Notes 1 and 9)............... 302,237 288,759 271,390
Amortized depreciation (Notes 1 and 9)..... 47,007 26,258 14,249
Income taxes (Note 5)...................... 261,620 218,229 235,164
Taxes, other than income (Note 5).......... 200,634 201,161 203,967
Voluntary early retirement program (Note
12)....................................... (65,661) 75,859
---------- ---------- ----------
2,178,022 2,223,937 2,164,194
---------- ---------- ----------
OPERATING INCOME........................... 573,776 501,162 562,808
---------- ---------- ----------
OTHER INCOME AND (DEDUCTIONS)
Allowance for equity funds used during
construction (Note 1)..................... 4,164 4,686 7,981
Income tax credits (expense) (Notes 5 and
14)....................................... (25,410) 38,437 1,280
Gain (loss) on subsidiary coal reserves
(Note 14)................................. 41,622 (73,670)
Other--net................................. (16,176) (915) 8,700
---------- ---------- ----------
4,200 (31,462) 17,961
---------- ---------- ----------
INCOME BEFORE INTEREST CHARGES............. 577,976 469,700 580,769
---------- ---------- ----------
INTEREST CHARGES
Long-term debt............................. 213,413 214,390 225,800
Short-term debt and other.................. 20,387 20,259 14,443
Allowance for borrowed funds used during
construction and interest capitalized
(Note 1).................................. (7,908) (8,392) (7,600)
---------- ---------- ----------
225,892 226,257 232,643
---------- ---------- ----------
NET INCOME................................. 352,084 243,443 348,126
Dividends on Preferred and Preference
Stock..................................... 27,768 28,405 33,885
---------- ---------- ----------
EARNINGS AVAILABLE TO PP&L RESOURCES,
INC. ..................................... $ 324,316 $ 215,038 $ 314,241
========== ========== ==========
- -------
<FN>
(a) Restated to reflect the retroactive dividend of PMDC to Resources, as
described in Financial Note 1.
See accompanying Notes to Financial Statements.
</FN>
</TABLE>
A-14
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1995 1994(A) 1993
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................... $ 352,084 $ 243,443 $ 348,126
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation................................. 351,478 317,287 289,055
Amortization of property under capital
leases...................................... 79,160 86,271 83,868
Amortization of contract settlement proceeds
and deferred cost of power plant spare
parts....................................... (37,538) (37,793) (38,602)
Deferred income taxes and investment tax
credits..................................... 15,758 (70,336) 12,229
Voluntary early retirement program........... (65,661) 75,859
Write down of coal reserves.................. 73,670
Change in current assets and current
liabilities
Unbilled and refundable electric revenues.. (2,367) 31,365 (10,291)
Fuel inventories........................... 43,312 (29,843) 46,672
Accounts payable........................... (17,460) (25,579) 9,991
Other...................................... (8,156) (10,239) 11,441
Other operating activities--net.............. (14,877) 56,042 17,244
--------- --------- ---------
Net cash provided by operating activities 695,733 710,147 769,733
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Property, plant and equipment expenditures..... (402,789) (505,029) (487,836)
Proceeds from sales of nuclear fuel to trust... 44,410 35,790 63,431
Proceeds from sale of coal reserves............ 52,000
Purchases of available-for-sale securities..... (81,458) (95,091)
Sales and maturities of available-for-sale
securities.................................... 79,774 89,552
Net purchases and sales of other financial
investments................................... 2,295 7,662 (705)
Other investing activities--net................ 5,147 20,032 6,825
--------- --------- ---------
Net cash used in investing activities..... (300,621) (447,084) (418,285)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt..................... 55,000 918,750 850,000
Issuance of common stock and capital
contribution from parent...................... 60,586 69,744 6,635
Issuance of preferred stock.................... 80,000 300,000
Retirement of long-term debt................... (140,250) (637,350) (809,000)
Retirement of preferred and preference stock... (120,000) (342,837)
Payments on capital lease obligations.......... (79,160) (86,271) (83,868)
Common, preferred and preference dividends
paid.......................................... (289,745) (283,650) (284,642)
Dividends for capitalization of PMDC........... (50,000)
Net increase (decrease) in short-term debt..... 14,977 (128,092) 42,912
Costs associated with issuance and retirement
of securities................................. (10,286) (25,317) (37,448)
Other financing activities--net................ (39) (39) (39)
--------- --------- ---------
Net cash used in financing activities..... (388,917) (262,225) (358,287)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... 6,195 838 (6,839)
Cash and Cash Equivalents at Beginning of
Period........................................ 9,109 8,271 15,110
--------- --------- ---------
Cash and Cash Equivalents at End of Period..... $ 15,304 $ 9,109 $ 8,271
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for Interest (net
of amount capitalized)..................... $ 217,785 $ 200,140 $ 205,090
Income taxes................................ $ 257,648 $ 264,198 $ 221,049
- -------
<FN>
(a) Restated to reflect the retroactive dividend of PMDC to Resources, as
described in Financial Note 1.
See accompanying Notes to Financial Statements.
</FN>
</TABLE>
A-15
<PAGE>
CONSOLIDATED BALANCE SHEET AT DECEMBER 31
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1995 1994 (A)
----------- -----------
<S> <C> <C>
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Electric utility plant in service--at original cost.. $ 9,637,401 $ 9,306,519
Accumulated depreciation (Notes 1 and 9)........... (3,113,374) (2,871,129)
Deferred depreciation (Notes 1 and 9).............. 209,330 256,021
----------- -----------
6,733,357 6,691,411
Construction work in progress--at cost............... 170,446 211,288
Nuclear fuel owned and leased--net of amortization
(Note 8)............................................ 133,447 143,591
Other leased property--net of amortization (Note 8).. 84,575 80,385
----------- -----------
Electric utility plant--net........................ 7,121,825 7,126,675
Other property--net of depreciation, amortization and
depletion (1995, $55,628; 1994, $54,199) (Note 14).. 57,120 67,850
----------- -----------
7,178,945 7,194,525
----------- -----------
INVESTMENTS
Associated company--at equity (Note 1)............... 17,169 17,088
Nuclear plant decommissioning trust fund (Notes 1 and
6).................................................. 109,400 87,490
Financial investments (Notes 1 and 7)................ 132,270 118,115
Other--at cost or less (Note 7)...................... 8,673 8,654
----------- -----------
267,512 231,347
----------- -----------
CURRENT ASSETS
Cash and cash equivalents (Note 1)................... 15,304 9,109
Marketable securities (Notes 1 and 7)................ 55,218 52,544
Accounts receivable (less reserve: 1995, $34,911;
1994, $29,083)
Customers.......................................... 197,071 189,771
Other.............................................. 13,233 14,000
Unbilled revenues.................................... 92,139 88,668
Fuel (coal and oil)--at average cost................. 82,233 125,545
Materials and supplies--at average cost.............. 108,052 123,630
Prepayments.......................................... 10,395 11,015
Deferred income taxes (Note 5)....................... 41,889 27,524
Other................................................ 30,967 26,916
----------- -----------
646,501 668,722
----------- -----------
DEFERRED DEBITS
Taxes recoverable through future rates (Notes 5 and
9).................................................. 1,002,902 986,292
Other (Notes 1, 3, 5, 9, 11 and 12).................. 327,935 239,796
----------- -----------
1,330,837 1,226,088
----------- -----------
$ 9,423,795 $ 9,320,682
=========== ===========
- -------
<FN>
(a) Restated to reflect the retroactive dividend of PMDC to Resources, as
described in Financial Note 1.
See accompanying Notes to Financial Statements.
</FN>
</TABLE>
A-16
<PAGE>
<TABLE>
<CAPTION>
1995 1994 (A)
LIABILITIES ---------- ----------
<S> <C> <C>
CAPITALIZATION
Common equity
Common stock............ $1,476,048 $1,440,527
Additional paid-in capi-
tal.................... 25,065
Earnings reinvested..... 1,033,900 973,230
Capital stock expense
and other.............. (7,117) (10,112)
---------- ----------
2,527,896 2,403,645
---------- ----------
Preferred stock
With sinking fund re-
quirements............. 295,000 295,000
Without sinking fund re-
quirements............. 171,375 171,375
Long-term debt............ 2,828,728 2,940,750
---------- ----------
5,822,999 5,810,770
---------- ----------
CURRENT LIABILITIES
Commercial paper (Note
10)...................... 68,000 64,000
Bank loans (Note 10)...... 21,145 10,168
Long-term debt due within
one year................. 30,000 39
Capital lease obligations
due within one year (Note
8)....................... 81,017 73,682
Accounts payable.......... 128,263 145,723
Taxes accrued............. 48,220 46,907
Interest accrued.......... 65,499 63,958
Dividends payable......... 73,379 71,710
Other..................... 86,091 101,924
---------- ----------
601,614 578,111
---------- ----------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES
Deferred investment tax
credits (Note 5)......... 219,250 230,064
Deferred income taxes
(Note 5)................. 2,106,535 2,046,869
Capital lease obligations
(Note 8)................. 138,624 151,083
Other (Notes 1, 3, 6 and
11)...................... 534,773 503,785
---------- ----------
2,999,182 2,931,801
---------- ----------
COMMITMENTS AND CONTINGENT
LIABILITIES (NOTE 15)....
---------- ----------
$9,423,795 $9,320,682
========== ==========
<FN>
See accompanying Notes to Financial Statements.
</FN>
</TABLE>
A-17
<PAGE>
CONSOLIDATED STATEMENT OF SHAREOWNER'S COMMON EQUITY
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
COMMON STOCK OUTSTANDING
------------------------
ADDITIONAL
PAID-IN EARNINGS CAPITAL STOCK
SHARES (A) AMOUNT CAPITAL REINVESTED EXPENSE & OTHER
------------------------ ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1992................... 151,885,335 $ 1,364,148 $1,014,760 $(11,969)
Net income.............. 348,126
Cash dividends declared
Preferred stock........ (29,065)
Preference stock....... (4,820)
Common stock........... (250,611)
Stock redemption costs.. (12,432)
Common stock issued (b). 246,754 6,635
Other................... 1,063
------------ ----------- ------- ---------- --------
BALANCE AT DECEMBER 31,
1993................... 152,132,089 $ 1,370,783 $ 0 $1,065,958 $(10,906)
Net income.............. 243,443
Cash dividends declared
Preferred stock........ (28,405)
Common stock........... (256,545)
Dividends for capital-
ization of PMDC (c)... (50,000)
Stock redemption costs.. (1,221)
Common stock issued (b). 3,349,873 69,744
Other................... 794
------------ ----------- ------- ---------- --------
BALANCE AT DECEMBER 31,
1994................... 155,481,962 $ 1,440,527 $ 0 $ 973,230 $(10,112)
Net income.............. 352,084
Cash dividends declared
Preferred stock........ (27,768)
Common stock........... (263,646)
Common stock issued (b). 1,818,420 35,521
Capital contribution
from Resources......... 25,065
Other................... 2,995
------------ ----------- ------- ---------- --------
BALANCE AT DECEMBER 31,
1995................... 157,300,382 $ 1,476,048 $25,065 $1,033,900 $ (7,117)
============ =========== ======= ========== ========
- -------
<FN>
(a) No par value. 170,000,000 shares authorized. Effective April 27, 1995, all
holders of PP&L common stock became holders of Resources common stock;
therefore, all PP&L common stock is now held by Resources.
(b) In 1993, Common Stock was issued through the ESOP. In 1994 and 1995,
Common Stock was issued through the ESOP and DRIP.
(c) Restated to reflect the retroactive dividend of PMDC to Resources, as
described in Financial Note 1.
</FN>
</TABLE>
CONSOLIDATED STATEMENT OF PREFERRED AND PREFERENCE STOCK AT DECEMBER 31
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES(A)
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
OUTSTANDING SHARES
----------------- OUTSTANDING SHARES
1995 1994 1995 AUTHORIZED
-------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Preferred Stock--$100 par, cumulative
4 1/2%............................... $ 53,019 $ 53,019 530,189 629,936
Series............................... 413,356 413,356 4,133,556 10,000,000
-------- --------
$466,375 $466,375
======== ========
- -------
<FN>
(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, 1995 and 1994, 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) PP&L does not have any sinking fund requirements through 2000.
(d) 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.
(e) Shares to be redeemed in full on April 1 as follows: 5.95%, 2001; 6.05%,
2002; and 6.15%, 2003.
(f) Shares to be redeemed annually on October 1 as follows: 2003-2007, 57,500;
2008, 862,500.
(g) Shares to be redeemed annually on July 1 as follows: 2003-2007, 50,000;
2008, 750,000.
See accompanying Notes to Financial Statements.
</FN>
</TABLE>
A-18
<PAGE>
DETAILS OF PREFERRED STOCK (B)
<TABLE>
<CAPTION>
SINKING FUND
OUTSTANDING OPTIONAL PROVISIONS (C)
----------------------- REDEMPTION -----------------------
SHARES PRICE PER SHARES TO BE
OUTSTANDING SHARE REDEEMED REDEMPTION
1995 1994 1995 1995 ANNUALLY PERIOD
----------- ----------- ----------- ---------- ------------ ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
With Sinking Fund
Requirements
Series Preferred
5.95%.................. $ 30,000 $ 30,000 300,000 (d) (e) 2001
6.05%.................. 25,000 25,000 250,000 (d) (e) 2002
6.125%................. 115,000 115,000 1,150,000 (d) (f) 2003-2008
6.15%.................. 25,000 25,000 250,000 (d) (e) 2003
6.33%.................. 100,000 100,000 1,000,000 (d) (g) 2003-2008
----------- -----------
$ 295,000 $295,000
=========== ===========
Without Sinking Fund
Requirements
4 1/2% Preferred....... $ 53,019 $ 53,019 530,189 $110.00
Series Preferred
3.35%.................. 4,178 4,178 41,783 103.50
4.40%.................. 22,878 22,878 228,773 102.00
4.60%.................. 6,300 6,300 63,000 103.00
6.75%.................. 85,000 85,000 850,000 (d)
----------- -----------
$ 171,375 $ 171,375
=========== ===========
</TABLE>
INCREASES (DECREASES) IN PREFERRED AND PREFERENCE STOCK (THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1995 1994 1993
------------- ----------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ -------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Series Preferred Stock
5.95%.................... 300,000 $30,000
6.05%.................... 250,000 25,000
6.125%................... 1,150,000 $115,000
6.15%.................... 250,000 25,000
6.33%.................... 1,000,000 100,000
6.75%.................... 850,000 85,000
6.875%................... (400,000) (40,000) (100,000) (10,000)
7.00%.................... (800,000) (80,000) (200,000) (20,000)
7.375%................... (500,000) (50,000)
7.40%.................... (176,000) (17,600)
7.82%.................... (500,000) (50,000)
7.927%................... (30,000) (3,000)
8.00%.................... (250,000) (25,000)
8.60%.................... (222,370) (22,237)
8.75%.................... (300,000) (30,000)
Preference Stock
$8.00.................... (350,000) (35,000)
$8.40.................... (400,000) (40,000)
$8.70.................... (400,000) (40,000)
<FN>
Decreases in Preferred and Preference Stocks represent: (i) the redemption of
stock pursuant to sinking fund requirements; or (ii) shares redeemed pursuant
to optional redemption provisions.
See accompanying Notes to Financial Statements.
</FN>
</TABLE>
A-19
<PAGE>
CONSOLIDATED STATEMENT OF LONG-TERM DEBT AT DECEMBER 31
PENNSYLVANIA POWER & LIGHT COMPANY
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
OUTSTANDING
----------------------
1995 1994 MATURITY(B)
---------- ---------- -----------------
<S> <C> <C> <C>
FIRST MORTGAGE BONDS (A)
5 5/8%......................... $ 30,000 $ 30,000 June 1, 1996
6 3/4%......................... 30,000 30,000 November 1, 1997
5 1/2%......................... 150,000 150,000 April 1, 1998
7%............................. 40,000 40,000 January 1, 1999
8 1/8%......................... 40,000 40,000 June 1, 1999
6%............................. 125,000 125,000 June 1, 2000
6.5% to 7.75%.................. 740,000 740,000 2001-2005
6.55% to 7.70%................. 350,000 350,000 2006-2010(c)
7 3/8%......................... 100,000 100,000 2011-2015
9 1/4%......................... 215,000 250,000 2016-2020(d)
6 3/4% to 9 3/8%............... 749,750 800,000 2021-2025(d)
FIRST MORTGAGE POLLUTION CONTROL
BONDS (A)
9 3/8% Series G................ 55,000
6.40% Series H................. 90,000 90,000 November 1, 2021
5.50% Series I................. 53,250 53,250 February 15, 2027
6.40% Series J................. 115,500 115,500 September 1, 2029
6.15% Series K................. 55,000 August 1, 2029
---------- ----------
2,883,500 2,968,750
Miscellaneous promissory notes... 39
---------- ----------
2,883,500 2,968,789
Unamortized (discount) and
premium--net.................... (24,772) (28,000)
---------- ----------
2,858,728 2,940,789
Less amount due within one year.. 30,000 39
---------- ----------
Total long-term debt......... $2,828,728 $2,940,750
========== ==========
- -------
<FN>
(a) Substantially all owned electric utility plant is subject to the lien of
PP&L's first mortgage.
(b) Aggregate long-term debt maturities through 2000 are (thousands of
dollars): 1996, $30,000; 1997, $30,000; 1998, $150,000; 1999, $80,000;
2000, $125,000. Maximum sinking fund requirements aggregate $16.5 million
through 2000 and may be met with property additions or retirement of
bonds.
(c) Includes $200 million principal amount of First Mortgage Bonds, 7.70%
Series due 2009. 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.
(d) In 1995, PP&L repurchased and retired $35 million of First Mortgage Bonds,
9 1/4% Series due 2019, and $50.25 million of First Mortgage Bonds, 9 3/8%
Series due 2021.
See accompanying Notes to Financial Statements.
</FN>
</TABLE>
A-20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GLOSSARY OF TERMS
Terms and abbreviations appearing in Notes to Financial Statements are
explained in the glossary on pages A-43-A-44.
BUSINESS AND CONSOLIDATION
In 1995, Resources, which had been a wholly owned subsidiary of PP&L, became
the parent holding company of PP&L. At that time, the holders of PP&L common
stock became holders of Resources common stock and the stock certificates
representing PP&L common stock now represent Resources common stock. At the
same time, PMDC, a subsidiary of PP&L, was transferred as a dividend in the
amount of $50.9 million from PP&L to become a direct subsidiary of Resources.
In the accompanying financial statements, for comparability purposes, the
dividend of PMDC was reported retroactive to March 1994 when PMDC was formed
as a subsidiary.
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. All nonutility operating transactions are
included in "Other Income and Deductions--Other-net" on the Consolidated
Statement of Income.
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 from prior years' financial statements have been
reclassified to conform to the current year presentation.
MANAGEMENT'S ESTIMATES
These financial statements have been prepared using information available to
PP&L including certain information which represents management's best
estimates of existing conditions.
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
PP&L prepares its financial statements in accordance with the provisions of
SFAS 71, "Accounting for the Effects of Certain Types of Regulation." SFAS 71
requires a rate-regulated entity to reflect the effects of regulatory
decisions in its financial statements. In accordance with SFAS 71, PP&L has
deferred certain costs pursuant to the rate actions of the PUC and the FERC
and is recovering or expects to recover such costs in electric rates charged
to customers. These deferred costs or "regulatory assets" are enumerated and
discussed in Note 9.
To the extent that PP&L concludes that recovery of a regulatory asset is no
longer probable due to regulatory treatment, the effects of competition or
other factors, the amount would have to be written off against income.
UTILITY PLANT
Additions to utility plant and replacement of units of property are
capitalized at cost. As provided in the Uniform System of Accounts, the cost
of funds used to finance construction projects or AFUDC is capitalized as part
of construction cost.
The cost of units of 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 an entire unit of property
are charged to operating expense.
A-21
<PAGE>
For financial statement purposes, depreciation is being provided over the
estimated useful lives of property using a straight-line method for all
property except for certain property at the Susquehanna steam station. Prior
to October 1995, PUC and FERC rate orders provided for increasing amounts of
annual depreciation for certain property at the Susquehanna station. As a
result of the PUC Decision, Susquehanna depreciation applicable to property
placed in service prior to January 1, 1989, will be recorded at an annual
level of $173 million through 1998 at which time depreciation is scheduled to
decline by about $71 million to the level that would have been recorded if the
straight-line method had been used since the Susquehanna units were placed in
service.
Deferred depreciation shown on the Consolidated Balance Sheet is the
accumulated difference between the straight-line depreciation that would have
been recorded on property placed in service at the Susquehanna station prior
to January 1, 1989 and the amount of depreciation on such property provided
for financial reporting purposes and included in rates. The annual difference
is shown as amortized depreciation on the Consolidated Statement of Income.
Provisions for depreciation, as a percent of average depreciable property,
approximated 3.7% in 1995, 3.5% in 1994 and 3.3% in 1993.
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 operating expense. Such amounts are invested in external trust
funds which can be used only for future decommissioning costs. See Notes 3 and
6.
The DOE is responsible for the permanent storage and disposal of spent
nuclear fuel removed from nuclear reactors. PP&L currently pays DOE a fee for
future disposal services and recovers such costs in customer rates.
FINANCIAL INVESTMENTS
In January 1994, PP&L adopted SFAS 115, "Accounting for Certain Investments
in Debt and Equity Securities." SFAS 115 addresses the accounting and
reporting for investments in equity securities that have readily determinable
fair values and for all investments in debt securities.
Securities subject to the requirements of SFAS 115 are carried at fair
value, determined at the balance sheet data. Net unrealized gains on
available-for-sale securities are included in common equity and totaled, after
applicable income taxes, $3.4 million and $0.4 million at December 31, 1995
and 1994, respectively. Net unrealized gains and losses on trading securities
are included in income and amounted to $0.6 million and $(0.2) million for
1995 and 1994, respectively. Net unrealized gains and losses on securities
that are not available for unrestricted use by PP&L 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. The adoption of SFAS 115 did not have a
material effect on PP&L's net income. Investments in financial limited
partnerships are accounted for under the equity method of accounting and
venture capital investments are recorded at cost. See Note 7.
PREMIUM ON REACQUIRED LONG-TERM DEBT
As provided in the Uniform System of Accounts, the premium paid and expenses
incurred by PP&L to redeem long-term debt are deferred and amortized over the
life of the new debt issue or the remaining life of the retired debt when the
redemption is not financed by a new issue.
CAPITAL LEASES
Leased property of PP&L capitalized on the Consolidated Balance Sheet is
recorded at the present value of future lease payments and is amortized so
that the total of interest on the lease obligation and amortization of the
leased property equals the rental expense allowed for ratemaking purposes. See
Note 8.
REVENUES
Electric revenues are recorded based on the amounts of electricity delivered
to customers through the end of each accounting period. This includes amounts
customers will be billed for electricity delivered from the time meters were
last read to the end of the respective period. For information on the ECR,
SBRCA and STAS, see Note 3.
PP&L's PUC tariffs contain an ECR under which customers are billed an
estimated amount for fuel and other energy costs. Any difference between the
actual and estimated amount for such costs is collected from, or
A-22
<PAGE>
refunded to, customers in a subsequent period. Revenues applicable to ECR
billings are recorded at the level of actual energy costs and the difference
between amounts billed to customers and the cost of fuel is recorded as
payable to, or receivable from, customers.
INCOME TAXES
PP&L and its wholly owned subsidiaries file a consolidated federal income
tax return with Resources, PP&L's parent company. Income taxes are allocated
to operating expenses and other income and deductions on the Consolidated
Statement of Income.
The provision for PP&L's deferred income taxes included on the Consolidated
Statement of Income is based upon the ratemaking principles reflected in rates
established by the PUC and FERC. The difference in the provision for deferred
income taxes 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 property.
PENSION PLAN AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
PP&L has a noncontributory pension plan covering substantially all
employees, and 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
11.
CASH EQUIVALENTS
PP&L considers all highly liquid debt instruments purchased with original
maturities of three months or less to be cash equivalents.
NEW ACCOUNTING STANDARDS
Effective January 1, 1996, PP&L adopted SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
SFAS 121 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.
PP&L does not anticipate any impairment as a result of adopting SFAS 121.
Also effective January 1, 1996, PP&L adopted SFAS 123, "Accounting for
Stock-Based Compensation." SFAS 123 addresses the recommended accounting and
required disclosures for stock-based employee compensation plans, which
include all arrangements by which employees receive shares of stock or other
equity instruments of the employer or the employer incurs liabilities to
employees in amounts based on the price of the employer's stock. PP&L's
current accounting for restricted stock awards conforms to requirements as
defined in SFAS 123.
The adoption of SFAS 121 and 123 will not have a significant impact on net
income.
2. SOURCES OF REVENUES
PP&L is an operating electric utility serving about 1.2 million customers in
a 10,000 square-mile territory of central eastern Pennsylvania with a
population of approximately 2.6 million persons. Substantially all of PP&L's
operating revenues are derived from the sale of electric energy subject to PUC
and FERC regulation.
During 1995, about 98% of total operating revenues were derived from
electric energy sales, with 34% coming from residential customers, 29% from
commercial customers, 20% from industrial customers, 12% from contractual
sales to other major utilities, 2% from energy sales to members of the PJM and
3% from others.
A-23
<PAGE>
3. RATE MATTERS
BASE RATE FILING WITH THE PUC
On September 27, 1995, the PUC issued a final order with respect to the base
rate case filed by PP&L on December 30, 1994.
PP&L's request to increase base rates, which was its first in ten years,
sought to increase annual PUC-jurisdictional revenues by $261.6 million, or
about 11.7%. The PUC's decision granted PP&L a $107 million increase in base
rates based on test year conditions. At the same time, PP&L's ECR was reduced
by $22 million related to capacity credit sales resulting in a net increase of
$85 million, or about 3.8%, in PUC-jurisdictional revenues effective September
28, 1995.
The PUC Decision allowed PP&L to levelize the annual amount of depreciation
on pre-1989 property for its Susquehanna station at $173 million for the
period October 1, 1995 through December 31, 1998. This levelization eliminates
the previously scheduled annual increase in depreciation expense resulting
from use of the modified sinking fund method of depreciation.
The PUC determined that all of PP&L's generating capacity is necessary to
meet customer needs, rejecting the arguments of some intervenors that an
excess capacity adjustment should be imposed on PP&L. As a result of the PUC's
action in this regard, PP&L's base rates include a full return on all of its
generating facilities used to serve retail customers, as well as all operating
expenses associated with those facilities.
Also, the PUC Decision permitted recovery of the PUC-jurisdictional amount
of retiree health care costs resulting from the adoption of SFAS 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions". In
addition, the PUC Decision permitted PP&L to recover, over a period of about
17 years, the amount of SFAS 106 costs that would have been deferred from
January 1, 1993, through September 30, 1995, pursuant to a PUC order but for a
Commonwealth Court decision that PP&L could not recover these deferred costs.
As a result of the PUC Decision, which provided for recovery of $27 million of
previously expensed SFAS 106 costs, PP&L recorded a $15.7 million after-tax
credit to income in the third quarter of 1995.
In addition, the PUC Decision permitted PP&L to recover through customer
rates the PUC-jurisdictional amount, $65.7 million, of the cost of its 1994
VERP over a period of five years. As a result, PP&L recorded a $37.8 million
after-tax credit to expense in the third quarter of 1995 to reverse the charge
for this program that was recorded in the fourth quarter of 1994. The
estimated annual savings of $35 million from the program also are reflected in
the allowed rates.
The PUC Decision also permitted recovery over a 10-year period of certain
deferred operating and capital costs, net of energy savings, incurred from the
time Susquehanna Unit No. 2 was placed in commercial operation until the
effective date of base rate recognition for that Unit, but the PUC denied
recovery of similar costs for Susquehanna Unit No. 1. As a result of the PUC
Decision with respect to Susquehanna Unit No. 1, PP&L recorded a one-time
charge in the third quarter of 1995 which, after taxes, reduced net income by
$20.4 million.
The PUC Decision made adjustments to the amount requested by PP&L for the
currently estimated cost of decommissioning the Susquehanna station. These
adjustments include the elimination of the $106.6 million contingency amount
included in the decommissioning cost estimate, an increase in the earnings
assumption on the decommissioning fund from 5.5% to 7.5% and a reflection of
post-shutdown earnings on the fund in calculating the total amount necessary
to decommission the Susquehanna station. After giving effect to these
adjustments, the total amount of the Susquehanna station decommissioning costs
included in PUC-jurisdictional rates is $9.5 million annually.
The PUC Decision granted PP&L a return on common equity of 11.5%.
In its decision, the PUC ruled that PP&L cannot include in its ECR the cost
of capacity, currently being billed to other utilities pursuant to contractual
arrangements, as those contracts terminate and the capacity returns to PP&L.
The PUC did rule that PP&L was not required to flow back to PUC-jurisdictional
customers through the ECR the revenues received for off-system sales of
capacity and energy attributable to such returning capacity.
A-24
<PAGE>
Accordingly, the PUC Decision permitted the benefits that can be achieved from
sales of the returning capacity to accrue to shareowners.
The OCA has appealed certain aspects of the PUC Decision to the Commonwealth
Court. PP&L cannot predict the final outcome of this matter.
ENERGY COST RATE ISSUES
As a result of the PUC Decision, PP&L adopted a new ECR effective as of
September 28, 1995 that reflects the roll-in of all test year energy costs
into base rates.
In April 1994, the PUC reduced PP&L's 1994-95 ECR claim by approximately
$15.7 million to reflect costs associated with replacement power during a
portion of the period that Susquehanna Unit 1 was out of service for refueling
and repairs. As a result of the PUC's action, PP&L recorded a charge against
income in the first quarter of 1994 for the $15.7 million of unrecovered
replacement power costs.
PP&L 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 OTS and other parties to the proceeding reducing the
amount of disallowed costs.
The PUC approved the settlement agreement and in the first quarter of 1995,
PP&L recorded a credit to income of $9.7 million.
SPECIAL BASE RATE CREDIT ADJUSTMENT
The SBRCA, which has been in effect since April 1, 1991, reduces PUC-
jurisdictional customers' bills for the effects of two nonrecurring items. The
first item is the annual amortization over a five-year period of a credit to
income associated with PP&L's use of an inventory method of accounting for
power plant spare parts. This credit will expire March 31, 1996.
The second relates to the proceeds from the settlement of outstanding
contract claims arising from construction of the Susquehanna station. In
accordance with approval of the settlement by the PUC, PP&L began, on April 1,
1992, to return the settlement proceeds to PUC customers through the SBRCA.
This credit will expire March 31, 1997.
A third nonrecurring item ended with the implementation of the new PUC rates
and related to costs that were being recovered from Atlantic pursuant to the
sale of 125,000 kilowatts of capacity (summer rating) and related energy from
PP&L's wholly owned coal-fired stations beginning October 1, 1991. As a result
of the PUC Decision, PP&L's SBRCA was changed to exclude that portion of the
credit associated with the Atlantic contract, since the costs recovered from
Atlantic were excluded from PUC-jurisdictional base rates.
REFUND OF STATE TAX DECREASE
In accordance with PP&L's tariffs, PUC-jurisdictional rates are adjusted for
changes in certain state taxes.
Due to the two state legislation changes decreasing the Pa. CNI rate as
described in Note 5, and the PUC Decision which reflected a 10.99% Pa. CNI
rate in base rates, PP&L filed three changes to its STAS in 1995. The final
STAS filing, which was approved on October 26, 1995, is expected to reduce
customer rates by about $12.9 million through March 1996. This change has no
effect on net income.
FERC-MAJOR UTILITIES' RATES
In October 1995, the FERC approved PP&L's request to recover postretirement
benefits other than pensions through its contractual agreements with other
major electric utilities, subject to refund after FERC review. PP&L is billing
these utilities their share of postretirement costs other than pensions
incurred since January 1993. See Note 4 for more details on these contracts.
In an October 1995 order, the FERC also ordered hearings to evaluate the
justness and reasonableness of PP&L's rates in its contractual agreements with
JCP&L, Atlantic, BG&E and UGI.
A-25
<PAGE>
In January 1996, PP&L filed a request with the FERC to incorporate a change
in the method of calculating depreciation in several of its contractual
agreements with other major utilities. PP&L also requested to increase its
decommissioning rate to reflect the projected cost of decommissioning the
Susquehanna station and fossil plants.
PP&L cannot predict the outcome of these proceedings.
URANIUM ENRICHMENT DECONTAMINATION AND DECOMMISSIONING FUND
The Energy Act established the D&D Fund and provides for an assessment on
domestic utilities with nuclear power operations, including PP&L. Assessments
are based on the amount of uranium a utility had processed for enrichment
prior to enactment of the Energy Act and the assessments are expected to be
paid to the D&D Fund by such utilities over a 15-year period. Amounts paid to
the D&D Fund are to be used for the ultimate decontamination and
decommissioning of the DOE's uranium enrichment facilities. The Energy Act
states that the assessment shall be deemed a necessary and reasonable current
cost of fuel and shall be fully recoverable in rates in all jurisdictions in
the same manner as the utility's other fuel costs.
As of December 31, 1995, PP&L's recorded liability for its total assessment
amounted to about $29.7 million. The liability is subject to adjustment for
inflation. The corresponding charge to expense was deferred because PP&L
includes its annual payments to the D&D Fund in the ECR which is in PP&L's PUC
tariffs and in the fuel adjustment clause which is in PP&L's FERC tariffs. As
a result, the assessment does not affect net income.
4. SALES TO OTHER MAJOR ELECTRIC UTILITIES
PP&L provides Atlantic with 125,000 kilowatts of capacity (summer rating)
and related energy from its wholly owned coal-fired stations. The agreement
with Atlantic originally provided for sales to continue through September
2000.
On March 20, 1995, Atlantic notified PP&L that it will terminate the
agreement on March 20, 1998, pursuant to termination provisions in the
agreement. PP&L expects to be able to resell the capacity and energy at market
prices.
PP&L provided JCP&L with 945,000 kilowatts of capacity and related energy
from all of its generating units. Sales to JCP&L were at the 945,000 kilowatt
level in 1995, and the amount will decline uniformly each year beginning
January 1996 (189,000 kilowatts per year) until the end of the agreement on
December 31, 1999.
In August 1995, JCP&L filed a complaint against PP&L with the FERC regarding
billings under the agreement. In its complaint, JCP&L alleges that PP&L
inappropriately allocated certain costs to JCP&L that should not have been
billed and seeks other adjustments. JCP&L is seeking both refunds (with
interest) in an unspecified amount and an amendment to the agreement. PP&L has
denied JCP&L's allegations and requested that FERC dismiss the complaint. PP&L
cannot predict the final outcome of this proceeding.
In April 1995, PP&L entered into a new agreement with JCP&L whereby PP&L
would provide JCP&L increasing amounts of capacity credits and energy from all
of its generating units. Sales to JCP&L under this agreement begin in June
1997 and continue through May 2004. Under this agreement, PP&L would 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 under the new agreement are
priced based on a predetermined demand rate that escalates over time, plus an
energy component based on PP&L's actual fuel-related costs. This agreement
with JCP&L must be approved by the FERC and the New Jersey Board of Public
Utilities.
PP&L provides BG&E with 129,000 kilowatts or 6.6 percent of its share of
capacity and related energy from the Susquehanna station. Sales to BG&E will
continue through May 2001.
See Note 3 for more information about these contracts.
In December 1995, PP&L entered into a one year agreement with PSE&G, which
provides PSE&G with 245,000 kilowatts of delivered output from Martins Creek
Units 1 & 2. PP&L will continue to seek additional opportunities to market its
capacity and energy in the bulk power markets that will produce revenues in
excess of the amount that would be realized through economy energy sales on
the PJM.
A-26
<PAGE>
5. TAXES
The corporate federal income tax rate from 1993 to 1995 was 35%.
In June 1994, state legislation was enacted that decreased the Pa. CNI 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 June
1995, state legislation was enacted that accelerated the tax decrease to 9.99%
retroactive to January 1, 1995. For 1995 and 1994, PP&L recorded a decrease in
income tax expense of $8.1 million and $0.8 million respectively,
substantially all of which was reflected in lower customer rates through the
STAS. For 1995 and 1994 PP&L also recorded a decrease in deferred income tax
liabilities and taxes recoverable through future rates of $1.1 million and
$124.0 million respectively to reflect the new tax rates.
The tax effects of significant temporary differences comprising PP&L's net
deferred income tax liability were as follows (thousands of dollars):
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Deferred tax assets
Deferred investment tax credits....................... $ 90,101 $ 94,650
Accrued pension costs................................. 53,859 67,327
Other................................................. 86,856 107,708
Valuation allowance................................... (5,664) (8,117)
---------- ----------
225,152 261,568
---------- ----------
Deferred tax liabilities
Electric utility plant--net........................... 1,787,975 1,790,378
Other property--net................................... 11,728 13,829
Taxes recoverable through future rates................ 416,110 409,417
Reacquired debt costs................................. 48,301 46,934
Other................................................. 25,684 20,355
---------- ----------
2,289,798 2,280,913
---------- ----------
Net deferred tax liability.............................. $2,064,646 $2,019,345
========== ==========
</TABLE>
A-27
<PAGE>
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 (thousands of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
INCOME TAX EXPENSE
Included in operating expenses
Provision--Federal............................. $195,028 $198,777 $162,795
State............................... 62,388 76,903 63,508
-------- -------- --------
257,416 275,680 226,303
-------- -------- --------
Deferred--Federal.............................. 9,020 (34,177) 22,491
State................................ 5,998 (11,021) (124)
-------- -------- --------
15,018 (45,198) 22,367
-------- -------- --------
Investment tax credit, net--Federal............ (10,814) (12,253) (13,506)
-------- -------- --------
261,620 218,229 235,164
-------- -------- --------
Included in other income and deductions
Provision (credit)--Federal.................... 9,653 (18,243) (5,134)
State...................... 4,203 (7,309) 486
-------- -------- --------
13,856 (25,552) (4,648)
-------- -------- --------
Deferred--Federal.............................. 9,433 (8,688) 4,047
State................................ 2,121 (4,197) (679)
-------- -------- --------
11,554 (12,885) 3,368
-------- -------- --------
25,410 (38,437) (1,280)
-------- -------- --------
Total income tax expense
--Federal.................................. 212,320 125,416 170,693
State.................................... 74,710 54,376 63,191
-------- -------- --------
$287,030 $179,792 $233,884
-------- -------- --------
RECONCILIATION OF INCOME TAX EXPENSE
Indicated federal income tax on pre-tax income at
statutory tax rate--35%......................... $223,690 $148,132 $203,704
-------- -------- --------
Increase (decrease) due to:
State income taxes............................. 50,148 35,008 41,829
Flow through of depreciation differences not
previously normalized......................... 16,479 14,883 8,470
Amortization of investment tax credit.......... (10,814) (12,253) (13,506)
Other.......................................... 7,527 (5,978) (6,613)
-------- -------- --------
63,340 31,660 30,180
-------- -------- --------
Total income tax expense......................... $287,030 $179,792 $233,884
-------- -------- --------
Effective income tax rate........................ 44.9% 42.5% 40.2%
-------- -------- --------
TAXES, OTHER THAN INCOME
State gross receipts............................. $101,783 $ 99,311 $ 98,280
State utility realty............................. 45,940 46,556 45,292
State capital stock.............................. 32,545 34,739 35,943
Social security and other........................ 20,366 20,555 24,452
-------- -------- --------
$200,634 $201,161 $203,967
======== ======== ========
</TABLE>
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
A-28
<PAGE>
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 charged to operating expense were $8.5 million in
1995, $7.2 million in 1994 and $6.9 million in 1993 and are based upon amounts
included in customer rates. The increase in 1995 is a result of the PUC
Decision in which recovery of decommissioning costs was based on the cost
estimates in the 1993 site-specific study. Rates charged to other small FERC
wholesale customers reflect the estimated cost of decommissioning in the 1993
study. In January 1996, PP&L filed with the FERC to increase its
decommissioning rate to reflect the projected cost of decommissioning the
Susquehanna station. See Note 3 for further information.
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, 1995 and 1994 aggregated
approximately $109.4 million, including $7.0 million of net unrealized gains,
and $87.5 million, including $0.7 million of net unrealized losses,
respectively. The trust funds experienced, on a fair market value basis, a
$14.0 million net gain in 1995, which includes net unrealized appreciation of
$7.7 million, and a net loss in 1994 of $2.3 million, which includes net
unrealized depreciation of $6.7 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 $112.2 million and $89.7 million at December 31, 1995 and 1994,
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 electric utility industry
accounting practices for decommissioning may change, including the possibility
that the estimated cost for decommissioning could be recorded as a liability
on a basis other than an accrual over the estimated life of the power plant.
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 (thousands
of dollars):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
ASSETS
Nuclear plant decommissioning trust
fund (a).............................. $ 109,400 $ 109,400 $ 87,490 $ 87,490
Financial investments (a).............. 187,488 185,572 170,659 169,528
Other investments...................... 8,673 8,673 8,654 8,654
Cash and cash equivalents.............. 15,304 15,304 9,109 9,109
Other financial instruments included in
other current assets.................. 3,163 3,163 2,435 2,435
LIABILITIES
Preferred stock with sinking fund
requirements (b)...................... 295,000 294,825 295,000 265,275
Long-term debt (b)..................... 2,858,728 3,032,742 2,940,789 2,756,131
Commercial paper and bank loans........ 89,145 89,145 74,168 74,168
- -------
<FN>
(a) The carrying value of 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.
</FN>
</TABLE>
A-29
<PAGE>
8. LEASES
PP&L has entered into capital leases consisting of the following (thousands
of dollars):
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1995 1994
-------- --------
<S> <C> <C>
Nuclear fuel, (net of accumulated amortization 1995,
$147,587; 1994, $196,617)................................... $135,066 $144,380
Vehicles, oil storage tanks and other property, (net of
accumulated amortization 1995, $91,914; 1994, $84,330)...... 84,575 80,385
======== ========
Net property under capital leases............................ $219,641 $224,765
======== ========
</TABLE>
Capital lease obligations incurred for the acquisition of nuclear fuel and
other property were (millions of dollars): 1995, $74.0; 1994, $62.0 and 1993,
$84.0.
Nuclear fuel lease payments, which are charged to expense as the fuel is
used for the generation of electricity, were (millions of dollars): 1995,
$63.2; 1994, $71.8 and 1993, $67.6. Future nuclear fuel lease payments are
based on the quantity of electricity produced by the Susquehanna station. The
maximum amount of unamortized nuclear fuel available for lease under current
arrangements is $200 million.
Future minimum lease payments under capital leases in effect at December 31,
1995 (excluding nuclear fuel) aggregate $99.7 million, including $15.2 million
in imputed interest. During the five years ending 2000, such payments decrease
from $31.3 million per year to $7.1 million per year.
Interest on capital lease obligations was recorded as operating expenses on
the Consolidated Statement of Income in the following amounts (millions of
dollars): 1995, $14.4; 1994, $11.1 and 1993, $9.1.
Generally, capital leases obligate PP&L to pay maintenance, insurance and
other related costs and contain renewal options. Various operating leases have
also been entered into which are not material with respect to PP&L's financial
position.
9. REGULATORY ASSETS
The following regulatory assets were reflected in the Consolidated Balance
Sheet (thousands of dollars):
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Deferred depreciation.................................... $ 209,330 $ 256,021
Deferred operating and carrying costs--Susquehanna....... 18,390 39,215
Reacquired debt costs.................................... 116,954 113,466
Taxes recoverable through future rates................... 1,002,902 986,292
Assessment for decommissioning uranium enrichment facili-
ties.................................................... 31,686 33,492
Postretirement benefits other than pensions.............. 31,406
Voluntary early retirement program....................... 62,377
Other.................................................... 56,632 52,307
---------- ----------
$1,529,677 $1,480,793
========== ==========
</TABLE>
As of December 31, 1995, all of PP&L's regulatory assets are being recovered
through rates charged to customers over periods ranging from 3 to 29 years.
For a discussion of taxes recoverable through future rates, postretirement
benefits other than pensions, assessment for decommissioning uranium
enrichment facilities, VERP, and additional information on the PUC Decision,
see Notes 3, 5, 11, and 12.
10. CREDIT ARRANGEMENTS
PP&L 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. PP&L's weighted average interest rate on short-term borrowings was
6.0% and 6.1% at December 31, 1995 and 1994, respectively.
A-30
<PAGE>
PP&L has entered into a $250 million revolving credit arrangement with a
group of banks. Any loans made under this credit arrangement would mature in
September 1999 and, at the option of PP&L, interest rates would be based upon
certificate of deposit rates, Eurodollar deposit rates or the prime rate. PP&L
has additional credit arrangements with another group of banks. The banks have
committed to lend PP&L up to $45 million under these credit arrangements,
which mature in November 1996, at interest rates based upon Eurodollar deposit
rates or the prime rate. These credit arrangements produce a total of $295
million of lines of credit to provide back-up for PP&L's commercial paper and
short-term borrowings of certain subsidiaries. No borrowings were outstanding
at December 31, 1995 under these credit arrangements.
PP&L leases its nuclear fuel from a trust. The maximum financing capacity of
the trust under existing credit arrangements is $200 million.
11. 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 also has two unfunded supplemental retirement plans for certain
management employees and directors. Benefit payments pursuant to these
supplemental plans are made directly by PP&L. At December 31, 1995, the
projected benefit obligation of these supplemental plans was approximately
$19.2 million.
The components of PP&L's net periodic pension cost for the three plans were
(thousands of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
Service cost-benefits earned during the period... $ 27,549 $ 33,527 $ 31,381
Interest cost.................................... 57,711 51,330 48,266
Actual return on plan assets..................... (241,075) 28,680 (92,085)
Net amortization and deferral.................... 166,758 (96,413) 29,696
--------- -------- --------
Net periodic pension cost........................ $ 10,943 $ 17,124 $ 17,258
========= ======== ========
</TABLE>
The net periodic pension cost charged to operating expenses was $6.4 million
in 1995, $9.9 million in 1994 and $10.1 million in 1993. The balance was
charged to construction and other accounts. The funded status of PP&L's Plan
was (thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1995 1994
---------- ---------
<S> <C> <C>
Fair value of plan assets............................... $1,086,236 $ 888,214
Actuarial present value of benefit obligations:
Vested benefits....................................... 673,264 573,564
Nonvested benefits.................................... 1,343 1,396
---------- ---------
Accumulated benefit obligation...................... 674,607 574,960
Effect of projected future compensation............... 194,203 173,311
---------- ---------
Projected benefit obligation........................ 868,810 748,271
---------- ---------
Plan assets in excess of projected benefit obligation... 217,426 139,943
Unrecognized transition assets (being amortized over 23
years)................................................. (63,277) (67,796)
Unrecognized prior service cost......................... 58,598 61,941
Unrecognized net gain................................... (394,105) (288,105)
---------- ---------
Accrued expense......................................... $ (181,358) $(154,017)
========== =========
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of projected benefit obligations was 6.75% and 7.5% on December 31, 1995
and 1994, respectively. The rate of increase in future compensation used in
determining the actuarial present value of projected benefit obligations was
5.0% and 5.7% on December 31, 1995 and 1994, respectively. The assumed long-
term rates of return on assets used in
A-31
<PAGE>
determining pension cost in 1995 and 1994 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, primarily by group annuity
contracts with insurance companies. 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 1995, 1994 and 1993.
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.
In January 1993, PP&L adopted SFAS 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," which requires PP&L to accrue,
during the years that the employees render the necessary service, the expected
cost of providing retiree health care and life insurance benefits. The
adoption of SFAS 106 did not have a material effect on PP&L's net income. In
accordance with a PUC order, PP&L had deferred the PUC-jurisdictional accrued
cost of retiree health and life insurance benefits in excess of actual claims
paid pending recovery of the increased cost in retail rates. As a result of a
decision of the Commonwealth Court, in 1994 PP&L started to expense the
increased costs applicable to operations that were previously being deferred
and wrote off such costs deferred in 1993.
The PUC Decision permitted recovery of the PUC-jurisdictional amount of
retiree health care costs resulting from the adoption of SFAS 106. In
addition, the PUC Decision permitted PP&L to recover, over a period of about
17 years, the amount of SFAS 106 costs that would have been deferred from
January 1, 1993 through September 30, 1995, pursuant to a PUC order but for a
Commonwealth Court decision that PP&L could not recover these deferred costs.
As a result of the PUC Decision, which provided for recovery of $27 million of
previously expensed SFAS 106 costs, PP&L recorded a $15.7 million after-tax
credit to income in the third quarter of 1995.
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. In
December 1995, as a result of the PUC Decision, PP&L resumed funding of these
trusts.
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
(thousands of dollars):
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees............................................... $ 127,926 $ 124,484
Fully eligible active plan participants................ 18,184 13,604
Other active plan participants......................... 78,790 68,828
--------- ---------
224,900 206,916
Plan assets at fair value, primarily temporary cash in-
vestments............................................... 29,208 23,506
--------- ---------
Accumulated postretirement benefit obligation in excess
of plan assets.......................................... 195,692 183,410
Unrecognized prior service costs......................... (5,208)
Unrecognized net loss.................................... (18,275) (13,770)
Unrecognized transition obligation (being amortized over
20 years)............................................... (147,750) (156,448)
--------- ---------
Accrued postretirement benefit cost...................... $ 24,452 $ 13,192
========= =========
</TABLE>
A-32
<PAGE>
The net periodic postretirement benefit cost included the following
components (thousands of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Service cost--benefits attributed to service during
the period.......................................... $ 3,711 $ 4,286 $ 3,699
Interest cost on accumulated postretirement benefit
obligation.......................................... 15,339 14,189 13,008
Actual return on plan assets......................... (1,737) (435)
Net amortization and deferral........................ 8,544 7,645 8,691
------- ------- -------
Net periodic postretirement benefit cost............. $25,857 $25,685 $25,398
======= ======= =======
</TABLE>
Retiree health and benefits costs charged to operating expenses were a net
credit of approximately $16.5 million in 1995, reflecting a $32.1 million
credit due to the PUC Decision and costs applicable to contractual agreements
with other major utilities, $27.2 million in 1994 (which includes $10.8
million of retiree health and benefits costs previously deferred in 1993) and
$6.9 million in 1993. Costs in excess of the amount charged to expense were
charged to construction and other accounts.
For measurement purposes, a 9% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1996; 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, 1995, by about $10.4 million and the aggregate of the service and
interest cost components of net periodic postretirement benefit cost for the
year then ended by about $1.0 million.
In determining the accumulated postretirement benefit obligation, the
weighted average discount rate used was 6.75% and 7.5% on December 31, 1995
and 1994, 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 6.5% on December 31, 1995 and 1994.
In 1992, as a result of the Energy Act, PP&L's subsidiaries formerly engaged
in coal mining accrued an additional liability for the cost of health care of
retired miners previously employed by them. The new liability, based on the
present value of future benefits, was estimated at $58 million. As of December
31, 1995, this estimate remains unchanged.
POSTEMPLOYMENT BENEFITS
PP&L provides health and life insurance benefits to disabled employees and
income benefits to eligible spouses of deceased employees. In December 1993,
the Company adopted SFAS 112, "Employers' Accounting for Postemployment
Benefits," which requires a company to accrue, during the years that the
employees render the necessary service, the expected cost of providing
benefits to former or inactive employees after employment but before
retirement. The adoption of SFAS 112 did not have a material effect on PP&L's
net income. Postemployment benefits charged to operating expenses were $0.2
million, $2.1 million and $6.5 million for 1995, 1994 and 1993, respectively.
Postemployment benefits charged to operating expenses decreased in 1995 from
1994 due to a change in assumptions used in the 1995 actuarial study.
12. WORKFORCE REDUCTIONS
PP&L continued to reduce the size of its workforce in 1995 as part of
ongoing efforts to reduce costs. During 1995, PP&L offered a voluntary
severance program to employees who are members of the IBEW Local 1600 and
continued re-engineering efforts that reduced the management workforce. Total
employment declined in 1995 by approximately 225 due to these two initiatives.
In addition, PP&L expects, and has accrued costs for, additional management
workforce reductions in the first half of 1996. The costs of the workforce
reductions in 1995 amounted to about $18.6 million after tax.
During 1994, PP&L offered a voluntary early retirement program to 851
employees who were age 55 or older by December 31, 1994. A total of 640
employees elected to retire under the program, at a total cost of $75.9
million. PP&L recorded the cost of the program as a charge against income in
the fourth quarter of 1994, which reduced net income by $43.4 million. As a
result of the PUC Decision, which permitted recovery of the PUC-jurisdictional
amount through customer rates, PP&L recorded in 1995 a $37.8 million after-tax
credit to expense, to reverse the charge for this program that was recorded in
1994. PP&L estimates annual savings of $35 million from this program which
were included in the recently decided rate case.
A-33
<PAGE>
13. JOINTLY OWNED FACILITIES
At December 31, 1995, PP&L or a subsidiary owned undivided interests in the
following facilities (millions of dollars):
<TABLE>
<CAPTION>
GENERATING STATIONS MERRILL
------------------------------ CREEK
SUSQUEHANNA KEYSTONE CONEMAUGH RESERVOIR
----------- -------- --------- ---------
<S> <C> <C> <C> <C>
Ownership interest..................... 90.00% 12.34% 11.39% 8.37%
Electric utility plant in service...... $4,068 $64 $101
Other property......................... $22
Accumulated depreciation............... 851 32 32 7
Construction work in progress.......... 35 1 1
</TABLE>
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 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.
14. SUBSIDIARY COAL RESERVES
In connection with a review by PP&L of its non-core business assets
performed in 1994, a subsidiary of PP&L initiated an evaluation of the
carrying value of its $83.5 million investment in undeveloped coal reserves in
western Pennsylvania. Outside appraisal firms completed the evaluation and
indicated that, due to changing market conditions an impairment had occurred.
Accordingly, the carrying value of this investment was written down to its
estimated net realizable value of $9.8 million, resulting in a $73.7 million
pre-tax charge to income. This write-down resulted in an after-tax charge to
income of $40 million in 1994.
These reserves were acquired in 1974 with the intention of supplying future
coal-fired generating stations. PP&L concluded that it would not develop these
reserves. In November 1995, the coal reserves were sold for $52 million, which
resulted in a $41.7 million gain, or $20.3 million after-tax.
15. COMMITMENTS AND CONTINGENT LIABILITIES
CONSTRUCTION EXPENDITURES
PP&L's construction expenditures are estimated to aggregate $308 million in
1996, $258 million in 1997 and $265 million in 1998, including AFUDC. For
discussion pertaining to construction expenditures, see Review of Financial
Condition and Results of Operations under the caption "Financial Condition--
Reduction in Capital Expenditure Requirements" on page A-6.
NUCLEAR OPERATIONS
PP&L is a member of certain insurance programs which provide coverage for
property damage to members' nuclear generating stations. Facilities at the
Susquehanna station are insured against property damage losses up to $2.75
billion under these programs. PP&L is also a member of an insurance program
which provides insurance coverage for the cost of replacement power during
prolonged outages of nuclear units caused by certain specified conditions.
Under the property and replacement power insurance programs, PP&L could be
assessed retrospective premiums in the event of the insurers' adverse loss
experience. The maximum amount PP&L could be assessed under these programs at
December 31, 1995 was about $40.0 million.
NRC 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 PP&L or the trustee under the Mortgage. PP&L's on-
site property damage insurance policies for the Susquehanna station conform to
these regulations.
PP&L's public liability for claims resulting from a nuclear incident at the
Susquehanna station is limited to about $8.9 billion under provisions of The
Price Anderson Amendments Act of 1988. PP&L is protected against this
liability by a combination of commercial insurance and an industry assessment
program. A utility's liability
A-34
<PAGE>
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 Price Anderson Amendments Act of 1988, PP&L could be assessed
up to $151 million per incident, payable at a rate of $20 million per year,
plus the additional 5% surcharge, if applicable.
FUEL OIL DEALERS' LITIGATION
In August 1991, a group of fuel oil dealers in PP&L's service area filed a
complaint against PP&L in District Court alleging that PP&L's promotion of
electric heat pumps and off-peak thermal storage systems had violated, and
continues to violate, the federal antitrust laws. Specifically, the complaint
alleged that PP&L's use of its PUC-filed tariff to provide a lower electric
rate for newly constructed residences equipped with thermal storage systems,
combined with PP&L's program of providing cash grants to developers and
contractors for the installation of high efficiency heat pumps in these
residences allowed PP&L to illegally capture at least 70% of the market for
heating in new residential construction within its service area.
The complaint requests judgment against PP&L for a sum in excess of $10
million for the alleged antitrust violations, treble the damages alleged to
have been sustained by the plaintiffs over the past four years. The complaint
also requests a permanent injunction against all activities found to be
illegal, including the cash grant program.
PP&L filed a motion for summary judgment seeking to dispose of plaintiffs'
claims in this case, and in September 1992, the judge ruled on this motion and
dismissed all counts against PP&L. The plaintiffs appealed to the Court of
Appeals for the Third Circuit. In April 1994, the Court of Appeals issued a
decision which in part affirmed the lower court's grant of summary judgment
for PP&L, but reversed the grant of summary judgment as to PP&L's payment of
cash grants to developers based upon all-electric builder agreements.
The district court judge has reacquired jurisdiction over this case, and a
trial date has been set for September 1996. PP&L cannot predict the outcome of
this litigation.
ENVIRONMENTAL MATTERS
Air
The Clean Air Act deals, 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 specified Phase I sulfur dioxide
emission limits for about 55% of PP&L's coal-fired generating capacity by
January 1995, and more stringent Phase II sulfur dioxide emission limits for
all of PP&L's fossil-fueled generating units by January 2000. PP&L has
complied with the Phase I acid rain provisions under Title IV. To meet the
Phase II limits, PP&L plans to purchase lower sulfur coal, utilize banked
emission allowances and purchase additional emission allowances instead of
relying on FGD. PP&L's decision not to install FGD, with an estimated capital
cost of $413 million, on the two generating units at the Montour station
represents a significant reduction in previously planned capital expenditures.
PP&L filed applications for Phase II permits for its fossil-fuel fired plants
in December 1995. The permit applications state that PP&L will comply with
applicable requirements and obtain emission allowances for each ton of sulfur
dioxide emitted.
PP&L has met the initial requirements under Title I to install reasonably
available control technology to reduce nitrogen oxide emissions. An additional
two-phase reduction in nitrogen oxides from pre-Clean Air Act levels has been
proposed for the area where PP&L's plants are located, a 55% reduction by May
1999 and a 75% reduction by 2003, unless scientific studies expected to be
completed by 1997 indicate a different reduction is appropriate. The
reductions would be required during a five-month ozone season from May through
September. Expenditures to meet the 1999 requirements are included in the
table of projected construction expenditures in "Financial Condition--
Reduction in Capital Expenditure Requirements" on page A-6.
In addition to acid rain and ambient ozone attainment provisions, the clean
air legislation requires the 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.
A-35
<PAGE>
PP&L currently estimates that additional capital expenditures and operating
costs for environmental compliance under the Clean Air Act will be incurred
beyond 2000 in amounts which are not now determinable but could be material.
The Pennsylvania Air Pollution Control Act implements the Clean Air Act. The
state legislation essentially requires that new state air emission standards
be no more stringent than federal standards. This legislation is not expected
to significantly affect PP&L's plans for compliance with the Clean Air Act.
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 that the cost of allowances will be recognized as
energy-related power production expenses and recoverable through the ECR.
Water and Residual Waste
The DEP regulations governing the handling and disposal of industrial (or
residual) solid waste require PP&L 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 siting and design
standards set forth in the regulations. In addition, the siting of future
facilities could be affected.
To address the DEP regulations, PP&L is moving forward with its plan to
install dry fly ash handling systems at the Brunner Island, Sunbury and
Holtwood stations similar to Montour's facilities. Dry fly ash handling
provides new opportunities for its beneficial use as opposed to disposing of
it on-site.
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. Many requirements of
the DEP regulations address these groundwater degradation issues. PP&L has
reviewed its remedial action plans with the DEP. Remedial work is
substantially completed at two generating stations. At this time, there is no
indication that remedial work will be required at other PP&L generating
stations.
The DEP 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 DEP to use both biomonitoring and a water quality-based
chemical-specific approach in the NPDES permits to control toxics. The current
Montour station NPDES permit contains stringent limits for certain toxic
metals and increased monitoring requirements. Toxic reduction studies are
being conducted at the Montour station before the permit limits become
effective. Depending on the results of the studies, additional water treatment
facilities may be needed at the Montour station. Improvements and upgrades are
being planned for the Sunbury, Brunner Island and Holtwood stations' waste
water treatment systems to meet the anticipated NPDES permit requirements.
Capital expenditures through 2000 to comply with the residual waste
regulations, correct groundwater degradation at fossil-fueled generating
stations and address waste water control at PP&L facilities, are included in
the table of construction expenditures in "Financial Condition--Reduction in
Capital Expenditure Requirements" on page 9. PP&L currently estimates that
about $68 million of additional capital expenditures could be required in 2000
and beyond. Actions taken to correct groundwater degradation, to comply with
the DEP's regulations and to address waste water control are also expected to
result in increased operating costs in amounts which are not now determinable
but could be material.
Superfund and Other Remediation
PP&L has signed a consent order with the DEP to address a number of sites
where PP&L may be liable for remediation of contamination. This may include
potential PCB contamination at certain of PP&L's substations and pole sites;
potential contamination at a number of coal gas manufacturing facilities
formerly owned and operated by PP&L; and oil or other contamination which may
exist at some of PP&L's former generating facilities. As a current or past
owner or operator of these sites, PP&L may be liable under Superfund or other
laws for the costs associated with addressing any hazardous substances at
these sites.
A-36
<PAGE>
These sites have been 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 PP&L's plans for the site. Under the
consent order, PP&L will not be required to spend more than $5 million per
year on investigation and remediation at those sites covered by the consent
order. PP&L will not be required to spend additional money under the consent
order in any year that its total remediation costs for sites both within and
outside the scope of the consent order exceeds $5 million.
At December 31, 1995, PP&L had accrued $11.2 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. PP&L 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 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 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.
Electric and Magnetic Fields
Concerns have been expressed by some members of the scientific community and
others regarding the potential health effects of EMFs. 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. PP&L is actively
participating in the current research effort to determine whether EMFs cause
any human health problems and is taking steps to reduce EMFs, where practical,
in the design of new transmission and distribution facilities. PP&L is unable
to predict what effect the EMF issue might have on PP&L operations and
facilities and the associated cost.
Subsidiary Issues
In June 1995, the DEP ordered a subsidiary to abate seepage allegedly
discharged from a mine formerly operated by that subsidiary. The subsidiary
currently does not believe that it is responsible for this seepage and has
appealed the order to DEP's Environmental Hearing Board, which has scheduled
evidentiary hearings on the matter.
A consultant has been hired to perform additional testing to determine the
source of the seepage. If no connection exists between the mine water and the
seepage, no abatement is required. However, if abatement ultimately is
required, the subsidiary may be responsible for an extensive and protracted
program to pump water from the mine at a cost which could be material.
Other Environmental Matters
In addition to the issues discussed above, PP&L may be required to modify,
replace or cease operating certain of its facilities to comply with other
statutes, regulations and actions by regulatory bodies involving environmental
matters, including the areas of water and air quality, hazardous and solid
waste handling and disposal and toxic substances. As a result, PP&L may also
incur material capital expenditures and operating expenses in amounts which
are not now determinable.
A-37
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
PENNSYLVANIA POWER & LIGHT COMPANY
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME ITEMS--THOUSANDS
Operating revenues...... $2,751,798 $2,725,099 $2,727,002 $2,744,122 $2,740,715
Operating income........ 573,776 501,162 562,808 573,431 582,331
Earnings available to
PP&L Resources,
Inc. (a)............... 324,316(b) 215,038(b) 314,241 306,229 303,727
BALANCE SHEET ITEMS--
thousands (c)
Property, plant and
equipment.............. 7,178,945 7,194,525 7,145,581 7,019,504 6,929,578
Total assets............ 9,423,795 9,320,682 9,454,113 8,191,768 7,934,595
Long-term debt.......... 2,858,728 2,940,789 2,662,570 2,627,159 2,582,233
Preferred and preference
stock
With sinking fund
requirements......... 295,000 295,000 335,000 325,600 364,590
Without sinking fund
requirements......... 171,375 171,375 171,375 223,612 231,375
Common equity........... 2,527,896 2,403,645 2,425,835 2,366,939 2,298,010
Short-term debt......... 89,145 74,168 202,260 159,348 147,170
Total capital provided
by investors........... 5,942,144 5,884,977 5,797,040 5,702,658 5,623,378
Capital lease
obligations............ 219,641 224,765 249,025 251,058 271,976
FINANCIAL RATIOS
Return on average common
equity--%.............. 13.10 8.83 13.06 13.11 13.42
Embedded cost rates (c)
Long-term debt--%..... 7.95 8.07 8.63 9.36 9.72
Preferred and
preference stock--%.. 6.09 6.07 6.30 7.36 7.51
Times interest earned
before income taxes.... 3.58 2.73 3.33 3.18 3.06
Ratio of earnings to
fixed charges--total
enterprise basis (d)... 3.48 2.70 3.31 3.15 3.04
Ratio of earnings to
fixed charges and
dividends on preferred
and preference stock--
total enterprise basis
(d).................... 2.92 2.26 2.71 2.53 2.43
REVENUE DATA
Average price per kwh
billed for system
sales--cents........... 7.10 7.14 7.27 7.39 7.30
SALES DATA
Customers (c)........... 1,226,089 1,213,023 1,203,139 1,186,682 1,173,680
Electric energy sales
billed--millions of kwh
Residential........... 11,300 11,444 11,043 10,604 10,385
Commercial............ 9,948 9,716 9,373 9,039 8,861
Industrial............ 9,845 9,536 9,100 8,746 8,456
Other................. 1,578 1,618 1,534 1,366 1,334
---------- ---------- ---------- ---------- ----------
System sales........ 32,671 32,314 31,050 29,755 29,036
Contractual sales to
other major utilities.. 7,676 6,307 7,142 7,327 7,183
PJM energy sales........ 2,358 3,158 4,142 5,160 7,553
---------- ---------- ---------- ---------- ----------
Total electric
energy sales
billed............. 42,705 41,779 42,334 42,242 43,772
---------- ---------- ---------- ---------- ----------
NUMBER OF FULL-TIME
EMPLOYEES (c).......... 6,661 7,431 7,677 7,882 8,043
- -------
<FN>
(a) Prior years restated to reflect formation of the holding company.
(b) 1995 and 1994 earnings were affected by several one-time adjustments. See
Financial Notes 3, 12, and 14.
(c) At Year-end
(d) 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.
</FN>
</TABLE>
A-38
<PAGE>
EXECUTIVE OFFICERS OF PP&L
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:
<TABLE>
<CAPTION>
EFFECTIVE DATE OF
ELECTION TO
NAME AGE POSITION PRESENT POSITION
---- --- -------- -----------------
<S> <C> <C> <C>
William F. Hecht...... 52 Chairman, President and Chief Executive Officer January 1, 1993
Francis A. Long....... 55 Executive Vice President and Chief Operating Officer January 1, 1993
Robert G. Byram....... 50 Senior Vice President--Nuclear March 26, 1993
Ronald E. Hill........ 53 Senior Vice President--Financial January 1, 1994
John R. Biggar........ 51 Vice President--Finance & Treasurer August 1, 1995
Robert J. Grey*....... 45 Vice President, General Counsel and Secretary March 6, 1995
Joseph J. McCabe...... 45 Vice President and Controller August 1, 1995
- -------
<FN>
* Mr. Grey has been elected Senior Vice President, General Counsel and
Secretary of PP&L, effective March 1, 1996.
</FN>
</TABLE>
Each of the above officers, with the exception of Mr. Grey and Mr. McCabe,
have been employed by PP&L for more than five years as of December 31, 1995.
Mr. McCabe joined PP&L in May 1994 and was previously employed by Deloitte &
Touche LLP as a partner. Mr. Grey joined PP&L in March 1995. He had been
General Counsel of Long Island Lighting Company since 1992. Prior to that
time, he held the position of partner at the law firm of Preston Gates &
Ellis.
Prior to election to the positions shown above, the following executive
officers held other positions with PP&L since January 1, 1991: Mr. Hecht was
Senior Vice President-System Power and Engineering, Executive Vice President-
Operations and President and Chief Operating Officer; Mr. Long was Vice
President-Power Supply and Senior Vice President--System Power & Engineering;
Mr. Byram was Vice President--Nuclear Operations and Senior Vice President--
System Power & Engineering; Mr. R. E. Hill was Vice President and Comptroller;
and Mr. Biggar was Vice President--Finance.
A-39
<PAGE>
SHAREOWNER AND INVESTOR INFORMATION
The following information is provided as a service to shareowners and other
investors. FOR ANY QUESTIONS YOU MAY HAVE OR ADDITIONAL INFORMATION YOU MAY
REQUIRE ABOUT PP&L AND ITS SUBSIDIARIES, PLEASE FEEL FREE TO CALL THE TOLL-
FREE NUMBER LISTED BELOW, OR WRITE TO:
George I. Kline, Manager
Investor Services Department
Pennsylvania Power & Light Co.
Two North Ninth Street
Allentown, PA 18101-1179
TOLL-FREE PHONE NUMBER: For information regarding your investor account, or
other inquiries, call toll-free: 1-800-345-3085.
ANNUAL MEETING: The annual meeting of shareowners is held each year on the
fourth Wednesday of April. The 1996 annual meeting will be held on Wednesday,
April 24, 1996, at Lehigh University's Stabler Arena, Lower Saucon Valley
Goodman Campus Complex, Bethlehem, PA. A reservation card for the meeting's
attendance is included with shareowners' proxy material.
PROXY MATERIAL: A proxy statement, a proxy and a reservation card for PP&L's
annual meeting are mailed in a package that includes this report. This
material was mailed to all shareowners of record as of February 28, 1996.
DIVIDENDS: For 1996, the dates on which the declaration of dividends will be
considered by the board or its executive committee are: February 28, May 22,
August 28, and November 27, for payment on April 1, July 1 and October 1,
1996, and January 1, 1997, respectively. Dividend checks are mailed ahead of
those dates with the intention they arrive as close as possible to the payment
dates.
RECORD DATES: The 1996 record dates for dividends are March 8, June 10,
September 10 and December 10.
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 preferred stock reinvested in 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. These shares will be registered in the name of PP&L
as agent for plan participants and will be credited to the participants'
accounts.
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 call or
write 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 call or write to Investor Services
for an explanation of the procedure to replace lost stock or bond
certificates.
PUBLICATIONS: Several publications are prepared each year and sent to all
investors of record and to others who request their names be placed on our
mailing lists. These publications are:
A-40
<PAGE>
SHAREOWNERS' NEWSLETTER--an easy-to-read newsletter containing current items
of interest to shareowners--published and mailed at the beginning of each
quarter. Additionally, a special year-end edition containing unaudited results
of the year's operations is mailed in early February.
QUARTERLY REVIEW--published in May, July and October to provide quarterly
financial information to investors.
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: Annual reports 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 call or write to
request that only one publication be delivered to your address. Please provide
account numbers for all duplicate mailings.
FORM 10-K: Resources' and PP&L's annual report, filed with the Securities
and Exchange Commission on Form 10-K, is available about mid-March. Investors
may obtain a copy, at no cost, by calling or writing to Investor Services.
LISTED SECURITIES: FISCAL AGENTS:
NEW YORK STOCK EXCHANGE STOCK TRANSFER AGENTS AND REGISTRARS
PP&L RESOURCES, INC.: Norwest Bank Minnesota, N.A.
Common Stock (Code: PPL) Shareowner Services
161 North Concord Exchange
PENNSYLVANIA POWER & LIGHT CO.: South St. Paul, MN 55075
4 1/2% Preferred Stock
(Code: PPLPRB) Pennsylvania Power & Light Co.
4.40% Series Preferred Stock Investor Services Department
(Code: PPLPRA) DIVIDEND DISBURSING OFFICE AND
DIVIDEND REINVESTMENT PLAN AGENT
PHILADELPHIA STOCK EXCHANGE Pennsylvania Power & Light Co.
PP&L RESOURCES, INC.: Investor Services Department
Common Stock MORTGAGE BOND TRUSTEE
Bankers Trust Co.
PENNSYLVANIA POWER & LIGHT CO. Attn: Security Transfer Unit
4 1/2% Preferred Stock P.O. Box 291569
3.35% Series Preferred Stock Nashville, TN 37229
4.40% Series Preferred Stock BOND INTEREST PAYING AGENT
4.60% Series Preferred Stock Pennsylvania Power & Light Co.
Investor Services Department
A-41
<PAGE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED (A)
-----------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1995
Operating revenues........................ $727,485 $609,213 $682,249 $732,851
Operating income.......................... 161,427 104,272 179,122 128,955
Net income................................ 108,207 51,887 94,762 97,228
Earnings available to PP&L Resources...... 101,265 44,945 87,820 90,286
1994 (B)
Operating revenues........................ $769,453 $640,218 $661,142 $654,286
Operating income.......................... 169,306 108,378 131,933 91,545
Net income (loss)......................... 113,634 53,643 76,598 (432)
Earnings (loss) available to PP&L Re-
sources.................................. 106,056 46,701 69,656 (7,375)
- -------
<FN>
(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.
(b) Restated to reflect the retroactive dividend of PMDC to PP&L Resources as
described in Financial Note 1.
</FN>
</TABLE>
A-42
<PAGE>
GLOSSARY OF TERMS AND ABBREVIATIONS
AFUDC (Allowance for Funds Used During Construction)--the cost of equity and
debt funds used to finance construction projects that is capitalized as part
of construction cost.
ATLANTIC--Atlantic City Electric Company
BANKRUPTCY COURT--United States Bankruptcy Court for the Middle District of
Pennsylvania
BG&E--Baltimore Gas & Electric Company
CLEAN AIR ACT (Federal Clean Air Act Amendments of 1990)--legislation passed
by Congress to address environmental issues including acid rain, ozone and
toxic air emissions.
CONTINENTAL--Continental Energy Associates
D&D FUND--a fund established by the Energy Act for the decontamination and
decommissioning of DOE's uranium enrichment facilities.
DEP--Pennsylvania Department of Environmental Protection
DOE--Department of Energy
DRIP (Dividend Reinvestment Plan)--program available to shareowners of
Resources' common stock and PP&L preferred stock to reinvest dividends in
Resources' common stock instead of receiving dividend checks.
ECR (Energy Cost Rate)--a tariff applied to PUC-jurisdictional customers to
recover fuel and other energy costs. Differences between actual and estimated
amounts are collected or refunded to customers.
EMF--Electric and Magnetic Fields
ENERGY ACT (Energy Policy Act of 1992)--legislation passed by Congress to
promote competition in the electric energy market for bulk power.
EPA--Environmental Protection Agency
ESOP--Employee Stock Ownership Plan
FASB (Financial Accounting Standards Board)--a rulemaking organization that
establishes financial accounting and reporting standards.
FGD--Flue gas desulfurization equipment installed at coal-fired power plants
to reduce sulfur dioxide emissions.
FERC (Federal Energy Regulatory Commission)--government agency that
regulates interstate transmission and sale of electricity and related matters.
IBEW--International Brotherhood of Electrical Workers
JCP&L--Jersey Central Power & Light Company
MAJOR UTILITIES--Atlantic, BG&E and JCP&L
NOPR (Notice of Proposed Rulemaking)--proposed rules and regulations issued
by FERC for comment by interested parties.
NPDES--National Pollutant Discharge Elimination System
NRC--Nuclear Regulatory Commission
NUG (Non-Utility Generator)--generating plants not owned by regulated
utilities. If the NUG meets certain criteria, its electrical output must be
purchased by public utilities as required by PURPA.
A-43
<PAGE>
OCA--Pennsylvania Office of Consumer Advocate
OTS--PUC Office of Trial Staff
PA. CNI--Pennsylvania Corporate Net Income Tax
PCB (Polychlorinated Biphenyl)--additive to oil used in certain electrical
equipment up to the late 1970s. Now classified as a hazardous chemical.
PECO--PECO Energy Company (the former Philadelphia Electric Company)
PJM (Pennsylvania--New Jersey--Maryland Interconnection Association)--Mid-
Atlantic power pool consisting of 11 operating electric utilities, including
PP&L.
PLAN--PP&L's noncontributory defined benefit pension plan.
PMDC--Power Markets Development Company
PP&L--Pennsylvania Power & Light Company
PSE&G--Public Service Electric & Gas Company
PUC (Pennsylvania Public Utility Commission)--agency that regulates certain
ratemaking, accounting, and operations of Pennsylvania utilities.
PUC DECISION--final order issued by the PUC on September 27, 1995 pertaining
to PP&L's base rate case filed in December 1994.
PUHCA--Public Utility Holding Company Act of 1935.
PURPA (Public Utility Regulatory Policies Act of 1978)--legislation passed
by Congress to encourage energy conservation, efficient use of resources, and
equitable rates.
RESOURCES (PP&L Resources, Inc.)--parent holding company of PP&L.
SBRCA--Special Base Rate Credit Adjustment
SEC--Securities and Exchange Commission
SFAS (Statement of Financial Accounting Standards)--accounting and financial
reporting rules issued by the FASB.
SMALL UTILITIES--utilities subject to FERC jurisdiction whose billings
include base rate charges and a supplemental charge or credit for fuel costs
over or under the levels included in base rates.
STAS (State Tax Adjustment Surcharge)--rate adjustment mechanism to customer
bills for changes in certain state taxes.
SUPERFUND--Federal and state legislation that addresses remediation of
contaminated sites.
UGI--UGI Corporation
VEBA (Voluntary Employee Benefit Association Trust)--trust accounts for
health and welfare plans for future payments to employees, retirees or their
beneficiaries.
VERP--Voluntary Early Retirement Program
WHEELING--transmitting power from one system to another over the
transmission facilities of a system not party to the transaction.
A-44
<PAGE>
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 toll-free number listed below, or
write to:
GEORGE I. KLINE, MANAGER
INVESTOR SERVICES DEPARTMENT
PENNSYLVANIA POWER & LIGHT COMPANY
TWO NORTH NINTH STREET
ALLENTOWN, PA 18101
TOLL-FREE PHONE NUMBER: 800-345-3085
---------------
PP&L files a Form 10-K Report annually with the Securities and Exchange
Commission. The Form 10-K Report for 1995 is available without charge by
writing to PP&L's Investor Services Department at the address printed above,
or by calling the toll-free number.
WHETHER YOU PLAN TO ATTEND THE MEETING OR NOT, PLEASE MARK, DATE, SIGN
AND MAIL THE ACCOMPANYING PROXY AS SOON AS POSSIBLE. AN ENVELOPE, WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES, IS INCLUDED FOR YOUR
CONVENIENCE.
<PAGE>
[LOGO APPEARS HERE] Pennsylvania Power & Light Company
----------------------------------
Two North Ninth Street.Allentown, PA 18101-1179.610/774-5151
March 15, 1996
Dear Shareowner:
It is a pleasure to invite you to attend the 1996 Annual Meeting of
Shareowners, which will be held at 1:00 p.m. on Wednesday, April 24, 1996 at
Lehigh University's Stabler Arena, Lower Saucon Valley Goodman Campus Complex,
Bethlehem, Pennsylvania, preceding the Annual Meeting of Shareowners of PP&L
Resources, Inc. ("Resources").
Detailed information as to the business to be transacted at the meeting is
contained in the accompanying Notice of Annual Meeting and Proxy Statement.
Please mark, sign, date and return your Proxy as soon as possible so that
you will be represented at the meeting in accordance with your wishes. The
Company is a subsidiary of Resources, and the Company's preferred stock is the
only class of stock outstanding in the hands of the public. Resources owns all
of the Company's common stock.
Sincerely yours,
/s/ William F. Hecht
William F. Hecht
Chairman, President
and Chief Executive Officer
[LOGO APPEARS HERE] Pennsylvania Power & Light Company
----------------------------------
Two North Ninth Street.Allentown, PA 18101-1179
Proxy Solicited on Behalf of the Board of Directors for Annual Meeting of
Shareowners, April 24, 1996
Please Vote and Sign on Reverse Side and Return in the Enclosed Envelope
William F. Hecht, Frank A. Long and Norman Robertson, and each of
them, are hereby appointed proxies, with the power of substitution, to vote
the shares of the undersigned, as directed on the reverse side of this
proxy, at the Annual Meeting of the Shareowners of Pennsylvania Power and
Light Company to be held on April 24, 1996, and any adjournments thereof,
and in their discretion to vote and act upon any other matters as may
properly come before said meeting and any adjournments thereof.
Shares represented by all properly executed proxies will be voted at the Annual
Meeting in the manner specified. If properly executed and returned, and no
specification is made, votes will be cast "FOR" Item 1 on the reverse of this
proxy.
(over)
<PAGE>
Tear along perforation and return in the enclosed envelope
Indicate your vote by placing an (X) in the appropriate box 868
- --------------------------------------------------------------------------------
1. ELECTION OF DIRECTORS: Nominees for terms ending in 1999.
(1) William J. Flood (2) William F. Hecht (3) Frank A. Long
For All Withhold
For All Except (*) For All
[_] [_] [_]
(*) To withhold authority to vote for any individual nominee, strike a line
through the nominee's name in the list above and mark an (X) in the "For all
Except" box.
- --------------------------------------------------------------------------------
PROXY
IMPORTANT: When signing as attorney,
executor, administrator, trustee or guardian,
please give your full title as such. In the
case of JOINT HOLDERS, all should sign.
Please date and sign
your name(s) exactly Date
as shown above and -------------------------- ------------
mail promptly in the Date
enclosed envelope -------------------------- ------------
<PAGE>
PENNSYLVANIA POWER & LIGHT COMPANY
ALLENTOWN, PENNSYLVANIA
If you plan to attend the Annual Meeting of Shareowners on April 24, 1996,
please fill out and return this reservation form so that an attendance card may
be sent to you. Please use the enclosed envelope for the return of both this
card and your proxy.
You may, of course, attend the meeting without a card upon proper
identification. However, by indicating your plans in advance, we can make the
necessary arrangements. Your cooperation is appreciated.
<PAGE>
ANNUAL MEETING RESERVATION
I
We .............................................................................
PLEASE TYPE OR PRINT NAME(S)
Address ........................................................................
PLEASE TYPE OR PRINT
............................................... Zip ...........................
plan to attend the Annual Meeting of Shareowners to be held at Lehigh
University's Stabler Arena, at the Goodman Campus Complex located in Lower
Saucon Township, outside Bethlehem, Pa., on Wednesday, April 24, 1996, at 1:00
p.m. Please send an attendance card.
HAVE YOU ENCLOSED YOUR SIGNED PROXY?
