<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
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 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] No fee required.
[_] 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:
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(2) Aggregate number of securities to which transaction applies:
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(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.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
[LOGO OF PP&L APPEARS HERE]
Pennsylvania Power & Light Company
Notice of Annual Meeting
April 23, 1997
and
Proxy Statement
(including appended 1996 Financial Statements)
<PAGE>
NOTICE OF ANNUAL MEETING OF SHAREOWNERS
The Annual Meeting of Shareowners of Pennsylvania Power & Light Company
("PP&L Co." 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 23, 1997, at 1:00 p.m., preceding
the Annual Meeting of Shareowners of PP&L Resources, Inc. The Annual Meeting
will be held for the purposes stated below and more fully described in the
accompanying Proxy Statement, and to transact such other business as may
properly come before the Meeting or any adjournments thereof:
1. The election of four 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 Friday, February 28, 1997,
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 14, 1997
<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 14, 1997.
OUTSTANDING STOCK AND VOTING RIGHTS
The Board of Directors has established Friday, February 28, 1997, 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.
("PP&L Resources")), 530,189 shares of 4 1/2% Preferred Stock and 4,133,556
shares of Series Preferred Stock.
As of February 15, 1997, 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
----- ------------------------ ------------------ ---------------
<C> <S> <C> <C>
6.33% Series Chancellor LGT Asset 85,000(a) 8.5%
Preferred Stock Management, Inc.,
Chancellor LGT Trust
Company, and
LGT Asset Management,
Inc.
1166 Avenue of the
Americas
New York, New York 10036
6.75% Series The Colonial Group, Inc. 56,000(b) 6.6%
Preferred Stock Colonial Management
Associates, Inc.
One Financial Center
Boston, MA 02111
Wellington Management 85,000(c) 10%
Company, LLP
75 State Street
Boston, MA 02109
</TABLE>
- -------
(a) Chancellor LGT Asset Management, Inc., and Chancellor LGT Trust Company,
as investment advisers for various fiduciary accounts, and LGT Asset
Management, Inc., as the holding company for Chancellor LGT Asset
Management, Inc., 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) The Colonial Group, Inc., as the holding company for Colonial Management
Associates, Inc., and Colonial Management Associates, Inc., as investment
advisers for various fiduciary accounts, have sole power to vote or direct
the vote, and sole power to dispose of or direct the disposal of, all of
the indicated shares.
(c) Number of shares beneficially owned includes shares for which Wellington
Management Company, LLP exercises investment and/or voting power, but
which are held by one of its wholly owned subsidiaries and/or investment
advisory clients.
Execution of the Proxy will not affect a Shareowner's right to attend the
Annual Meeting and vote in person. Any Shareowner giving a Proxy has the right
to revoke it at any time before it is voted by giving notice in writing to the
Secretary. Shares represented by Proxy will be voted in accordance with the
instructions given. In the absence of instructions to the contrary, the Proxy
solicited hereby will be voted FOR the election of directors. 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 certain designated employees. These employees
sign a confidentiality agreement which prohibits them from disclosing the
manner in which a Shareowner has voted to any Company employee or to any other
person
1
<PAGE>
(except to the Judges of Election or the person in whose name the shares are
registered), unless otherwise required by law.
With respect to Proposal 1 (the election of directors), Shareowners have the
unconditional right of cumulative voting. Shareowners may vote in this manner
by multiplying the number of shares registered in their respective names on
the Record Date by the total number of directors to be elected at the Annual
Meeting and casting all of such votes for one nominee or distributing them
among any two or more nominees. The nominees receiving the highest number of
votes, up to the number of directors to be elected, will be elected. Authority
to vote for any individual nominee can be withheld by striking a line through
that person's name in the list of nominees on the accompanying Proxy. Shares
will be voted for the remaining nominees on a pro rata basis.
PROPOSAL 1: ELECTION OF DIRECTORS
PP&L Co. has a classified Board of Directors, currently consisting of twelve
directors divided into three classes. These classes consist of four directors
whose terms will expire at the 1997 Annual Meeting, four directors whose terms
will expire at the 1998 Annual Meeting, and four directors whose terms will
expire at the 1999 Annual Meeting. The directors of PP&L Co. also serve as the
directors of PP&L Resources.
The nominees this year are E. Allen Deaver, Nance K. Dicciani, Elmer D.
Gates and Norman Robertson. All of the nominees are currently serving as
directors and were elected by the Shareowners at the 1994 Annual Meeting. If
elected by the Shareowners, the above nominees will serve until the 2000
Annual Meeting and until their successors shall be elected and qualified.
Following their election, there will be twelve members of the Board of
Directors, consisting of the following classes: four directors whose terms
will expire at the 1998 Annual Meeting, four directors whose terms will expire
at the 1999 Annual Meeting, and four directors whose terms will expire at the
2000 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:
[PHOTO APPEARS E. ALLEN DEAVER, 61, is Executive Vice President, a member of
HERE] the President's Office, and a director of Armstrong World
Industries, Inc., Lancaster, Pa., a manufacturer of interior
furnishings and specialty products. He graduated from the
University of Tennessee with a B.S. in Mechanical Engineering
and joined Armstrong in 1960. He is a director of the
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 Compensation and Corporate Governance
Committees and a member of the Executive and Finance
Committees, has been a director since 1991.
[PHOTO APPEARS NANCE K. DICCIANI, 49, is Vice President and Monomers
HERE] Business Unit Director, Rohm and Haas Company, Philadelphia,
Pa., a specialty chemical company. Dr. Dicciani joined Rohm
and Haas in 1991 as Business Unit Director, Petroleum
Chemicals, and held various positions in the Petroleum
Chemicals Division until being named to her current position
in 1996. She received a B.S. in Chemical Engineering from
Villanova University, an M.S. from the University of
Virginia, an M.B.A. from the Wharton School of Business and a
Ph.D. from the University of Pennsylvania. Dr. Dicciani is
chairman of the advisory board of RohMax, a joint venture
formed for the research, manufacture and sale of petroleum
additives. She is a director of the World Affairs Council and
a trustee of Villanova University. Dr. Dicciani, chair of the
Nuclear Oversight Committee and a member of the Finance
Committees, has been a director since 1994.
2
<PAGE>
[PHOTO APPEARS ELMER D. GATES, 67, is Vice Chairman of Fuller Company,
HERE] Bethlehem, Pa., a company involved in the design and
manufacture of plants, machinery and equipment used in the
cement, paper, power and processing industries. He has a B.S.
in Mechanical Engineering from Clarkson College. Mr. Gates is
vice chairman and a director of Ambassador Bank, a director
of SI Handling Systems, Inc., and president of the Lehigh
Valley Partnership and the Lehigh Valley Economic Development
Corporation. 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 Finance Committees and a member of
the Compensation and Corporate Governance and Executive
Committees, has been a director since 1989.
[PHOTO APPEARS NORMAN ROBERTSON, 69, served as Senior Vice President and
HERE] Chief Economist of Mellon Bank N.A., Pittsburgh, Pa., until
his retirement in 1992. Mr. Robertson received a B.S. in
Economics from the University of London, England, and
attended the London School of Economics. Mr. Robertson is a
director of Economics America-Pennsylvania Council on
Economic Education and an independent economic advisor to
Smithfield Trust Company, a private investment management
firm. He is also an Adjunct Professor of Economics at
Carnegie Mellon University. Mr. Robertson, a member of the
Executive, Finance and Compensation and Corporate Governance
Committees, has been a director since 1969.
DIRECTORS CONTINUING IN OFFICE:
[PHOTO APPEARS FREDERICK M. BERNTHAL, 54, is President of Universities
HERE] Research Association ("URA"), Washington, D.C., a position he
has held since 1994. URA is a not-for-profit consortium of
major research universities, and is management and operations
contractor on behalf of the Department of Energy for the
Fermi National Accelerator Laboratory. Prior to assuming his
current position, Dr. Bernthal had served since 1990 as
Deputy Director of the National Science Foundation and, from
1983 to 1988, as a member of the U.S. Nuclear Regulatory
Commission. Dr. Bernthal received a B.S. in chemistry from
Valparaiso University, and a Ph.D. in nuclear chemistry from
the University of California at Berkeley. Active in a number
of professional organizations, he is also a director of the
Challenger Centers Foundation. Dr. Bernthal, a member of the
Audit and Corporate Responsibility and Nuclear Oversight
Committees, has been a director since March 1, 1997; his term
ends in 1999.
[PHOTO APPEARS WILLIAM J. FLOOD, 61, is Secretary-Treasurer of Highway
HERE] Equipment & Supply Co. (HESCO), Harrisburg, Pa., supplier of
heavy equipment for highway construction, industry and
general contractors. Mr. Flood received a B.A. from Dartmouth
College and joined HESCO in 1960. He is a director of HESCO,
Geisinger Foundation, Hescorp, Inc. and PNC Bank (Northeast
PA). A member of the Audit and Corporate Responsibility and
Nuclear Oversight Committees, Mr. Flood has been a director
since 1990; his term ends in 1999.
[PHOTO APPEARS DEREK C. HATHAWAY, 52, is Chairman, President and Chief
HERE] Executive Officer of Harsco Corporation, Camp Hill, Pa., a
diversified multi-national manufacturing company. In 1966,
Mr. Hathaway founded Dartmouth Investments Ltd. in the United
Kingdom and built a group of engineering businesses into a
public corporation, which was acquired by Harsco in 1979.
After coming to the U.S. in 1984, Mr. Hathaway became a
citizen in 1991. Mr. Hathaway served as President and Chief
Operating Officer of Harsco from 1991 until 1994, when he was
elected to his current position. 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,
chair of the Audit and Corporate Responsibility Committee and
member of the Finance Committees, has been a director since
1995; his term ends in 1998.
3
<PAGE>
[PHOTO APPEARS WILLIAM F. HECHT, 53, is Chairman, President and Chief
HERE] Executive Officer of both PP&L Resources, Inc. and
Pennsylvania Power & Light Company. Mr. Hecht received a B.S.
and M.S. in Electrical Engineering from Lehigh University,
and joined Pennsylvania Power & Light Company in 1964. He was
elected President and Chief Operating Officer in 1991 and was
named to his present Pennsylvania Power & Light Company
position in 1993, and to his PP&L Resources, Inc. 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 Boards and of the Corporate Leadership
Council, an internal committee comprised of the senior
officers of PP&L Resources, Inc. Mr. Hecht has been a
director since 1990; his term ends in 1999.
[PHOTO APPEARS STUART HEYDT, 57, has been President and Chief Executive
HERE] Officer of Geisinger Foundation, Danville, Pa., since 1991.
Geisinger Foundation is a not-for-profit corporation involved
in health care and related services. Dr. Heydt, who
specializes in maxillofacial surgery, attended Dartmouth
College and received an M.D. from the University of Nebraska.
He is past president of the American College of Physician
Executives and a director of Bucknell University, Wilkes
University, PNC Bank (Northeast PA) and PNC Bank, N.A. A
member of the Compensation and Corporate Governance and
Executive Committees, Dr. Heydt has been a director since
1991; his term ends in 1998.
[PHOTO APPEARS CLIFFORD L. JONES, 69, served as President of the Capital
HERE] Region Economic Development Corporation, Camp Hill, Pa., from
1992 until 1994. Prior to that, he served as President of the
Pennsylvania Chamber of Business and Industry from 1983 until
his retirement in 1991. Mr. Jones had previously served as
Chairman of the Pennsylvania Public Utility Commission and as
Secretary of the Pennsylvania Department of Environmental
Resources. He received a B.A. from Westminster College. Mr.
Jones is a director of Mercom, Inc., a Michigan-based cable
television company. A member of the Audit and Corporate
Responsibility and Nuclear Oversight Committees, Mr. Jones
has been a director since 1989; his term ends in 1998.
[PHOTO APPEARS RUTH LEVENTHAL, 56, is Professor of Biology at the Milton S.
HERE] Hershey Medical Center, Hershey, Pa. She previously had
served as Provost and Dean of Penn State Harrisburg, a
position which she held from 1984 through 1994. Dr. Leventhal
earned a B.S. in Medical Technology, a Ph.D. in Parasitology
and an M.B.A. from 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
Corporate Responsibility and Nuclear Oversight Committees,
has been a director since 1988; her term ends in 1998.
[PHOTO APPEARS FRANK A. LONG, 56, is Executive Vice President of PP&L
HERE] Resources, Inc. and Executive Vice President and Chief
Operating Officer of Pennsylvania Power & Light Company. Mr.
Long received a B.S. in Electrical Engineering from
Northeastern University, and joined Pennsylvania Power &
Light Company in 1963. Senior Vice President-System Power &
Engineering from 1990 until 1993, he was named to his present
Pennsylvania Power & Light Company position in 1993 and to
his PP&L Resources, Inc. position in February 1995. Mr. Long
is chairman of the Pennsylvania Electric Association, and a
director of the Smart Discovery Center and the Homemaker/Home
Health Aide Services of Lehigh County. A director since 1993,
Mr. Long's term ends in 1999.
4
<PAGE>
GENERAL INFORMATION REGARDING DIRECTORS AND EXECUTIVE OFFICERS
DIRECTOR ATTENDANCE AT BOARD MEETINGS
The Board of Directors held ten meetings during 1996. Each director attended
at least 75% of the meetings held by the Board and the Committees during the
year. The average attendance of directors at Board and Committee meetings held
during 1996 was 94%.
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. As
of January 1, 1997, non-employee directors receive a retainer of $25,000 per
year, of which a minimum of $7,000 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 PP&L Resources and PP&L Co. meet on the same day, and when
"dual" committee meetings are held on the same day. Also, only one retainer is
paid for service on the Boards of both PP&L Resources and PP&L Co.
Non-employee directors may elect to defer all or any part of the retainer
and fees, 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.
On December 18, 1996, the Board of Directors voted to terminate the
Directors Retirement Plan for current directors, effective as of December 31,
1996. Instead, beginning on January 1, 1997, the directors will be provided
annually with $4,500 worth of PP&L Resources' common stock, which approximates
the benefit previously provided each director under the Directors Retirement
Plan. The purpose of this change is to more closely align the interest of
directors with the shareowners and to tie director compensation to Company
performance. This additional common stock is provided by increasing the
directors' annual retainer from the prior $20,500 to the current $25,000.
Under the terms of the DDCP, this increased retainer is automatically
allocated to each director's deferred stock account. In addition, as of
January 1, 1997, each current director was provided with a one-time credit of
additional deferred common stock equal to that director's accrued benefit
under the Directors Retirement Plan. As with the DDCP benefits, this
additional deferred stock together with applicable dividends is available to
the directors after retirement from the Board, at which time they can receive
this stock in one or more annual installments for a period of up to ten years.
STOCK OWNERSHIP
As noted above, all the common stock of PP&L Co. is owned by PP&L Resources.
No directors or executive officers own any PP&L Co. preferred stock.
BOARD COMMITTEES
The Board of Directors reorganized its committee structure effective August
1, 1996, and now has four standing committees--the Executive, Compensation and
Corporate Governance, Finance, and Nuclear Oversight Committees. Each non-
employee director usually serves on two or more of these and PP&L Resources'
Board committees. (PP&L Resources' committees include the Executive, Audit and
Corporate Responsibility, Compensation and Corporate Governance and Finance
Committees.) All but the Executive Committee are composed entirely of
directors who are not Company employees. (PP&L Resources' Audit and Corporate
Responsibility Committee provides audit oversight to PP&L Co.)
EXECUTIVE COMMITTEE. The Executive Committee exercises during the periods
between Board meetings all of the powers of the Board of Directors, except
that the Executive Committee may not elect directors, change the membership of
or fill vacancies in the Executive Committee, fix the compensation of the
directors, change the Bylaws, or take any action restricted by the
Pennsylvania Business Corporation Law or the Bylaws. The Executive Committee
of PP&L Co. did not meet in 1996. The members of the Executive Committee for
both the Company and PP&L Resources are Mr. Hecht (chair), Dr. Heydt, and
Messrs. Deaver, Gates and Robertson.
5
<PAGE>
COMPENSATION AND CORPORATE GOVERNANCE COMMITTEE. This committee, which met
twice in 1996, combines the functions of the previously separate Management
Development and Compensation Committee and the PP&L Resources Nominating
Committee, which met once and three times, respectively, prior to the
reorganization of the committees. The principal functions of the Compensation
and Corporate Governance Committee are to review and evaluate at least
annually the performance of the chief executive officer and other senior
officers of the Company, and to set their remuneration, including incentive
awards; to review the fees paid to outside directors for their services on the
Board of Directors and its Committees; and to review management's succession
planning. For those individuals who are senior officers of both the Company
and PP&L Resources, the Compensation and Corporate Governance Committees of
both companies act jointly to set remuneration for services to both companies.
Another principal committee function is to develop and review criteria for the
qualifications of Board members and to identify and recommend to the Board of
Directors candidates for election to the Board. The members of the
Compensation and Corporate Governance Committee for both the Company and PP&L
Resources are Mr. Deaver (chair), Messrs. Gates and Robertson and Dr. Heydt.
Nominees for directors may be proposed by Shareowners in accordance with the
procedures set forth in the Bylaws. Recommendations for the 1998 Annual
Meeting must be received by November 14, 1997. Shareowners interested in
recommending nominees for directors should submit their recommendations in
writing to the Chair of the Compensation and Corporate Governance Committee,
c/o Secretary, Two North Ninth Street, Allentown, Pennsylvania 18101.
FINANCE COMMITTEE. The principal functions of the Finance Committee, which
assumed the finance-related functions of the Executive Committee, and which
met twice in 1996, are to approve specific Company financings, and to review
the Company's annual financing plans and overall financial strategy. The
members of the Finance Committee for both the Company and PP&L Resources are
Mr. Gates (chair), Dr. Dicciani, and Messrs. Deaver, Hathaway and Robertson.
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 Company's nuclear plant. Industry experts are
retained to provide technical advice and assistance to committee members. The
Nuclear Oversight Committee met three times in 1996. The members of the
Nuclear Oversight Committee are Dr. Dicciani (chair), Messrs. Flood and Jones,
and Drs. Bernthal and Leventhal.
RETIREMENT PLANS FOR EXECUTIVE OFFICERS
PP&L Co. officers who retire from the Company are eligible for benefits
under PP&L Resources' Officers 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>
$250,000 85,778 119,528 132,028 144,528
300,000 106,028 146,528 161,528 176,528
350,000 126,278 173,528 191,028 208,528
400,000 146,528 200,528 220,528 240,528
450,000 166,778 227,528 250,028 272,528
500,000 187,028 254,528 279,528 304,528
550,000 207,278 281,528 309,028 336,528
600,000 227,528 308,528 338,528 368,528
650,000 247,778 335,528 368,028 400,528
700,000 268,028 362,528 397,528 432,528
750,000 288,278 389,528 427,028 464,528
</TABLE>
6
<PAGE>
Benefits under both the Retirement Plan and the SERP benefit formulas are
based on length of service and the average compensation for the highest 60
consecutive months in the final 120 months of employment. For purposes of
calculating benefits under the Retirement Plan, the compensation used is base
salary less amounts deferred pursuant to the Officers Deferred Compensation
Plan. Base salary, including any amounts deferred, is listed in the Summary
Compensation Table which follows. (Of the officers listed in that Table, Mr.
Hecht deferred $52,000 of compensation for each of 1995 and 1996; Mr. Long
deferred $32,094, $26,000 and $31,200 for the years 1994, 1995, and 1996,
respectively; and Mr. Grey deferred $10,800 for 1995 and $600 for 1996.) For
purposes of calculating benefits under the SERP, the compensation used is base
salary, bonus and the value of any restricted stock grant for the year in
which earned, as listed in the Table, as well as dividends paid on restricted
stock.
Benefits payable under the Retirement Plan are subject to limits set forth
in the Internal Revenue Code and are not subject to any deduction for Social
Security benefits or other offset. They are computed on the basis of the life
annuity form of pension at the normal retirement age of 65. Benefits payable
under the SERP are computed on the same basis; are offset by Retirement Plan
benefits, the maximum Social Security benefit payable at 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, 1997, the years of credited service under the Retirement
Plan for Messrs. Hecht, Long, Byram, Grey and Hill were 26.8, 29.4, 20.3, 1.7
and 27.4, 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 PP&L 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 Compensation and Corporate
Governance Committee of the Board of Directors may change or eliminate the
restriction period applicable to any outstanding restricted stock awards under
the Incentive Compensation Plan.
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 Co. and PP&L Resources.
Compensation amounts for these officers are the same as those shown in the
PP&L Resources' proxy statement; they are not additive. Messrs. Hecht and Long
also served as directors but received no separate remuneration in that
capacity.
<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 1996 531,194 138,600 0 138,920 4,418
Chairman, President and 1995 489,024 0/5/ 0 413,920 4,149
Chief Executive Officer 1994 440,374 0/6/ 0 0/6/ 4,042
Frank A. Long 1996 367,555 82,688 14,424 82,800 4,462
Executive Vice President 1995 344,041 0/5/ 13,654 237,318 4,187
and Chief Operating Of-
ficer 1994 295,434 24,375 7,050 42,525 4,078
Robert G. Byram 1996 246,944 48,195 0 48,300 3,673
Senior Vice President--
Nuclear 1995 232,717 0/5/ 4,616 134,640 3,496
1994 206,434 16,500 0 28,755 3,423
Robert J. Grey 1996 231,878 44,415 0 44,620 2,250
Senior Vice President, 1995 173,471 25,000/5/ 0 60,958 140,547
General Counsel and Sec-
retary 1994 0 0 0 0 0
Ronald E. Hill 1996 205,092 40,257 4,997 40,250 4,175
Senior Vice President--
Financial 1995 199,315 0/5/ 8,808 113,883 3,936
1994 171,950 12,975 1,100 22,680 3,840
</TABLE>
/1/ Salary and bonus data include deferred compensation. Bonus data include a
one-time employment bonus of $25,000 for Mr. Grey in 1995.
/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 Co. The Safe Harbor fees earned are as follows:
Mr. Long -- $800 in 1994; and Mr. Hill -- $1,100 in 1994, $1,000 in 1995 and
$900 in 1996.
/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, 1996, the officers listed in this
table held the following number of shares of restricted common stock, with
the following values: Mr. Hecht -- 19,400 shares ($446,200); Mr. Long --
13,340 shares ($306,820); Mr. Byram -- 8,070 shares ($185,610); Mr. Grey --
2,450 shares ($56,350); and Mr. Hill -- 6,330 shares ($145,590). These
year-end data do not include awards made in January 1997 for 1996
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 then 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 PP&L
Resources stock rather than in cash.
/6/ Mr. Hecht requested to forgo his incentive award for 1994.
8
<PAGE>
JOINT REPORT OF THE COMPENSATION AND CORPORATE GOVERNANCE
COMMITTEES REGARDING EXECUTIVE COMPENSATION
GENERALLY
PP&L Resources, Inc. (the "Company") is the parent holding company of
Pennsylvania Power & Light Company ("PP&L Co."), and PP&L Co. is its principal
subsidiary. The members of the Company's Compensation and Corporate Governance
Committee/1/ -- all independent outside directors -- and Board of Directors
also serve in the same capacity for PP&L Co. Certain senior officers of the
Company are also senior officers of PP&L Co. 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 Co. and discussions of their
compensation include compensation earned for services to both the Company and
PP&L Co.
During 1996, 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 Co. and Power Markets Development Company (an unregulated subsidiary of
the Company created to pursue worldwide energy-related business opportunities)
("PMDC"). These officers include: William F. Hecht, Chairman, President and
Chief Executive Officer of the Company; Frank A. Long, Executive Vice
President of the Company; Robert G. Byram, Senior Vice President -- Nuclear of
PP&L Co.; Robert D. Fagan, President of PMDC; Robert J. Grey, Senior Vice
President, General Counsel and Secretary of the Company; and Ronald E. Hill,
Senior Vice President -- Financial of the Company. Except for Mr. Fagan, these
individuals are also senior officers of PP&L Co./2/
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 individual executive performance.
Incentive compensation is awarded based on corporate performance and
shareowner value./3/ 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, and any awards made are granted 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 addition, the Committee annually reviews the performance of each
executive to determine the appropriate level of base salary adjustment for
that individual.
In January 1996, the Committee reviewed salary ranges for the senior
officers by comparing these salary levels with levels within the utility
industry generally, and, more specifically, with executive compensation levels
at 12 comparable electric utilities./4/ All of the comparison companies were
included in the EEI (Edison Electric Institute) 100 Index of Investor-owned
Electric Utilities. The 12 electric utilities used for comparison purposes in
- -------
/1/ As a result of a restructuring of the Company and PP&L Co. Board
Committees, the Management Development and Compensation Committees became
the Compensation and Corporate Governance Committees, effective August 1,
1996.
/2/ Mr. Fagan has no position with PP&L Co., but is a member of the Corporate
Leadership Council and a "senior officer" of Resources by virtue of his
position as President of PMDC.
/3/ Because/of his position as President of PMDC, Mr. Fagan's incentive
compensation is based on separate goals established for that position.
/4/ Mr. Fagan's salary was compared with those of similar subsidiary positions
in both regulated and non-regulated companies.
9
<PAGE>
1996 were selected based on their similarity to PP&L Co. in terms of annual
revenues, service area and other measures of size.
After reviewing salary data for executive positions at comparable utilities,
the Committee reviewed the actual salaries and performance appraisals of each
of the senior officers. In the case of the Chief Executive Officer, the
Committee considered directors' individual appraisals of his performance in
determining his salary. The Committee then solicited input and recommendations
from the Chief Executive Officer regarding the performance and individual
salaries of the other senior officers.
Upon completion of this review, the Committee established the 1996 salaries
of the senior officers. As of January 1996, Mr. Hecht's total compensation was
about 15% less than the average total compensation of the chief executive
officers of the comparable companies. Also, the total compensation of the
senior officers as a group was approximately 15% less than the average paid to
their counterparts at these companies. Considering this information and
individual performance, a salary increase was given to Mr. Hecht effective in
August 1996, Mr. Long effective in May 1996, Mr. Byram effective in July 1996,
Mr. Fagan and Mr. Grey effective in March 1996, and Mr. Hill effective in
October 1996. It is anticipated that the revised short- and long-term
incentive plans established in 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. 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, in 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
The Short-Term Incentive Plan achieves the Company's objective of placing a
large portion of executive compensation "at risk" by providing the opportunity
to base approximately 30-40% of the senior officers' total compensation on the
achievement of key corporate goals. 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.
10
<PAGE>
The following are the goal categories for 1996:
I. FINANCIAL -- based on net income and total return on common stock.
II. OPERATIONAL -- based on customer relations indices, power plant
performance, safety and environmental performance and affirmative action
results.
III. CORPORATE STRATEGY -- based on achievement of specific goals related to
deregulation and industry restructuring.
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
The Company also has 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 increased stock ownership on the part of the officers and aligns
the interests of management and shareowners.
11
<PAGE>
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.
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 1996 solely on
the corporate goals and return on common equity achieved. In January 1997, the
Committee reviewed performance achieved during 1996 for each of the corporate
goals under the Short-Term Incentive Plan. During 1996, the Company achieved
50% of the financial goals, 60% of the operational goals and 90% 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 -- 25.2%; Mr. Long -- 22.1%; Mr. Byram --
18.9%; Mr. Grey -- 18.9%; and Mr. Hill -- 18.9%. Mr. Fagan received a 1996
short-term incentive award of 45.0% of base salary based on separate goals
related to the administration and strategic organization of PMDC; budgetary
control and the establishment of certain financial capabilities and policies;
and investments in specific international projects.
In January 1997, the Committee also reviewed the Company's ROE performance
for the Long-Term Incentive Plan. During 1996, the Company achieved an ROE of
12.33%, resulting in a three-year average ROE of 11.32%. The peer group of
comparable companies achieved an average ROE of 10.79% and a three-year
average of 11.57%. Applying the formula for comparative and absolute ROE
performance described above, the senior officers received the following Long-
Term Incentive Plan awards as a percent of base salary: Mr. Hecht -- 25.2%;
Mr. Long -- 22.1%; Mr. Byram -- 18.9%; Mr. Grey -- 18.9%; and Mr. Hill --
18.9%. Mr. Fagan's 1996 long-term incentive award equal to 50.0% of his base
salary (1/3 in cash and 2/3 in restricted stock) was based on an established
formula emphasizing PMDC's committed equity investment and cash flow.
The 1996 incentive awards made to the five most highly compensated executive
officers are shown in the Summary Compensation Table.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
In establishing Mr. Hecht's 1996 salary, in December 1995 and January 1996
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 1995 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 1996 salary at $550,000, effective August 1, 1996.
Based on the Company's performance in 1996 on the specific corporate goals
under the Short-Term Incentive Plan, Mr. Hecht received a Short-Term Incentive
Plan award equal to approximately 25.2% of his year-end salary. Based on the
Company's three-year return on common equity through 1996, Mr. Hecht received
a Long-Term Incentive Plan award of restricted stock equal to approximately
25.2% of his year-end salary.
12
<PAGE>
TAX DEDUCTIBILITY OF EXECUTIVE COMPENSATION
Section 162(m) of the Internal Revenue Code of 1986, as amended, generally
provides that publicly held corporations may not deduct in any taxation year
certain compensation in excess of $1,000,000 paid to the chief executive
officer and the next four most highly compensated executive officers. Section
162(m) did not apply to the Company's 1996 executive compensation. The Company
will continue to monitor this issue and will establish appropriate policies in
this regard as necessary.
The Compensation and Corporate
Governance Committee
E. Allen Deaver, Chair
Elmer D. Gates
Stuart Heydt
Norman Robertson
- -------------------------------------------------------------------------------
INDEPENDENT AUDITORS
Upon the recommendation of PP&L Resources' Audit and Corporate
Responsibility Committee, which is composed of directors who are not employees
of the Company or its affiliates, the Board of Directors of PP&L Resources
appointed Price Waterhouse LLP to serve as independent auditors for the year
ending December 31, 1997, for PP&L Resources and its subsidiaries, including
the Company. This appointment is subject to reconsideration by the Board if it
is not ratified by the Shareowners of PP&L Resources.
Deloitte & Touche LLP ("Deloitte") served as independent auditors of PP&L
for the year ended December 31, 1994. Based upon a recommendation of its then
Audit Committee, the Board of Directors of PP&L decided on January 25, 1995
that Deloitte would not be retained as PP&L's independent auditors for the
year ended December 31, 1995. Deloitte's reports on PP&L's financial
statements for the fiscal years ended December 31, 1993 and 1994, did not
contain any adverse opinion or 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 1998 ANNUAL MEETING
To be included in the proxy material for the 1998 Annual Meeting, any
proposal intended to be presented at that meeting by a Shareowner must be
received by the Secretary no later than November 14, 1997.
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 14, 1997
13
<PAGE>
[LOGO OF PP&L APPEARS HERE]
PENNSYLVANIA POWER & LIGHT COMPANY
1996 FINANCIAL STATEMENTS
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Glossary................................................................... A-1
Review of the Financial Condition and Results of Operations................ A-3
Report of Independent Accountants.......................................... A-14
Management's Report on Responsibility for Financial Statements............. A-15
Consolidated Statement of Income........................................... A-16
Consolidated Statement of Cash Flows....................................... A-17
Consolidated Balance Sheet................................................. A-18
Consolidated Statement of Shareowner's Common Equity....................... A-20
Consolidated Statement of Preferred Stock.................................. A-21
Consolidated Statement of Long-Term Debt................................... A-22
Notes to Financial Statements.............................................. A-23
Selected Financial and Operating Data...................................... A-37
Executive Officers of PP&L................................................. A-38
Shareowner and Investor Information........................................ A-39
Quarterly Financial Data................................................... A-41
</TABLE>
<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
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.
DEP--Pennsylvania Department of Environmental Protection
DISTRICT COURT--United States District Court for the Eastern District of
Pennsylvania
DOE--Department of Energy
DRIP (Dividend Reinvestment Plan)--program available to shareowners of PP&L
Resources' common stock and PP&L preferred stock to reinvest dividends in PP&L
Resources' common stock instead of receiving dividend checks.
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. The ECR was terminated
effective December 1996.
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
IEC (Interstate Energy Company)--a subsidiary of PP&L that operates an oil
and gas pipeline.
ISO--Independent System Operator
JCP&L--Jersey Central Power & Light Company
MAJOR UTILITIES--Atlantic, BG&E and JCP&L
MSHA--Mine Safety and Health Administration
NJDEP--New Jersey Department of Environmental Protection
NPDES--National Pollutant Discharge Elimination System
NRC--Nuclear Regulatory Commission
NUG (Non-Utility Generator)--generating plant 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-1
<PAGE>
OCA--Pennsylvania Office of Consumer Advocate
OSM--United States Office of Surface Mining
PA. CNI--Pennsylvania Corporate Net Income Tax
PCB (Polychlorinated Biphenyl)--additive to oil used in certain electrical
equipment up to the late 1970s. Now classified as a hazardous chemical.
PECO--PECO Energy Company
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 Resources' unregulated
subsidiary formed to invest in and develop world-wide power markets.
PP&L--Pennsylvania Power & Light Company
PP&L RESOURCES (PP&L Resources, Inc.)--parent holding company of PP&L, PMDC
and Spectrum.
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.
PURPA (Public Utility Regulatory Policies Act of 1978)--legislation passed
by Congress to encourage energy conservation, efficient use of resources, and
equitable rates.
RCRA--1976 Resource Conservation and Recovery Act
SBRCA--Special Base Rate Credit Adjustment
SEC--Securities and Exchange Commission
SER--Schuylkill Energy Resources, Inc.
SFAS (Statement of Financial Accounting Standards)--accounting and financial
reporting rules issued by the FASB.
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.
SPECTRUM (Spectrum Energy Services Corporation)--PP&L Resources' unregulated
subsidiary formed to offer energy related products and services.
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
A-2
<PAGE>
REVIEW OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF PENNSYLVANIA POWER & LIGHT COMPANY
PP&L is an operating public utility providing electric service in central
eastern Pennsylvania. It is the principal subsidiary of PP&L Resources. PP&L
Resources also is the parent holding company of PMDC and Spectrum.
Terms and abbreviations appearing in the Review of the Financial Condition
and Results of Operations are explained in the glossary.
RESULTS OF OPERATIONS
EARNINGS
Earnings available to PP&L Resources were $329 million in 1996, $324 million
in 1995 and $215 million in 1994. The following table highlights the major
items that impacted earnings for each of the years (millions of dollars):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Earnings Available to PP&L Resources, Inc.--excluding
workforce reductions and one-time adjustments............... $329 $282 $308
Workforce reduction programs:
Voluntary early retirement program......................... 38 (43)
Other...................................................... (5) (18) 5
One-time adjustments:
Research and experimentation income tax credits............ 5
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)
---- ---- ----
Earnings Available to PP&L Resources, Inc.--reported......... $329 $324 $215
==== ==== ====
</TABLE>
Earnings, excluding the adjustments identified above, improved by $47
million for 1996. This earnings improvement reflects higher revenues resulting
from the 3.8% base rate increase from the PUC Decision, as well as higher
sales to all service-area classes. On a weather-adjusted basis, sales to
commercial customers grew by 3.6%, with sales to residential and industrial
customers posting increases of 3.2% and 1.7%, respectively. Earnings also
benefited from lower interest expense, due to the refinancing of long-term
debt with lower cost securities. These earnings gains were partially offset by
a reduction in contractual bulk power sales to JCP&L, as well as higher
depreciation expense. The higher depreciation is due to new property, plant
and equipment placed in service in 1996, as well as higher depreciation for
the Susquehanna station as a result of the PUC Decision.
The decline in earnings in 1995, excluding the adjustments identified above,
was primarily due to higher operating costs, depreciation for the Susquehanna
station and costs billed to PP&L by PP&L Resources associated with the review
of PECO's proposals to acquire PP&L Resources.
The reduction in contractual bulk power sales to JCP&L and other major
utilities will continue to adversely affect earnings over the next few years.
PP&L has increased its efforts to sell this returning energy and capacity on
the open market. In addition, legislation recently enacted in Pennsylvania to
restructure its electric utility industry to create retail access to a
competitive market for generation of electricity could have a major impact on
the future financial performance of PP&L. See "Pennsylvania Restructuring
Legislation" for additional information.
A-3
<PAGE>
ELECTRIC ENERGY SALES
The increases (decreases) in PP&L's electric energy sales were attributable
to the following:
<TABLE>
<CAPTION>
1996 1995
VS VS
1995 1994
--------- --------
(MILLIONS OF KWH)
<S> <C> <C>
Electric energy sales
Residential.............................................. 548 (144)
Commercial............................................... 341 232
Industrial............................................... 171 309
Other (including UGI).................................... 60 (40)
--------- --------
System sales........................................... 1,120 357
Sales to other utilities................................. 3,843 1,368
PJM energy sales......................................... (1,020) (800)
--------- --------
3,943 925
========= ========
</TABLE>
System, or service area, sales increased 1.1 billion kwh, or 3.4%, over
1995. Part of this increase was attributable to colder weather in the first
quarter of 1996. If normal weather had been experienced in both 1996 and 1995,
system sales for 1996 would have increased by about 953 million kwh, or 2.9%,
over 1995.
Actual sales to residential customers in 1996 increased 548 million kwh, or
4.8%, from 1995, compared with a decrease in 1995 of 144 million kwh, or 1.3%,
from 1994. Under normal weather conditions, the 1996 increase would have been
3.2%. Weather-adjusted commercial sales increased 3.6% in 1996, and sales to
industrial customers increased by 1.7% from 1995. Commercial and industrial
sales are good indicators of the region's economic health.
Sales to other utilities increased 3.8 billion kwh, or 50.1%, from 1995,
despite a reduction in PP&L's contractual bulk power sales to JCP&L. These
increases were primarily the result of PP&L's one-year contract to supply
energy to PSE&G and increased efforts to sell energy and capacity on the open
market. Sales to other utilities in 1995 increased by 1.4 billion kwh, or
21.7% from 1994. These increases were primarily due to PP&L's efforts to
increase direct two-party sales to other utilities rather than selling to PJM.
Sales to PJM in 1996 decreased by 1 billion kwh, or 43.3%, from 1995. These
lower PJM sales were primarily the result of increases in direct sales to
other utilities, such as the contract sales to PSE&G referenced above. Sales
to PJM in 1995 decreased by 800 million kwh, or 25.3% from 1994. These
decreases were also primarily due to PP&L's efforts to increase direct two-
party sales.
See "Operating Revenues" for more information.
OPERATING REVENUES
The increases in total operating revenues were attributable to the
following:
<TABLE>
<CAPTION>
1996 1995
VS VS
1995 1994
---------- ----------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Base rate revenues:
Rate increase--PUC Decision........................... $ 76 $ 17
Sales volume/mix...................................... 57 25
Weather............................................... 13 (10)
Energy revenue.......................................... 5 4
Sales to other utilities & PJM.......................... 27 (5)
Other, net.............................................. (20) (4)
---------- ----------
$ 158 $ 27
========== ==========
</TABLE>
Operating revenues increased by $158 million, or 5.8%, in 1996 over 1995.
Base rate revenues were enhanced by the PUC Decision, which increased PUC
jurisdictional rates about 3.8% and by strong sales growth
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in all customer classes. In addition, weather had a favorable impact when
comparing 1996 to 1995. This is a result of the extremely cold weather during
the first quarter of 1996 compared to milder weather during the first quarter
of 1995. Finally, revenues during 1996 reflect increased sales to other
utilities, primarily due to the one-year contract to supply energy to PSE&G.
These increases were partially offset by the loss of revenue due to the
phasing-out of the capacity sales agreement with JCP&L.
Operating revenues increased $27 million, or 1%, in 1995 over 1994. Base
rate revenues in 1995 were enhanced for three months as a result of the PUC
Decision and by higher sales in the commercial and industrial sectors. These
revenues were partially offset by unfavorable weather variances caused by the
mild weather in early 1995 compared to the extremely cold weather in early
1994.
PP&L's generation sales tariff was amended effective January 1, 1997,
subject to FERC approval, to allow PP&L to buy energy for the purpose of
resale in competitive wholesale markets. This change provides PP&L additional
flexibility in creating wholesale power supply opportunities that will
increase operating revenues.
PENNSYLVANIA RESTRUCTURING LEGISLATION
In December 1996, Pennsylvania enacted legislation to restructure its
electric utility industry in order to create retail access to a competitive
market for the generation of electricity. The legislation, which was effective
on January 1, 1997, includes the following major provisions:
1. All electric utilities in Pennsylvania are required to file, beginning on
April 1, 1997 and in no event later than September 30, 1997, a restructuring
plan to implement direct access to a competitive market for electric
generation. The plan must include unbundled rates for generation,
jurisdictional transmission, distribution and other services; a proposed
competitive transition charge; a proposed universal service and energy
conservation cost recovery mechanism; procedures for ensuring direct access to
all licensed energy suppliers; a discussion of the proposed plan's impacts on
utility employees and revised tariffs and rates implementing the foregoing.
2. Retail customer choice will be phased in as follows: up to 33% of all
customer load on January 1, 1999; up to 66% of all customer load on January 1,
2000; and 100% of all customer load by January 1, 2001. The PUC can delay this
schedule by two 6-month periods, if necessary.
3. Electric distribution companies will be the suppliers of last resort. The
PUC will ensure that adequate generation reserves exist to maintain reliable
electric service. The utility's transmission and distribution system must
continue to meet established national industry standards for installation,
maintenance and safety.
4. Retail rates will be capped for at least 4 1/2 years for transmission and
distribution charges and for as long as 9 years for generation charges. A
utility may be exempted from the caps only under very specific circumstances,
e.g., the need for extraordinary rate relief, non-utility generation
contracts, changes in laws or regulations, required upgrades or repairs to the
transmission system, increases in fuel prices or purchased power prices,
nuclear power plant decommissioning costs or taxes.
5. Pennsylvania utilities are permitted to recover PUC-approved transition
or stranded costs over several years; however, the utilities are required to
mitigate these costs to the extent practicable. Also, the recovery of these
costs must not result in cost shifting among customers.
6. "Transition bonds" may be issued to pay the stranded costs. This
procedure involves the following elements: (i) the sale or transfer by the
utility of the right to recover a portion of its stranded costs to a financing
entity--for a lump-sum payment of cash--that could be used to retire the
utility's debt and equity and to pay stranded costs; (ii) the issuance by the
financing entity of "transition bonds"; (iii) the collection by the utility of
"transition charges" on customers' bills, which are transferred to the
financing entity to pay the principal and interest and other related costs of
issuing the transition bonds; (iv) upon the imposition of transition charges
on customers' bills, the utility must reduce customer rates by an amount equal
to the revenue requirements of the stranded costs financed with transition
bonds; and (v) a PUC "qualified rate order," which would be irrevocable,
approving the collection of the transition charges. This irrevocability would
protect the cash flow stream used to repay the transition bonds.
7. All generation suppliers must demonstrate financial and technical fitness
and must be licensed by the PUC. Cooperatives and municipalities may
participate in retail competition but are not subject to the provisions of the
legislation, unless they elect to serve customers outside their franchise
territories.
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8. State tax revenues paid by utilities and generation suppliers are to
remain at their current level, to protect against any state revenue loss from
restructuring.
9. The PUC will monitor electricity markets for anti-competitive or
discriminatory conduct, and will consider the impact of mergers and
acquisitions on these markets.
PP&L is formulating its restructuring plan, which it currently plans to file
on April 1, 1997. Under the legislation, the PUC must take action on the
restructuring plan within nine months of the filing date. PP&L is unable to
predict the ultimate effect of this legislation on its financial position,
results of operation or its need to issue securities to meet future capital
requirements.
RATE MATTERS
Base Rate Filing with the PUC
In September 1995, the PUC issued a final order with respect to the base
rate case filed by PP&L in December 1994. The PUC Decision increased PUC
jurisdictional rates by about $85 million annually, or 3.8%. The PUC Decision
permitted the levelization of depreciation expense for the Susquehanna
station, recovery of retiree health care costs and costs of the 1994 voluntary
early retirement program and revised costs to decommission Susquehanna SES.
The order also permitted recovery of deferred operating and capital costs, net
of energy savings, for Susquehanna Unit 2 but disallowed similar costs for
Unit No. 1. The PUC also ruled that PP&L could not include in the ECR the cost
of capacity billed to other utilities after the contractual arrangements with
these utilities expire. The OCA has appealed certain aspects of the PUC
Decision to the Commonwealth Court. PP&L cannot predict the final outcome in
this matter.
Energy Cost Rate Issues
Through December 1996, PP&L's PUC tariffs contained an ECR under which
customers were billed an estimated amount for fuel and other energy costs. Any
difference between the actual and estimated amount for such costs was
collected from, or refunded to, customers in a subsequent period.
In December 1996, the PUC issued a tentative order permitting the roll-in of
PP&L's ECR into base rates. The order also authorized PP&L to defer certain
unrecovered energy costs as regulatory assets and seek recovery for these
costs in the competitive transition charge described above under "Pennsylvania
Restructuring Legislation."
In 1994, the PUC reduced PP&L's ECR claim by $16 million for costs
associated with replacement power during a Susquehanna Unit 1 outage for
refueling and repairs. PP&L's appeal of that reduction was settled in 1995,
and as a result PP&L recorded a net credit to income of $10 million.
Special Base Rate Credit Adjustment
Beginning in April 1991, PP&L's PUC tariff included a SBRCA rider which
provided for credits to retail customers' bills for three nonrecurring items.
They were (i) the use of an inventory method of accounting for certain power
plant spare parts (this credit expired as of April 1, 1996); (ii) the sale of
capacity and related energy from PP&L's wholly owned coal-fired stations to
Atlantic (this credit was rolled into retail base rates at Docket No. R-
00943271 and was removed from the SBRCA effective in September 1995); and
(iii) the proceeds from a settlement of outstanding contract claims arising
from construction of the Susquehanna station (this credit is due to expire in
the second quarter of 1997).
State Tax Adjustment Surcharge
Through December 1996, PP&L's PUC tariffs included a rate mechanism to
adjust customer bills for changes in certain state taxes. The STAS had no
effect on net income. In December 1996, the PUC issued a tentative order
permitting the roll-in of STAS into base rates.
FERC--Major Utilities' Rates
In August 1995, JCP&L filed a complaint against PP&L with the FERC regarding
billings under the bulk power sales agreement between the parties. 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
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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 October 1995, FERC allowed PP&L to begin charging, subject to refund,
four major electric utility customers of PP&L (Atlantic, BG&E, JCP&L and UGI)
for certain PP&L costs for post-retirement benefits other than pensions. In
that same proceeding, FERC opened to review all other charges by PP&L under
its contracts with those customers. JCP&L raised a number of objections to
PP&L's charges. In November 1996, an Administrative Law Judge ruled in PP&L's
favor on all issues. The case currently is pending before the FERC.
In January 1996, PP&L filed a request with the FERC to incorporate a change
in the method of calculating depreciation under its contracts with these same
four major utilities. PP&L also sought to increase the charges to those
customers for nuclear decommissioning costs. This case was settled in
principle with the four customers in January 1997, under terms which would
have no material effect on PP&L. Formal settlement documents are expected to
be filed with the FERC by March 1997.
See Note 4 for more information regarding these contracts.
POWER PURCHASES
Power purchases in 1996 increased $61 million from 1995 and remained
essentially unchanged in 1995 from 1994. The increase in 1996 was primarily
due to greater quantities of power purchased from PJM and other utilities,
increased customer demand, planned and unplanned outages of PP&L generating
stations, and attractive market prices for energy.
INCOME TAXES
Income tax expense for 1996 decreased $33 million, or 11.5%, from 1995. This
was primarily due to a decrease in pre-tax book income of $25 million, and the
recording of the tax benefits of research and experimental tax credits and
deductions of $5 million.
Income tax expense in 1995 increased $107 million, or 60%, from 1994. This
increase was primarily due to a higher pre-tax book income of $216 million,
and one-time charges for expensing deferred tax benefits of $12 million as a
result of the PUC Decision and recognizing deferred tax liabilities of $4
million relative to undeveloped coal reserves. Partially offsetting these
increases was an $8 million decrease resulting from the reduction of the Pa.
CNI rate from 11.99% for 1994 to 9.99% for 1995.
OTHER OPERATION, MAINTENANCE AND DEPRECIATION
Other operation expenses increased $40 million in 1996 and $29 million in
1995. However, other operation expenses were impacted by the PUC Decision,
which prescribed the treatment of postretirement benefit costs, the
amortization of VERP expenses and other issues. After eliminating the effects
of these rate case issues from both years, other operation expenses decreased
by $6 million in 1996, versus an increase of $54 million in 1995.
The $6 million decrease in 1996 reflects a $24 million decline in workforce
reduction expenses and a $5 million decrease in the provision for
uncollectible customer accounts. These decreases were partially offset by a
1996 accrual of $9 million for licensing and design basis projects committed
for the Susquehanna station, an $8 million increase in pension and medical
expenses, and a net increase of $6 million relating to higher lease expenses
and outside litigation costs.
The $54 million increase in 1995 was primarily due to $31 million for PP&L's
workforce reductions, an $18 million increase in computer support designed to
enhance productivity, an $8 million increase in the provision for
uncollectible accounts, and $6 million of higher leasing costs. These
increases were partially offset by a $17 million decline in postretirement
benefits costs in 1995 versus 1994. The 1994 postretirement benefits costs
included the write-off of FAS 106 costs, based on the May 1994 Commonwealth
Court decision that reversed a previous PUC order permitting the deferral of
these costs.
Maintenance expenses increased $5 million in 1996 and $6 million in 1995.
The 1996 maintenance expenses were $21 million less than in 1995 due to the
expiration of a credit to income for a change in inventory practices.
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See "Rate Matters" for a discussion of the SBRCA. In addition, 1996 contracted
maintenance costs were about $10 million higher at the fossil generating
stations due to unplanned outages. These items were partially offset by a $19
million charge recorded in 1995 for obsolete and excess inventory at PP&L's
generating stations, and a $5 million decrease in the amortization of deferred
refueling and inspection outage costs at the Susquehanna station. The $6
million increase in 1995 resulted from the $19 million charge for obsolete and
excess inventory, offset by $13 million in lower maintenance costs reflecting
continued efforts to reduce costs and achieve longer operating cycles at
PP&L's generating stations.
Depreciation expense increased $14 million in 1996 and $34 million in 1995.
These increases resulted from new property, plant and equipment placed in
service, as well as higher depreciation expense for the Susquehanna station.
The PUC Decision provided for an increase in Susquehanna depreciation
applicable to property placed in service prior to January 1, 1989. The order
provided for the Susquehanna property to be depreciated at an annual level of
$173 million from October 1, 1995 to December 31, 1998, after which
depreciation is scheduled to decline by $71 million annually.
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 $76 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 this program as a charge against income in
the fourth quarter of 1994, which reduced net income by $43 million.
As a result of the PUC Decision, PP&L was allowed to recover through
customer rates the PUC-jurisdictional amount, $66 million, of the cost of its
VERP over a period of five years. Consequently, PP&L recorded a $38 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 this
program also are included in rates.
OTHER INCOME AND (DEDUCTIONS)--NET
Other income and deductions improved in 1996 due to gains on the sale of
investment securities and higher AFUDC. Other income and deductions in 1995
reflected a gain on the sale of a subsidiary's undeveloped coal reserves,
offset by the write-off of Susquehanna Unit 1 deferred operating expenses and
carrying costs (net of energy savings) resulting from the PUC Decision, and by
expenses associated with evaluating and responding to PECO's unsolicited
proposals to acquire PP&L Resources. Other income and deductions in 1994 were
adversely impacted by the writedown of the undeveloped coal reserves which
were sold in 1995.
FINANCING COSTS
In 1996, PP&L continued to take advantage of opportunities to reduce its
financing costs by retiring long-term debt with the proceeds from the sale of
securities at a lower cost. Interest on long-term debt and dividends on
preferred stock decreased from $260 million in 1993 to $235 million in 1996,
for a total decrease of $25 million.
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FINANCIAL CONDITION
CAPITAL EXPENDITURE REQUIREMENTS
The schedule below shows PP&L's current capital expenditure projections for
the years 1997-2001 and actual spending for the year 1996.
PP&L'S CAPITAL EXPENDITURE REQUIREMENTS (A)
<TABLE>
<CAPTION>
PROJECTED
ACTUAL ------------------------
1996 1997 1998 1999 2000 2001
------ ---- ---- ---- ---- ----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Construction expenditures
Generating facilities......................... $ 86 $ 65 $ 81 $ 53 $ 76 $ 68
Transmission and distribution facilities...... 124 120 126 123 147 142
Environmental................................. 16 16 21 34 3 3
Other......................................... 39 57 44 20 17 17
---- ---- ---- ---- ---- ----
Total Construction Expenditures............. 265 258 272 230 243 230
Nuclear fuel owned and leased................... 98 68 71 67 71 73
Other leased property........................... 19 24 22 22 22 22
---- ---- ---- ---- ---- ----
Total Capital Expenditures.................. $382 $350 $365 $319 $336 $325
==== ==== ==== ==== ==== ====
</TABLE>
- -------
(a) Construction expenditures include AFUDC which is expected to be less than
$10 million in each of the years 1997-2001.
PP&L's capital expenditure projections for the years 1997-2001 total about
$1.7 billion. Capital expenditure plans are revised from time to time to
reflect changes in conditions.
FINANCING AND LIQUIDITY
Net cash provided by operating activities for 1996 increased $103 million
over 1995. This increase is primarily due to higher operating revenues, which
reflects the 3.8% base rate increase from the PUC Decision as well as higher
sales to all customer classes. Lower interest expense also contributed to the
increase. These increases were partially offset by higher fuel inventories.
Net cash provided by operating activities between 1995 and 1994 was
essentially unchanged.
Net cash used in investing activities was $42 million less in 1996 than
1995. This decrease was due to lower construction expenditures by PP&L. Net
cash used in investing activities was $146 million lower in 1995 than 1994.
This decrease was due primarily to lower construction expenditures by PP&L and
the proceeds from the sale of coal reserves.
In 1996, PP&L sold $116 million of unsecured notes and retired $145 million
of long-term debt.
For the years 1994-1996, PP&L issued $1.1 billion of long-term debt and $80
million of preferred stock. For the same period, PP&L received a total of $162
million from issuing common stock or receiving capital contributions from PP&L
Resources. Proceeds from security sales were used to retire $923 million of
long-term debt and $120 million of preferred stock to lower PP&L's financing
costs, reduce short-term debt and finance construction expenditures. During
the years 1994-1996, PP&L also incurred $249 million of obligations under
capital leases (primarily nuclear fuel).
To enhance financing flexibility, PP&L maintains a $250 million revolving
credit arrangement with a group of banks, which 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, 1996 under these
arrangements. See Financial Note 9 for further information. In January 1997,
PP&L requested FERC authorization to issue, from time to time, up to $750
million of short-term debt to provide funding for working capital
requirements, the maturity of long-term debt, the early retirement of long-
term debt and the refinancing of other securities.
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PP&L plans to redeem four series of its first mortgage bonds on April 1,
1997. Three of the series of first mortgage bonds, which have a total
principal amount of $180 million, will be redeemed under the maintenance and
replacement fund provisions of these bonds. The fourth series, having a
principal amount of $30 million, will be redeemed under the optional
redemption provisions of these bonds. The redemption of these series of bonds
is part of PP&L's plan to reduce its overall cost of financing.
On March 3, 1997, PP&L Resources initiated a tender offer for any and all of
the outstanding 4 1/2% Preferred Stock and Series Preferred Stock of PP&L
(collectively, the "Preferred Stock"). All shares of the Preferred Stock
purchased by PP&L Resources pursuant to the tender offer will continue to be
outstanding securities of PP&L and held by PP&L Resources. PP&L Resources may
vote shares acquired pursuant to the tender offer or other future transactions
to effect amendments to PP&L's Articles of Incorporation, or to obtain
consents thereunder, which may be adverse to the unaffiliated holders of the
Preferred Stock. Under PP&L's Articles of Incorporation, such consents may be
effected by obtaining the consent (given by vote at a meeting held pursuant to
notice containing a statement of such purpose) of (i) the holders of a
majority of the number of shares of the 4 1/2% Preferred Stock then
outstanding and (ii) the holders of a majority of the total number of shares
of the Preferred Stock then outstanding (voting as a single class). Under
PP&L's Articles of Incorporation, such amendments may be effected by obtaining
the consent (given by vote at a meeting or by written consent) of (i) the
holders of two-thirds of the number of shares of the 4 1/2% Preferred Stock
then outstanding and (ii) the holders of two-thirds of the total number of
shares of the Preferred Stock then outstanding (voting as a single class).
Provisions of PP&L's Articles of Incorporation which the companies may wish to
amend or obtain consents under include, among other things, limitations on
PP&L's ability to increase the authorized number of any series of Preferred
Stock, merge or consolidate with other corporations, issue senior stock, issue
unsecured debt, issue additional shares of the Series Preferred Stock and pay
dividends on PP&L's common stock in the event that PP&L's common equity
capitalization falls below specified levels.
It is expected that PP&L will lend to PP&L Resources (either directly or
indirectly) the funds that PP&L Resources will need to complete the tender
offer. However, the exact amount that will be required by PP&L Resources to
purchase the shares so tendered cannot be determined until the expiration of
the tender offer, which is scheduled to occur on April 4, 1997. Assuming that
PP&L Resources purchases all outstanding shares of the Preferred Stock, the
total amount required to purchase such shares will be approximately $471
million, including fees and other expenses. In this regard, PP&L expects to
derive the funds necessary to make the loan to PP&L Resources from the planned
issuance of Junior Subordinated Deferrable Interest Debentures to support a
$100 million public offering of Trust Originated Preferred Securities,
internally generated funds, the liquidation of temporary investments and the
issuance of short-term debt. The tender offer is not conditioned upon
consummation of the planned $100 million public offering of Trust Originated
Preferred Securities.
PP&L currently expects to receive capital contributions from Resources
related to PP&L's ESOP through about 2001, 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.
FINANCIAL INDICATORS
PP&L earned a 12.95% return on average common equity during 1996, a decrease
from the 13.10% earned in 1995. Excluding one-time adjustments, as described
in "Earnings", the return on average common equity was 12.75% during 1996, an
increase from the 12.24% earned in 1995. The ratio of PP&L's pre-tax income to
interest charges was 3.62 for 1996, virtually unchanged from 1995. Excluding
one-time adjustments, the ratio of PP&L's pre-tax income to interest charges
was 3.60 in 1996, an increase from the 3.49 in 1995.
ENVIRONMENTAL MATTERS
Air
The Clean Air Act deals, in part, with acid rain, attainment of federal
ambient ozone standards and toxic air emissions. PP&L has complied with the
Phase I acid rain provisions, required to be implemented by 1995, by
installing continuous emission monitors on all units, burning lower sulfur
coal and installing low nitrogen oxide burners on certain units. To comply
with the year 2000 acid rain provisions, PP&L plans to purchase lower sulfur
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coal and use banked or purchased emission allowances instead of installing FGD
equipment on its wholly-owned units.
PP&L has met the initial ambient ozone requirements identified in Title I of
the Clean Air Act by reducing nitrogen oxide emissions by 40% through the use
of low nitrogen oxide burners. Further seasonal (i.e., 5 month) nitrogen oxide
reductions to 55% and 75% of pre-Clean Air Act levels for 1999 and 2003,
respectively, are specified under the Northeast Ozone Transport Region's
Memorandum of Understanding.
The Clean Air Act requires EPA to study the health effects of hazardous air
emissions from power plants and other sources. In this regard, in November
1996 the EPA proposed new national standards for ambient levels of ground-
level ozone and fine particulates. The new standards, if implemented, may
result in EPA mandating additional NOx and SO/2/ reductions from utility
boilers in the 2005-2010 timeframe. NOx reductions to meet the new ozone
standard are likely to be in the range of the 75% seasonal NOx reductions that
already are required for PP&L under the Memorandum of Understanding in 2003
and beyond. However, to meet the new fine particulate standards, EPA may
mandate additional SO/2/ reductions significantly greater than those now
planned for the acid rain program and extend the NOx reductions required by
the Memorandum of Understanding from seasonal to year-round.
Expenditures to meet the year 1999 Memorandum of Understanding requirements
are included in the table of projected construction expenditures in the
section "Financial Condition--Capital Expenditure Requirements". PP&L
currently estimates that additional capital expenditures and operating costs
for environmental compliance under the Clean Air Act will be incurred beyond
2001 in amounts which are not now determinable but could be material.
Water and Residual Waste
DEP residual waste regulations require PP&L to obtain permits for existing
ash basins at all of its coal-fired generating stations as disposal
facilities. Ash basins that cannot be permitted 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.
To address the DEP regulations, PP&L is moving forward with plans to install
dry fly ash handling systems at its power stations.
Groundwater degradation related to fuel oil leakage from underground
facilities and seepage from coal refuse disposal areas and coal storage piles
has been identified at several PP&L generating stations. Remedial work 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 current Montour station NPDES permit and proposed Holtwood station NPDES
permit contain stringent limits for certain toxic metals and increased
monitoring requirements. Depending on the results of toxic reduction studies
in progress, additional water treatment facilities may be needed at these
stations.
Capital expenditures through the year 2001 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 the section "Financial Condition--
Capital Expenditure Requirements". PP&L currently estimates that $12 million
of additional capital expenditures may be required in the next four years and
$67 million of additional capital expenditures could be required beyond the
year 2001. 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 PP&L substations and pole sites;
potential contamination at a number of coal gas manufacturing facilities
formerly owned and operated by PP&L; and oil or other contamination which may
exist at some of PP&L's former generating facilities.
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At December 31, 1996, PP&L had accrued $10 million, representing the amount
PP&L can reasonably estimate it will have to spend to remediate sites
involving the removal of hazardous or toxic substances including those covered
by the consent order mentioned above. Future cleanup or remediation work at
sites currently under review, or at sites not currently identified, may result
in material additional operating costs which PP&L cannot estimate at this
time. In addition, certain federal and state statutes, including Superfund and
the Pennsylvania Hazardous Sites Cleanup Act, empower certain governmental
agencies, such as the EPA and the DEP, to seek compensation from the
responsible parties for the lost value of damaged natural resources. The EPA
and the DEP may file such compensation claims against the parties, including
PP&L, held responsible for cleanup of such sites. Such natural resource damage
claims against PP&L could result in material additional liabilities.
Other Environmental Matters
In addition to the issues discussed above, PP&L may be required to modify,
replace or cease operating certain facilities to comply with other statutes,
regulations and actions by regulatory bodies or courts involving environmental
matters, including the areas of water and air quality, hazardous and solid
waste handling and disposal, toxic substances and electric and magnetic
fields. In this regard, PP&L also may incur capital expenditures, operating
expenses and other costs in amounts which are not now determinable, but may be
material.
INCREASING COMPETITION
Background
The electric utility industry has experienced and will continue to
experience a significant increase in the level of competition in the energy
supply market. PP&L has publicly expressed its support for full customer
choice of electricity suppliers for all customer classes. PP&L is actively
involved in efforts at both the state and federal levels to encourage a smooth
transition to full competition. PP&L believes that this transition to full
competition should provide for the recovery of a utility's stranded costs,
which are generation-related costs that traditionally would be recoverable in
a regulated environment, but which may not be recoverable in a competitive
electric generation market.
Pennsylvania Activities
Reference is made to "Pennsylvania Restructuring Legislation" for a
discussion of the recent Pennsylvania restructuring legislation and PP&L's
planned PUC filings pursuant to that legislation.
In response to a July 1996 PUC Report on achieving retail competition in
Pennsylvania, PP&L in October 1996 became the first Pennsylvania utility to
file for PUC approval of a retail pilot program. Under this program,
approximately 54,000 PP&L residential, commercial, and industrial customers--
representing approximately 5% of PP&L's average peak load--will have an
opportunity to purchase energy from alternative suppliers. In January 1997,
the PUC issued final guidelines for retail access pilot programs. Those
guidelines require each major electric utility in Pennsylvania to file a
proposed pilot program in accordance with the guidelines by March 1, 1997.
PP&L is currently evaluating the impact of the guidelines on its proposed
pilot program and will respond, as appropriate, by March 1, 1997.
Under its proposed pilot program, PP&L initially will provide all back-up
services and customer service. Other utilities may participate in PP&L's
program as suppliers if they offer this same opportunity for PP&L to
participate in their programs.
Federal Activities
Legislation has been introduced in the U.S. Congress that would give all
retail customers the right to choose among competitive suppliers of
electricity as early as 2000.
In addition, in April 1996 the FERC adopted rules on competition in the
wholesale electricity market primarily dealing with open access to
transmission lines, recovery of stranded costs, and information systems for
displaying available transmission capability (FERC Orders 888 and 889). These
rules required all electric utilities to file open access transmission tariffs
by July 9, 1996. The tariffs must offer point-to-point and network services,
as well as ancillary services. A utility must offer these services to all
eligible wholesale customers on a basis comparable to
A-12
<PAGE>
the services the utility provides to itself. A utility must take service under
its open access transmission tariff for its own wholesale sales and purchases.
The rules do not abrogate existing transmission agreements.
The rules also provide that utilities are entitled to recover from their
wholesale customers all "legitimate, verifiable, prudently incurred stranded
costs." The FERC has provided recovery mechanisms for wholesale stranded
costs, including stranded costs resulting from municipalization. Wholesale
contracts signed after July 11, 1994 must contain explicit provisions
addressing recovery of stranded costs. 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.
Finally, the rules require that a power pool-wide open access transmission
tariff and modified bilateral coordination agreements reflecting the removal
of discriminatory provisions be filed by December 31, 1996 and implemented by
March 1, 1997. In addition, utilities must separate their transmission and
power marketing functions, and they must implement an electronic bulletin
board for transmission capacity information by January 3, 1997.
Under the new rules, 16 small utilities which have contracts with PP&L
signed before July 11, 1994, requested and were provided with PP&L's current
estimate of its stranded costs applicable to these customers if they were to
terminate their contracts in 1999. Based upon a formula set forth in FERC
Order 888 and applicable only to wholesale customers, and based upon data
unique to the contracts between PP&L and these customers, PP&L estimated that
the stranded costs associated with service to these wholesale customers would
be approximately $95 million. This estimate was subsequently raised to
approximately $125 million. As a result of a protest by these parties against
such recovery, the FERC has scheduled hearings in the spring of 1997 regarding
PP&L's right to recover these stranded costs.
In July 1996, PP&L filed the open access transmission tariff required by
FERC Order 888. Under the new FERC rules, that tariff became effective on July
9, 1996, subject to refund. Several parties, including the small utilities,
moved to intervene and protested the new rates. These matters may be set for
hearing by the FERC.
In addition, PP&L has made the required informational filing which showed
unbundled generation and transmission components of its billing to existing
wholesale customers. The FERC has accepted this filing.
In July 1996, all of the PJM companies, except PECO, submitted a
comprehensive filing for FERC approval of changes to the PJM to accommodate
greater competition and broader participation. The filing would (i) establish
pool-wide transmission service tariffs to provide comparable, open-access
service for all wholesale transactions throughout PJM; (ii) establish a price-
based bidding system, with the resulting regional energy market open to all
wholesale buyers and sellers of power; (iii) create a not-for-profit corporate
entity in the form of an ISO responsible for impartial daily management and
administration of the energy market and the transmission system; and (iv)
develop an enhanced pool-wide planning function to be administered by the ISO.
In August 1996, PECO filed a separate PJM restructuring proposal with the
FERC, which differed significantly in several areas from the other companies'
filing.
In November 1996, the FERC rejected both proposals for restructuring the PJM
for several reasons, the principal one being its view that the ISO was not
sufficiently independent. FERC ordered the PJM companies to file a pool-wide
tariff and modified coordination agreements reflecting the removal of
provisions which FERC considered discriminatory against non-PJM members. In
December 1996, all members of PJM submitted an interim compliance filing with
the FERC, which proposed a pool-wide pro forma transmission tariff and a
revised interconnection agreement and transmission owners agreement designed
to accommodate open, non-discriminatory participation in the pool. The PJM
companies currently are working with multiple stakeholders to develop a
consensus package for the comprehensive restructuring of the PJM, which is
expected to be filed with the FERC in May 1997.
A-13
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
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 stock and of long-term debt as of December 31, 1996
and 1995, and the related consolidated statements of income, of cash flows and
of shareowner's common equity for each of the years ended December 31, 1996
and 1995 present fairly, in all material respects, the consolidated financial
position of Pennsylvania Power & Light Company and Subsidiaries (the Company),
and the consolidated results of their operations and their 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 audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above. The consolidated financial statements of the Company
for the year ended December 31, 1994, 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.
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 consolidated financial statements.
In our opinion, such adjustments are appropriate and have been properly
applied to the Company's 1994 consolidated financial statements.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Philadelphia, Pennsylvania
February 3, 1997
A-14
<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-14.
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 PP&L Resources' Audit and Corporate
Responsibility Committee, oversees management's responsibilities in the
preparation of the financial statements. In performing this function, the
Audit and Corporate Responsibility Committee, which is composed of five
independent directors, meets periodically with management, the internal
auditors and the independent certified public accountants to review the work
of each. The independent certified public accountants and the internal
auditors have free access to PP&L Resources' Audit and Corporate
Responsibility Committee and to the Board of Directors, without management
present, to discuss internal accounting control, auditing and financial
reporting matters.
Management also recognizes its responsibility for fostering a strong ethical
climate so that PP&L's affairs are conducted according to the highest
standards of personal and corporate conduct. This responsibility is
characterized and reflected in PP&L's business policies and guidelines. These
policies and guidelines address: the necessity of ensuring open communication
within PP&L; potential conflicts of interest; proper procurement activities;
compliance with all applicable laws, including those relating to financial
disclosure; and the confidentiality of proprietary information.
/s/ William F. Hecht
William F. Hecht
Chairman, President and Chief Executive Officer
/s/ R. E. Hill
R. E. Hill
Senior Vice President--Financial
A-15
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
OPERATING REVENUES (NOTES 1, 3 AND 4)................... $2,910 $2,752 $2,725
------ ------ ------
OPERATING EXPENSES
Operation
Fuel.................................................. 448 451 472
Power purchases....................................... 352 291 287
Other................................................. 544 504 475
Maintenance............................................. 191 186 180
Depreciation (including amortized depreciation) (Notes 1
and 8)................................................. 363 349 315
Income taxes (Note 5)................................... 253 262 218
Taxes, other than income (Note 5)....................... 203 201 201
Voluntary early retirement program (Note 11)............ (66) 76
------ ------ ------
2,354 2,178 2,224
------ ------ ------
OPERATING INCOME........................................ 556 574 501
------ ------ ------
OTHER INCOME AND (DEDUCTIONS)--NET...................... 15 4 (31)
------ ------ ------
INCOME BEFORE INTEREST CHARGES.......................... 571 578 470
------ ------ ------
INTEREST CHARGES
Long-term debt.......................................... 207 213 214
Short-term debt and other............................... 7 13 13
------ ------ ------
214 226 227
------ ------ ------
NET INCOME.............................................. 357 352 243
Dividends on Preferred Stock............................ 28 28 28
------ ------ ------
EARNINGS AVAILABLE TO PP&L RESOURCES, INC............... $ 329 $ 324 $ 215
====== ====== ======
</TABLE>
See accompanying Notes to Financial Statements.
A-16
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 357 $ 352 $ 243
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation............................................ 366 352 317
Amortization of property under capital leases........... 86 79 86
Amortization of contract settlement proceeds and
deferred cost of power plant spare parts............... (15) (37) (38)
Deferred income taxes and investment tax credits........ (1) 16 (70)
Voluntary early retirement program...................... (66) 76
Write down of coal reserves............................. 74
Change in current assets and current liabilities
Fuel inventories...................................... (14) 43 (30)
Other................................................. (38) (28) (4)
Other operating activities--net......................... 58 (15) 56
----- ----- -----
Net cash provided by operating activities........... 799 696 710
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Property, plant and equipment expenditures................ (360) (403) (505)
Proceeds from sales of nuclear fuel to trust.............. 93 44 36
Proceeds from sale of coal reserves....................... 52
Purchases of available-for-sale securities................ (90) (81) (95)
Sales and maturities of available-for-sale securities..... 93 80 90
Other investing activities--net........................... 5 7 27
----- ----- -----
Net cash used in investing activities............... (259) (301) (447)
----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt................................ 116 55 919
Issuance of common stock and capital contribution from
parent................................................... 32 60 70
Issuance of preferred stock............................... 80
Retirement of long-term debt.............................. (145) (140) (638)
Retirement of preferred stock............................. (120)
Payments on capital lease obligations..................... (86) (79) (86)
Common and preferred dividends paid....................... (296) (290) (284)
Dividends for capitalization of PMDC...................... (50)
Net increase (decrease) in short-term debt................ (79) 15 (128)
Other financing activities--net........................... (2) (10) (25)
----- ----- -----
Net cash used in financing activities............... (460) (389) (262)
----- ----- -----
NET INCREASE IN CASH AND CASH EQUIVALENTS................. 80 6 1
Cash and Cash Equivalents at Beginning of Period.......... 15 9 8
----- ----- -----
Cash and Cash Equivalents at End of Period................ $ 95 $ 15 $ 9
===== ===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest (net of amount capitalized).................... $ 208 $ 218 $ 200
Income taxes............................................ $ 289 $ 258 $ 264
</TABLE>
See accompanying Notes to Financial Statements.
A-17
<PAGE>
CONSOLIDATED BALANCE SHEET AT DECEMBER 31
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Electric utility plant in service--at original cost.......... $ 9,824 $ 9,637
Accumulated depreciation (Notes 1 and 8)................... (3,337) (3,113)
------- -------
6,487 6,524
Construction work in progress--at cost....................... 172 170
Nuclear fuel owned and leased--net of amortization........... 170 134
Other leased property--net of amortization................... 76 85
------- -------
Electric utility plant--net................................ 6,905 6,913
Other property--(net of depreciation, amortization and
depletion 1996, $54; 1995, $56) (Note 13)................... 55 57
------- -------
6,960 6,970
------- -------
INVESTMENTS
Affiliated companies--at equity (Note 1)..................... 17 17
Nuclear plant decommissioning trust fund (Notes 1 and 6)..... 128 110
Financial investments (Notes 1 and 7)........................ 133 132
Other--at cost or less (Note 7).............................. 10 9
------- -------
288 268
------- -------
CURRENT ASSETS
Cash and cash equivalents (Note 1)........................... 95 15
Marketable securities (Notes 1 and 7)........................ 51 55
Accounts receivable (less reserve: 1996, $25; 1995, $35)
Customers.................................................. 196 197
Other...................................................... 14 13
Unbilled revenues............................................ 85 92
Fuel, material and supplies--at average cost................. 201 190
Deferred income taxes (Note 5)............................... 21 42
Other........................................................ 53 42
------- -------
716 646
------- -------
REGULATORY ASSETS AND OTHER (Note 8)......................... 1,407 1,540
------- -------
$ 9,371 $ 9,424
======= =======
</TABLE>
See accompanying Notes to Financial Statements.
A-18
<PAGE>
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
LIABILITIES
CAPITALIZATION
Common equity
Common stock.................................................. $1,476 $1,476
Additional paid-in capital.................................... 57 25
Earnings reinvested........................................... 1,094 1,034
Capital stock expense and other............................... (10) (7)
------ ------
2,617 2,528
------ ------
Preferred stock
With sinking fund requirements................................ 295 295
Without sinking fund requirements............................. 171 171
Long-term debt.................................................. 2,802 2,829
------ ------
5,885 5,823
------ ------
CURRENT LIABILITIES
Commercial paper (Note 9)....................................... 68
Bank loans (Note 9)............................................. 10 21
Long-term debt due within one year.............................. 30 30
Capital lease obligations due within one year................... 81 81
Accounts payable................................................ 132 128
Taxes accrued................................................... 21 48
Interest accrued................................................ 60 66
Dividends payable............................................... 75 74
Other........................................................... 78 86
------ ------
487 602
------ ------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
Deferred investment tax credits (Note 5)........................ 209 219
Deferred income taxes (Note 5).................................. 2,050 2,106
Capital lease obligations....................................... 166 139
Other (Notes 1, 3, 6 and 10).................................... 574 535
------ ------
2,999 2,999
------ ------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 14)
------ ------
$9,371 $9,424
====== ======
</TABLE>
See accompanying Notes to Financial Statements.
A-19
<PAGE>
CONSOLIDATED STATEMENT OF SHAREOWNER'S COMMON EQUITY
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES
(MILLIONS 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,
1993................... 152,132,089 $1,371 $ 0 $1,066 $(11)
Net income.............. 243
Cash dividends declared
Preferred stock....... (28)
Common stock.......... (257)
Dividends for
capitalization of
PMDC................. (50)
Stock redemption costs.. (1)
Common stock issued (b). 3,349,873 70
Other................... 1
----------- ------ --- ------ ----
BALANCE AT DECEMBER 31,
1994................... 155,481,962 $1,441 $ 0 $ 973 $(10)
Net income.............. 352
Cash dividends declared
Preferred stock....... (28)
Common stock.......... (263)
Common stock issued (b). 1,818,420 35
Capital contribution
from PP&L Resources.... 25
Other................... 3
----------- ------ --- ------ ----
BALANCE AT DECEMBER 31,
1995................... 157,300,382 $1,476 $25 $1,034 $ (7)
Net income.............. 357
Cash dividends declared
Preferred stock....... (28)
Common stock.......... (269)
Common stock issued.....
Other................... 32 (3)
----------- ------ --- ------ ----
BALANCE AT DECEMBER 31,
1996................... 157,300,382 $1,476 $57 $1,094 $(10)
=========== ====== === ====== ====
</TABLE>
- -------
(a) No par value, 170,000,000 shares authorized. As of April 27, 1995, all
holders of PP&L common stock became holders of PP&L Resources common
stock, and all of PP&L's common stock was acquired by PP&L Resources.
(b) Common Stock was issued through the ESOP and DRIP.
See accompanying Notes to Financial Statements.
A-20
<PAGE>
CONSOLIDATED STATEMENT OF PREFERRED STOCK AT DECEMBER 31
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES(A)
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
OUTSTANDING SHARES
----------- OUTSTANDING SHARES
1996 1995 1996 AUTHORIZED
----- ----- ----------- ----------
<S> <C> <C> <C> <C>
Preferred Stock-- $100 par, cumulative
4-1/2%..................................... $ 53 $ 53 530,189 629,936
Series..................................... 413 413 4,133,556 10,000,000
----- -----
$ 466 $ 466
===== =====
</TABLE>
DETAILS OF PREFERRED STOCK (B)
<TABLE>
<CAPTION>
SINKING FUND
PROVISIONS (C)
------------------------
OPTIONAL
REDEMPTION
OUTSTANDING SHARES PRICE PER SHARES TO BE
----------- OUTSTANDING SHARE REDEEMED REDEMPTION
1996 1995 1996 1996 ANNUALLY PERIOD
----- ----- ----------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
With Sinking Fund
Requirements
Series Preferred
5.95%.................. $ 30 $ 30 300,000 (d) 300,000 April 2001
6.05%.................. 25 25 250,000 (d) 250,000 April 2002
6.125%................. 115 115 1,150,000 (d) (e) 2003-2008
6.15%.................. 25 25 250,000 (d) 250,000 April 2003
6.33%.................. 100 100 1,000,000 (d) (f) 2003-2008
----- -----
$ 295 $ 295
===== =====
Without Sinking Fund
Requirements
4-1/2% Preferred....... $ 53 $ 53 530,189 $110.00
Series Preferred
3.35%.................. 4 4 41,783 103.50
4.40%.................. 23 23 228,773 102.00
4.60%.................. 6 6 63,000 103.00
6.75%.................. 85 85 850,000 (d)
----- -----
$ 171 $ 171
===== =====
</TABLE>
INCREASES (DECREASES) IN PREFERRED STOCK
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- ----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Series Preferred Stock
5.95%............................ 300,000 $ 30
6.05%............................ 250,000 25
6.125%...........................
6.15%............................ 250,000 25
6.33%............................
6.75%............................
6.875%........................... (400,000) (40)
7.00%............................ (800,000) (80)
</TABLE>
- -------
Decreases in Preferred Stock represent: (i) the redemption of stock pursuant
to sinking fund requirements; or (ii) shares redeemed pursuant to optional
redemption provisions. There were no issuances or redemptions of preferred
stock in 1996 or 1995.
(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, 1996 and 1995, respectively.
(b) The involuntary liquidation price of the preferred stock is $100 per
share. The optional voluntary liquidation price is the optional redemption
price per share in effect, except for the 4-1/2% Preferred Stock for which
such price is $100 per share (plus in each case any unpaid dividends).
(c) These series of preferred stock are not redeemable prior to the following
years: 5.95%, 2001; 6.05%, 2002; 6.125%, 6.15%, 6.33% and 6.75%, 2003.
(d) Shares to be redeemed annually on October 1 as follows: 2003-2007, 57,500;
2008, 862,500.
(e) Shares to be redeemed annually on July 1 as follows: 2003-2007, 50,000;
2008, 750,000.
See accompanying Notes to Financial Statements.
A-21
<PAGE>
CONSOLIDATED STATEMENT OF LONG-TERM DEBT AT DECEMBER 31
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
OUTSTANDING
----------------
1996 1995 MATURITY(B)
------ ------ -----------------
<S> <C> <C> <C>
FIRST MORTGAGE BONDS (A)
5 5/8%............................... $ 30 June 1, 1996
6 3/4%............................... $ 30 30 November 1, 1997
5 1/2%............................... 150 150 April 1, 1998
7%................................... 40 40 January 1, 1999
8 1/8%............................... 40 June 1, 1999
6%................................... 125 125 June 1, 2000
7 1/4%............................... 60 60 February 1, 2001
6.5% to 7 3/4%....................... 755 830 2002-2006
7.70%................................ 200 200 2007-2011(c)
7 3/8%............................... 100 100 2012-2016
9 1/4% to 9 3/8%..................... 315 315 2017-2021
6 3/4% to 8 1/2%..................... 650 650 2022-2026
FIRST MORTGAGE POLLUTION CONTROL BONDS
(A)
6.40% Series H....................... 90 90 November 1, 2021
5.50% Series I....................... 53 53 February 15, 2027
6.40% Series J....................... 116 116 September 1, 2029
6.15% Series K....................... 55 55 August 1, 2029
------ ------
2,739 2,884
Unsecured promissory notes............. 116(d)
------ ------
2,855 2,884
Unamortized (discount) and premium--
net................................... (23) (25)
------ ------
2,832 2,859
Less amount due within one year........ 30 30
------ ------
Total long-term debt............... $2,802 $2,829
====== ======
</TABLE>
- -------
(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 2001 are (millions of
dollars): 1997, $30; 1998, $150; 1999, $40; 2000, $125; 2001, $60. Maximum
sinking fund requirements aggregate $5.6 million through 2001 and may be
met with property additions or retirement of bonds. The annual sinking
fund requirements through 2001 will not exceed $1.8 million.
(c) 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 1996, PP&L issued $116 million of unsecured promissory notes due in
March 2001. The proceeds were used to redeem $40 million of First Mortgage
Bonds, 8 1/8% Series due 1999, and $75 million of First Mortgage Bonds, 7
5/8% Series due 2002.
See accompanying Notes to Financial Statements.
A-22
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Terms and abbreviations appearing in Notes to Financial Statements are
explained in the glossary.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND CONSOLIDATION
PP&L Resources is the parent holding company of PP&L, PMDC and Spectrum.
PP&L is an operating public utility providing electric service in central
eastern Pennsylvania.
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--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
including certain information which represents management's best estimates of
existing conditions. Actual results could differ from these estimates.
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 8.
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. 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-23
<PAGE>
Major classes of electric utility plant in service and their respective
balances are (millions of dollars):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Production........................................................ $6,303 $6,251
Transmission...................................................... 386 374
Distribution...................................................... 2,774 2,652
General........................................................... 303 302
Other............................................................. 58 58
------ ------
$9,824 $9,637
====== ======
</TABLE>
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.
Susquehanna property is depreciated at an annual rate of $173 million from
October 1995 through December 1998, after which depreciation is scheduled to
decline by $71 million annually. Provisions for depreciation, as a percent of
average depreciable property, approximated 3.8% in 1996, 3.7% in 1995 and 3.5%
in 1994.
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 pays DOE a fee for future
disposal services and recovers such costs in customer rates. PP&L has joined
other utilities in a federal lawsuit to suspend payments to DOE and to place
the fees in escrow unless that department begins accepting nuclear fuel as
agreed to in its contract with the utilities.
FINANCIAL INVESTMENTS
Securities subject to the requirements of SFAS 115 "Accounting for Certain
Investments in Debt and Equity Securities" are carried at fair value,
determined at the balance sheet date. Net unrealized gains on available-for-
sale securities are included in common equity. Net unrealized gains and losses
on trading securities are included in income. Net unrealized gains and losses
on securities that are not available for unrestricted use due to regulatory or
legal reasons are reflected in the related asset and liability accounts.
Realized gains and losses on the sale of securities are recognized utilizing
the specific cost identification method. 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
Premiums 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.
Future minimum lease payments under capital leases in effect at December 31,
1996 (excluding nuclear fuel) aggregate $89 million, including $13 million in
imputed interest. Future lease payments for nuclear fuel are based on the
quantity of electricity produced at the Susquehanna Station. The maximum
amount of nuclear fuel available for lease under current arrangements is $200
million.
REVENUES
Electric revenues are recorded based on the amounts of electricity delivered
to customers through the end of each calendar month. This includes amounts
customers will be billed for electricity delivered from the time meters were
last read to the end of the month. Through December 1996, PP&L's tariff
included revenues from the ECR, SBRCA and STAS.
A-24
<PAGE>
Approximately 98% of operating revenues were derived from electric energy
sales, with 35% coming from residential customers, 28% from commercial
customers, 20% from industrial customers, 14% from other major utilities and
the PJM and 3% from others. For information on the ECR, SBRCA and STAS, see
Note 3.
INCOME TAXES
PP&L and its wholly owned subsidiaries file a consolidated federal income
tax return with PP&L 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 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. 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 10.
CASH EQUIVALENTS
All highly liquid debt instruments purchased with original maturities of
three months or less are considered to be cash equivalents.
2. PENNSYLVANIA RESTRUCTURING LEGISLATION
In December 1996, Pennsylvania enacted legislation to restructure its
electric utility industry in order to create retail access to a competitive
market for the generation of electricity. The legislation, which was effective
on January 1, 1997, includes the following major provisions:
1. All electric utilities in Pennsylvania are required to file, beginning on
April 1, 1997 and in no event later than September 30, 1997, a restructuring
plan to implement direct access to a competitive market for electric
generation. The plan must include unbundled rates for generation,
jurisdictional transmission, distribution and other services; a proposed
competitive transition charge; a proposed universal service and energy
conservation cost recovery mechanism; procedures for ensuring direct access to
all licensed energy suppliers; a discussion of the proposed plan's impacts on
utility employees and revised tariffs and rates implementing the foregoing.
2. Retail customer choice will be phased in as follows: up to 33% of all
customer load on January 1, 1999; up to 66% of all customer load on January 1,
2000; and 100% of all customer load by January 1, 2001. The PUC can delay this
schedule by two 6-month periods, if necessary.
3. Electric distribution companies will be the suppliers of last resort. The
PUC will ensure that adequate generation reserves exist to maintain reliable
electric service. The utility's transmission and distribution system must
continue to meet established national industry standards for installation,
maintenance and safety.
4. Retail rates will be capped for at least 4 1/2 years for transmission and
distribution charges and for as long as 9 years for generation charges. A
utility may be exempted from the caps only under very specific circumstances,
e.g., the need for extraordinary rate relief, non-utility generation
contracts, changes in laws or regulations, required upgrades or repairs to the
transmission system, increases in fuel prices or purchased power prices,
nuclear power plant decommissioning costs or taxes.
5. Pennsylvania utilities are permitted to recover PUC-approved transition
or stranded costs over several years; however, the utilities are required to
mitigate these costs to the extent practicable. Also, the recovery of these
costs must not result in cost shifting among customers.
A-25
<PAGE>
6. "Transition bonds" may be issued to pay the stranded costs. This
procedure involves the following elements: (i) the sale or transfer by the
utility of the right to recover a portion of its stranded costs to a financing
entity--for a lump-sum payment of cash--that could be used to retire the
utility's debt and equity and to pay stranded costs; (ii) the issuance by the
financing entity of "transition bonds"; (iii) the collection by the utility of
"transition charges" on customers' bills, which are transferred to the
financing entity to pay the principal and interest and other related costs of
issuing the transition bonds; (iv) upon the imposition of transition charges
on customers' bills, the utility must reduce customer rates by an amount equal
to the revenue requirements of the stranded costs financed with transition
bonds; and (v) a PUC "qualified rate order," which could be irrevocable,
approving the collection of the transition charges. This irrevocability would
protect the cash flow stream used to repay the transition bonds.
7. All generation suppliers must demonstrate financial and technical fitness
and must be licensed by the PUC. Cooperatives and municipalities may
participate in retail competition but are not subject to the provisions of the
legislation, unless they elect to serve customers outside their franchise
territories.
8. State tax revenues paid by utilities and generation suppliers are to
remain at their current level, to protect against any state revenue loss from
restructuring.
9. The PUC will monitor electricity markets for anti-competitive or
discriminatory conduct, and will consider the impact of mergers and
acquisitions on these markets.
PP&L is formulating its restructuring plan, which it currently plans to file
on April 1, 1997. Under the legislation, the PUC must take action on the
restructuring plan within nine months of the filing date. PP&L is unable to
predict the ultimate effect of this legislation on its financial position,
results of operation or its need to issue securities to meet future capital
requirements.
3. RATE MATTERS
Base Rate Filing with the PUC
In September 1995, the PUC issued a final order with respect to the base
rate case filed by PP&L in December 1994. The PUC Decision increased PUC
jurisdictional rates by about $85 million annually, or 3.8%. The PUC Decision
permitted the levelization of depreciation expense for the Susquehanna
station, recovery of retiree health care costs and costs of the 1994 voluntary
early retirement program and revised costs to decommission Susquehanna SES.
The order also permitted recovery of deferred operating and capital costs, net
of energy savings, for Susquehanna Unit 2 but disallowed similar costs for
Unit No. 1. The PUC also ruled that PP&L could not include in the ECR the cost
of capacity billed to other utilities after the contractual arrangements with
these utilities expire. The OCA has appealed certain aspects of the PUC
Decision to the Commonwealth Court. PP&L cannot predict the final outcome in
this matter.
Energy Cost Rate Issues
Through December 1996, PP&L's PUC tariffs contained an ECR under which
customers were billed an estimated amount for fuel and other energy costs. Any
difference between the actual and estimated amount for such costs was
collected from, or refunded to, customers in a subsequent period.
In December 1996, the PUC issued a tentative order permitting the roll-in of
PP&L's ECR into base rates. The order also authorized PP&L to defer certain
unrecovered energy costs as regulatory assets and seek recovery for these
costs in the competitive transition charge described above under "Pennsylvania
Restructuring Legislation."
In 1994, the PUC reduced PP&L's ECR claim by $16 million for costs
associated with replacement power during a Susquehanna Unit 1 outage for
refueling and repairs. PP&L's appeal of that reduction was settled in 1995,
and as a result PP&L recorded a net credit to income of $10 million.
Special Base Rate Credit Adjustment
Beginning in April 1991, PP&L's PUC tariff included a SBRCA rider which
provided for credits to retail customers' bills for three nonrecurring items.
They were (i) the use of an inventory method of accounting for certain power
plant spare parts (this credit expired as of April 1, 1996); (ii) the sale of
capacity and related energy from PP&L's wholly owned coal-fired stations to
Atlantic (this credit was rolled into retail base rates at Docket
A-26
<PAGE>
No. R-00943271 and was removed from the SBRCA effective in September 1995);
and (iii) the proceeds from a settlement of outstanding contract claims
arising from construction of the Susquehanna station (this credit is due to
expire in the second quarter of 1997).
State Tax Adjustment Surcharge
Through December 1996, PP&L's PUC tariffs included a rate mechanism to
adjust customer bills for changes in certain state taxes. The STAS had no
effect on net income. In December 1996, the PUC issued a tentative order
permitting the roll-in of STAS into base rates.
FERC--Major Utilities' Rates
In August 1995, JCP&L filed a complaint against PP&L with the FERC regarding
billings under the bulk power sales agreement between the parties. 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 October 1995, FERC allowed PP&L to begin charging, subject to refund,
four major electric utility customers of PP&L (Atlantic, BG&E, JCP&L and UGI)
for certain PP&L costs for post-retirement benefits other than pensions. In
that same proceeding, FERC opened to review all other charges by PP&L under
its contracts with those customers. JCP&L raised a number of objections to
PP&L's charges. In November 1996, an Administrative Law Judge ruled in PP&L's
favor on all issues. The case currently is pending before the FERC.
In January 1996, PP&L filed a request with the FERC to incorporate a change
in the method of calculating depreciation under its contracts with these same
four major utilities. PP&L also sought to increase the charges to those
customers for nuclear decommissioning costs. This case was settled in
principle with the four customers in January 1997, under terms which would
have no material effect on PP&L. Formal settlement documents are expected to
be filed with the FERC by March 1997.
See Note 4 for more information regarding these contracts.
4. SALES TO OTHER ELECTRIC UTILITIES
PP&L provides Atlantic with 125,000 kilowatts of capacity (summer rating)
and related energy from its wholly owned coal-fired stations. Sales to
Atlantic will continue through March 1998.
PP&L provided JCP&L with 756,000 kilowatts of capacity and related energy
from all of its generating units during 1996. This amount will decline by
189,000 kilowatts per year until the end of the agreement on December 31,
1999. PP&L expects to be able to resell the capacity and energy at market
prices.
In March 1996, the New Jersey Board of Public Utilities approved an
agreement between PP&L and JCP&L, under which PP&L will provide JCP&L with
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. Prices under the new agreement are based on a
predetermined reservation rate that escalates over time, plus an energy
component based on PP&L's actual fuel-related costs. PP&L filed the agreement
for FERC review and acceptance in October 1996, and the matter is still
pending.
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 regarding these contracts.
In September 1996, PP&L made installed capacity credit sales for up to
300,000 kilowatts to GPU Energy which will continue through the first half of
1997.
On December 31, 1996, PP&L filed for FERC approval of amendments to its
generation sales tariff to allow PP&L to buy energy for the purpose of resale
in competitive wholesale markets. This change provides PP&L flexibility in
pursuing wholesale power supply opportunities to increase operating revenues.
PP&L is currently operating under this amended tariff, subject to final FERC
approval.
A-27
<PAGE>
5. INCOME TAXES
The corporate federal income tax rate is 35%. The Pa. CNI rate was 11.99% in
1994 and 9.99% in 1995 and 1996.
For 1995 PP&L recorded a decrease in Pa. CNI expense of $8 million from the
prior year related to the rate reduction. Substantially all of this reduction
was reflected in lower customer rates through the STAS.
The tax effects of significant temporary differences comprising PP&L's net
deferred income tax liability were as follows (millions of dollars):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Deferred tax assets
Deferred investment tax credits............................... $ 86 $ 90
Accrued pension costs......................................... 67 54
Other......................................................... 75 87
Valuation allowance........................................... (5) (6)
------ ------
223 225
------ ------
Deferred tax liabilities
Electric utility plant--net................................... 1,788 1,788
Other property--net........................................... 9 12
Taxes recoverable through future rates........................ 399 416
Reacquired debt costs......................................... 46 48
Other......................................................... 10 25
------ ------
2,252 2,289
------ ------
Net deferred tax liability...................................... $2,029 $2,064
====== ======
</TABLE>
Details of the components of income tax expense, a reconciliation of federal
income taxes derived from statutory tax rates applied to income from
continuing operations for accounting purposes, and details of taxes, other
than income are as follows (millions of dollars):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
INCOME TAX EXPENSE
Included in operating expenses
Provision--Federal.......................................... $189 $195 $198
State............................................ 64 62 77
---- ---- ----
253 257 275
---- ---- ----
Deferred--Federal........................................... 4 9 (34)
State............................................. 6 6 (11)
---- ---- ----
10 15 (45)
---- ---- ----
Investment tax credit, net--Federal......................... (10) (10) (12)
---- ---- ----
253 262 218
---- ---- ----
Included in other income and deductions
Provision (credit)--Federal................................. 2 10 (18)
State................................... 1 4 (7)
---- ---- ----
3 14 (25)
---- ---- ----
Deferred--Federal........................................... (1) 9 (9)
State............................................. (1) 2 (4)
---- ---- ----
(2) 11 (13)
---- ---- ----
1 25 (38)
---- ---- ----
Total income tax expense--Federal............................. 184 213 125
State............................... 70 74 55
---- ---- ----
$254 $287 $180
==== ==== ====
</TABLE>
A-28
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
RECONCILIATION OF INCOME TAX EXPENSE
Indicated federal income tax on pre-tax income at statutory
tax rate--35%............................................... $214 $224 $148
Increase (decrease) due to:
State income taxes......................................... 44 50 35
Flow through of depreciation differences not previously
normalized................................................ 20 16 15
Amortization of investment tax credit...................... (10) (10) (12)
Research & experimentation income tax credits.............. (5)
Other...................................................... (9) 7 (6)
---- ---- ----
40 63 32
---- ---- ----
Total income tax expense..................................... $254 $287 $180
==== ==== ====
Effective income tax rate.................................... 41.6% 44.9% 42.5%
TAXES, OTHER THAN INCOME
State gross receipts....................................... $105 $102 $ 99
State utility realty....................................... 44 46 47
State capital stock........................................ 34 33 35
Social security and other.................................. 20 20 20
---- ---- ----
$203 $201 $201
==== ==== ====
</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 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 $12 million in 1996,
$8 million in 1995 and $7 million in 1994 and are based upon amounts included
in customer rates. The increases in 1996 and 1995 are 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 small utilities
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, 1996 and 1995 aggregated
approximately $128 million and $110 million, respectively. The trust funds
experienced, on a fair market value basis, a $6 million net gain in 1996,
which includes net unrealized appreciation of $2 million, and a net gain in
1995 of $14 million, which includes net unrealized appreciation of $8 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 $130 million and $112
million at December 31, 1996 and 1995, respectively.
The FASB issued an exposure draft on the accounting for liabilities related
to closure and removal of long-lived assets, including decommissioning of
nuclear power plants. As a result, current industry accounting practices for
decommissioning may change, including the possibility that the estimated cost
for decommissioning could be recorded as a liability at the present value of
the estimated future cash outflows that will be required to satisfy those
obligations.
A-29
<PAGE>
7. FINANCIAL INSTRUMENTS
The carrying amount shown on the Consolidated Balance Sheet and the
estimated fair value of PP&L's financial instruments are as follows (millions
of dollars):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------------ ------------------
<S> <C> <C> <C> <C>
ASSETS
Nuclear plant decommissioning trust fund
(a)..................................... $ 128 $ 128 $ 110 $ 110
Financial investments (a)................ 184 184 187 186
Other investments........................ 10 10 9 9
Cash and cash equivalents................ 95 95 15 15
Other financial instruments included in
other current assets.................... 2 2 3 3
LIABILITIES
Preferred stock with sinking fund
requirements (b)........................ 295 294 295 295
Long-term debt (b)....................... 2,832 2,885 2,859 3,033
Commercial paper and bank loans.......... 10 10 89 89
</TABLE>
- -------
(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.
8. REGULATORY ASSETS
The following regulatory assets were reflected in the Consolidated Balance
Sheet (millions of dollars):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Deferred depreciation............................................. $ 140 $ 209
Deferred operating and carrying costs--Susquehanna................ 17 18
Reacquired debt costs............................................. 110 117
Taxes recoverable through future rates............................ 963 1,003
Assessment for decommissioning uranium enrichment facilities...... 30 32
Postretirement benefits other than pensions....................... 28 31
Voluntary early retirement program................................ 49 62
ECR undercollection............................................... 17
Other............................................................. 45 57
------ ------
$1,399 $1,529
====== ======
</TABLE>
As of December 31, 1996, substantially all of PP&L's regulatory assets are
being recovered through rates charged to customers over periods ranging from 3
to 29 years. In December 1996, Pennsylvania passed restructuring legislation
which will continue to permit utilities to recover approved regulatory assets
as transition or stranded costs. See Note 2 "Pennsylvania Restructuring
Legislation".
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, 10, and 11.
9. 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
4.9% and 6.0% at December 31, 1996 and 1995, respectively.
PP&L has a $250 million revolving credit arrangement with a group of banks.
At the option of PP&L, interest rates would be based upon certificate of
deposit rates, Eurodollar deposit rates or the prime rate. Any loans made
A-30
<PAGE>
under this credit arrangement would mature in September 1999. 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 May 1997, 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, 1996 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.
10. PENSION PLAN AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
PENSION PLAN
PP&L has a funded noncontributory defined benefit pension plan covering
substantially all employees. Benefits are based upon a participant's earnings
and length of participation in the Plan, subject to meeting certain minimum
requirements.
PP&L has an unfunded supplemental retirement plan for certain management
employees. A similar plan for directors was terminated December 31, 1996.
Benefit payments pursuant to these supplemental plans are made directly by
PP&L. At December 31, 1996, the projected benefit obligation of these
supplemental plans was approximately $20 million.
The components of PP&L's net periodic pension cost for the three plans were
(millions of dollars):
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- ----
<S> <C> <C> <C>
Service cost-benefits earned during the period.............. $ 32 $ 27 $ 33
Interest cost............................................... 61 58 51
Actual return on plan assets................................ (146) (241) 29
Net amortization and deferral............................... 68 167 (96)
----- ----- ----
Net periodic pension cost................................... $ 15 $ 11 $ 17
===== ===== ====
</TABLE>
The net periodic pension cost charged to operating expenses was $9 million
in 1996, $6 million in 1995 and $10 million in 1994. The balance was charged
to construction and other accounts. The funded status of PP&L's Plan was
(millions of dollars):
<TABLE>
<CAPTION>
DECEMBER 31
--------------
1996 1995
------ ------
<S> <C> <C>
Fair value of plan assets...................................... $1,187 $1,086
Actuarial present value of benefit obligations:
Vested benefits.............................................. 695 673
Nonvested benefits........................................... 2
------ ------
Accumulated benefit obligation............................. 695 675
Effect of projected future compensation...................... 191 194
------ ------
Projected benefit obligation............................... 886 869
------ ------
Plan assets in excess of projected benefit obligation.......... 301 217
Unrecognized transition assets (being amortized over 23 years). (59) (63)
Unrecognized prior service cost................................ 55 59
Unrecognized net gain.......................................... (495) (394)
------ ------
Accrued expense................................................ $ (198) $ (181)
====== ======
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of projected benefit obligations was 7.0% and 6.75% on December 31, 1996
and 1995, respectively. The rate of increase in future compensation used in
determining the actuarial present value of projected benefit obligations was
5.0% on December 31, 1996 and 1995. The assumed long-term rates of return on
assets used in determining pension cost in 1996 and 1995 was 8.0%. Plan assets
consist primarily of common stocks, government and corporate bonds and
temporary cash investments.
A-31
<PAGE>
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. This plan was amended to freeze benefit
increases effective June 1996. In addition, the companies are liable under
federal and state laws to pay black lung benefits to claimants and dependents
with respect to approved claims, and are members of a trust which was
established to facilitate payment of such liabilities. Such costs were not
material in 1996, 1995 and 1994.
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 accordance with a PUC order, PP&L had deferred from January 1, 1993
through 1994, the PUC-jurisdictional accrued cost of retiree health and life
insurance benefits recorded pursuant to SFAS 106, "Employers' Accounting For
Postretirement Benefits Other Than Pensions" 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 in 1995 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 $16 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.
Continued funding of these trusts is subject to the resolution of the OCA
appeal of the PUC Decision. See Note 3.
The following table sets forth the plans' combined funded status reconciled
with the amount shown on PP&L's Consolidated Balance Sheet as of December 31
(millions of dollars):
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees....................................................... $ 123 $ 128
Fully eligible active plan participants........................ 19 18
Other active plan participants................................. 85 79
----- -----
227 225
Plan assets at fair value, primarily temporary cash investments.. 31 29
----- -----
Accumulated postretirement benefit obligation in excess of plan
assets.......................................................... 196 196
Unrecognized prior service costs................................. (5) (5)
Unrecognized net loss............................................ (12) (19)
Unrecognized transition obligation (being amortized over 20
years).......................................................... (139) (148)
----- -----
Accrued postretirement benefit cost.............................. $ 40 $ 24
===== =====
</TABLE>
A-32
<PAGE>
The net periodic postretirement benefit cost included the following
components (millions of dollars):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost--benefits attributed to service during the period... $ 4 $ 4 $ 4
Interest cost on accumulated postretirement benefit obligation... 15 15 14
Actual return on plan assets..................................... (1) (2)
Net amortization and deferral.................................... 9 9 8
--- --- ---
Net periodic postretirement benefit cost......................... $27 $26 $26
=== === ===
</TABLE>
Retiree health and benefits costs charged to operating expenses were
approximately $20 million in 1996, a net credit of approximately $17 million
in 1995 (reflecting both a $32 million credit due to the PUC Decision and
costs applicable to contractual agreements with other major utilities), and
$27 million in 1994 (which includes $11 million of retiree health and benefits
costs previously deferred in 1993). Costs in excess of the amount charged to
expense were charged to construction and other accounts.
For measurement purposes, an 8% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1997; 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, 1996, by about $11 million and the aggregate of the service and
interest cost components of net periodic postretirement benefit cost for the
year then ended by about $1 million.
In determining the accumulated postretirement benefit obligation, the
weighted average discount rate used was 7.0% and 6.75% on December 31, 1996
and 1995, 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, 1996 and 1995.
In 1992, as a result of the Energy Act, PP&L and its subsidiaries formerly
engaged in coal mining accrued an additional liability for the cost of health
care of retired miners previously employed by them. The liability, based on
the present value of future benefits, was estimated at $54 million as of
December 1996 and 1995.
POSTEMPLOYMENT BENEFITS
PP&L provides health and life insurance benefits to disabled employees and
income benefits to eligible spouses of deceased employees. Postemployment
benefits charged to operating expenses were not material.
11. WORKFORCE REDUCTIONS
PP&L continued its efforts to reduce costs in 1996. An employment decline of
approximately 100 management employees occurred through job displacements,
rather than from the type of major initiatives in workforce reductions that
took place in 1994 and 1995. In anticipation of planned further workforce
reductions in 1997 and to accrue for enhanced pension benefits for employees
displaced in 1996, PP&L recorded costs of $5 million after-tax. 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. The costs of the workforce reductions in 1995
amounted to about $19 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 $76 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 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 $38 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 PUC Decision.
A-33
<PAGE>
12. JOINTLY OWNED FACILITIES
At December 31, 1996, PP&L or its 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...... $4,060 $66 $102
Other property......................... $22
Accumulated depreciation............... 1,000 35 37 8
Construction work in progress.......... 55 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 PP&L Consolidated Statement
of Income. The Merrill Creek Reservoir provides water during periods of low
river flow to replace water from the Delaware River used by PP&L and other
utilities in the production of electricity.
13. 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 $84 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 $10 million, resulting in a $74 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 $42 million gain, or $20 million after-tax.
14. COMMITMENTS AND CONTINGENT LIABILITIES
CONSTRUCTION EXPENDITURES
PP&L's construction expenditures for the period 1997-2001 are estimated to
aggregate $1.2 billion, including AFUDC. For discussion pertaining to
construction expenditures, see Review of Financial Condition and Results of
Operations under the caption "Financial Condition--Capital Expenditure
Requirements" on page A-9.
NUCLEAR INSURANCE
PP&L is a member of certain insurance programs which provide coverage for
property damage to members' nuclear generating stations. Facilities at the
Susquehanna station are insured against property damage losses up to $2.75
billion under these programs. PP&L is also a member of an insurance program
which provides insurance coverage for the cost of replacement power during
prolonged outages of nuclear units caused by certain specified conditions.
Under the property and replacement power insurance programs, PP&L could be
assessed retroactive premiums in the event of the insurers' adverse loss
experience. The maximum amount PP&L could be assessed under these programs at
December 31, 1996 was about $35 million.
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. In the event of a nuclear incident at any of the reactors covered by
The Price Anderson Amendments Act of 1988, PP&L could be assessed up to $151
million per incident, payable at a rate of $20 million per year, plus an
additional 5% surcharge, if applicable.
ENVIRONMENTAL MATTERS
Air
The Clean Air Act deals, in part, with acid rain, attainment of federal
ambient ozone standards and toxic air emissions. PP&L has complied with the
Phase I acid rain provisions, required to be implemented by 1995, by
A-34
<PAGE>
installing continuous emission monitors on all units, burning lower sulfur
coal and installing low nitrogen oxide burners on certain units. To comply
with the year 2000 acid rain provisions, PP&L plans to purchase lower sulfur
coal and use banked or purchased emission allowances instead of installing FGD
on its wholly-owned units.
PP&L has met the initial ambient ozone requirements identified in Title I of
the Clean Air Act by reducing nitrogen oxide emissions by 40% through the use
of low nitrogen oxide burners. Further seasonal (i.e., 5 month) nitrogen oxide
reductions to 55% and 75% of pre-Clean Air Act levels for 1999 and 2003,
respectively, are specified under the Northeast Ozone Transport Region's
Memorandum of Understanding.
The Clean Air Act requires EPA to study the health effects of hazardous air
emissions from power plants and other sources. In this regard, in November
1996 the EPA proposed new national standards for ambient levels of ground-
level ozone and fine particulates. The new standards, if implemented, may
result in EPA mandating additional NOx and SO/2/ reductions from utility
boilers in the 2005-2010 timeframe. NOx reductions to meet the new ozone
standard are likely to be in the range of the 75% seasonal NOx reductions that
already are required for PP&L under the Memorandum of Understanding in 2003
and beyond. However, to meet the new fine particulate standards, EPA may
mandate additional SO/2/ reductions significantly greater than those now
planned for the acid rain program and extend the NOx reductions required by
the Memorandum of Understanding from seasonal to year-round.
Expenditures to meet the year 1999 Memorandum of Understanding requirements
are included in the table of projected construction expenditures in the Review
of the Financial Condition and Results of Operations under the caption
"Financial Condition--Capital Expenditure Requirements". PP&L currently
estimates that additional capital expenditures and operating costs for
environmental compliance under the Clean Air Act will be incurred beyond 2001
in amounts which are not now determinable but could be material.
Water and Residual Waste
DEP residual waste regulations require PP&L to obtain permits for existing
ash basins at all of its coal-fired generating stations as disposal
facilities. Ash basins that cannot be permitted 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.
To address the DEP regulations, PP&L is moving forward with plans to install
dry fly ash handling systems at its power stations.
Groundwater degradation related to fuel oil leakage from underground
facilities and seepage from coal refuse disposal areas and coal storage piles
has been identified at several PP&L generating stations. Remedial work 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 current Montour station NPDES permit and proposed Holtwood station NPDES
permit contain stringent limits for certain toxic metals and increased
monitoring requirements. Depending on the results of toxic reduction studies
in progress, additional water treatment facilities may be needed at these
stations.
Capital expenditures through the year 2001 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 the Review of the Financial
Condition and Results of Operations under the caption "Financial Condition--
Capital Expenditure Requirements". PP&L currently estimates that $12 million
of additional capital expenditures may be required in the next four years and
$67 million of additional capital expenditures could be required beyond the
year 2001. 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 PP&L substations and pole sites;
potential contamination at a number of coal gas manufacturing facilities
formerly owned and operated by PP&L; and oil or other contamination which may
exist at some of PP&L's former generating facilities.
A-35
<PAGE>
At December 31, 1996, PP&L had accrued $10 million, representing the amount
PP&L can reasonably estimate it will have to spend to remediate sites
involving the removal of hazardous or toxic substances including those covered
by the consent order mentioned above. Future cleanup or remediation work at
sites currently under review, or at sites not currently identified, may result
in material additional operating costs which PP&L cannot estimate at this
time. In addition, certain federal and state statutes, including Superfund and
the Pennsylvania Hazardous Sites Cleanup Act, empower certain governmental
agencies, such as the EPA and the DEP, to seek compensation from the
responsible parties for the lost value of damaged natural resources. The EPA
and the DEP may file such compensation claims against the parties, including
PP&L, held responsible for cleanup of such sites. Such natural resource damage
claims against PP&L could result in material additional liabilities.
Other Environmental Matters
In addition to the issues discussed above, PP&L may be required to modify,
replace or cease operating certain facilities to comply with other statutes,
regulations and actions by regulatory bodies or courts involving environmental
matters, including the areas of water and air quality, hazardous and solid
waste handling and disposal, toxic substances and electric and magnetic
fields. In this regard, PP&L also may incur capital expenditures, operating
expenses and other costs in amounts which are not now determinable, but may be
material.
SOURCE OF LABOR SUPPLY
At December 31, 1996, PP&L had a total of approximately 6,428 full-time
employees. Approximately 65 percent of these full-time employees are
represented by the IBEW. The existing three-year agreement with the IBEW will
expire in May 1997.
A-36
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
PENNSYLVANIA POWER & LIGHT COMPANY
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
INCOME ITEMS--MILLIONS
Operating revenues...... $ 2,910 $ 2,752 $ 2,725 $ 2,727 $ 2,744
Operating income........ 556 574 501 563 573
Earnings available to
PP&L Resources, Inc.
(d).................... 329 324(c) 215(c) 314 306
BALANCE SHEET ITEMS--
MILLIONS (A)
Property, plant and
equipment, net......... 6,960 6,970 7,195 7,146 7,020
Total assets............ 9,371 9,424 9,321 9,454 8,192
Long-term debt.......... 2,832 2,859 2,941 2,663 2,627
Preferred and preference
stock
With sinking fund
requirements......... 295 295 295 335 326
Without sinking fund
requirements......... 171 171 171 171 224
Common equity........... 2,617 2,528 2,404 2,426 2,367
Short-term debt......... 10 89 74 202 159
Total capital provided
by investors........... 5,925 5,942 5,885 5,797 5,703
Capital lease
obligations............ 247 220 225 249 251
FINANCIAL RATIOS
Return on average common
equity--% ............. 12.95 13.10 8.83 13.06 13.11
Embedded cost rates (a)
Long-term debt--%..... 7.89 7.95 8.07 8.63 9.36
Preferred and
preference stock--%.. 6.09 6.09 6.07 6.30 7.36
Times interest earned
before income taxes.... 3.62 3.58 2.73 3.33 3.18
Ratio of earnings to
fixed charges--total
enterprise basis (b)... 3.50 3.48 2.70 3.31 3.15
Ratio of earnings to
fixed charges and
dividends on preferred
and preference stock--
total enterprise basis
(b).................... 2.93 2.92 2.26 2.71 2.53
REVENUE DATA
Average price per kwh
billed for system
sales--cents........... 7.22 7.10 7.14 7.27 7.39
SALES DATA
Customers(a)............ 1,236,294 1,226,089 1,213,023 1,203,139 1,186,682
Electric energy sales
billed--millions of kwh
Residential........... 11,849 11,300 11,444 11,043 10,604
Commercial............ 10,288 9,948 9,716 9,373 9,039
Industrial............ 10,016 9,845 9,536 9,100 8,746
Other................. 1,638 1,578 1,618 1,534 1,366
--------- --------- --------- --------- ---------
System sales........ 33,791 32,671 32,314 31,050 29,755
Contractual sales to
other major utilities.. 11,519 7,676 6,307 7,142 7,327
PJM energy sales........ 1,338 2,358 3,158 4,142 5,160
--------- --------- --------- --------- ---------
Total electric
energy sales
billed............. 46,648 42,705 41,779 42,334 42,242
--------- --------- --------- --------- ---------
NUMBER OF FULL-TIME
EMPLOYEES (A).......... 6,428 6,661 7,431 7,677 7,882
</TABLE>
- -------
(a) At year-end
(b) 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.
(c) 1995 and 1994 earnings were affected by several one-time adjustments. See
Financial Notes 3, 11, and 13.
(d) Prior years restated to reflect formation of the holding company.
A-37
<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........ 53 Chairman, President and Chief Executive Officer January 1, 1993
Francis A. Long......... 56 Executive Vice President and Chief Operating Officer January 1, 1993
Robert G. Byram......... 51 Senior Vice President--Nuclear March 26, 1993
Ronald E. Hill.......... 54 Senior Vice President--Financial January 1, 1994
John R. Biggar.......... 52 Vice President--Finance August 1, 1996
Robert J. Grey.......... 46 Senior Vice President, General Counsel and Secretary March 1, 1996
Joseph J. McCabe........ 46 Vice President and Controller August 1, 1995
</TABLE>
Each of the above officers, with the exception of Mr. Grey and Mr. McCabe,
has been employed by PP&L for more than five years as of December 31, 1996.
Mr. McCabe joined PP&L in May 1994 and was previously a partner of Deloitte &
Touche LLP. Mr. Grey joined PP&L in March 1995. He had been General Counsel of
Long Island Lighting Company since 1992. 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, 1992: Mr. Hecht was
President and Chief Operating Officer; Mr. Long was Senior Vice President--
System Power & Engineering; Mr. Byram was Vice President--Nuclear Operations
and Senior Vice President--System Power & Engineering; Mr. Hill was Vice
President, Comptroller; Mr. Biggar was Vice President--Finance and Vice
President--Finance and Treasurer; Mr. Grey was Vice President, General Counsel
and Secretary; and Mr. McCabe was Controller.
A-38
<PAGE>
SHAREOWNER AND INVESTOR INFORMATION
ANNUAL MEETING: The annual meeting of shareowners is held each year on the
fourth Wednesday of April. The 1997 annual meeting will be held on Wednesday,
April 23, 1997, at Lehigh University's Stabler Arena, at the Goodman Campus
Complex located in Lower Saucon Township, outside Bethlehem, PA.
PROXY MATERIAL: A proxy statement and notice of PP&L's annual meeting is
mailed to all shareowners of record as of February 28, 1997.
DIVIDENDS: The 1997 dates for consideration of the declaration of dividends
by the board of directors or its finance committee are February 26, May 28,
August 27 and November 26. Subject to the declaration, dividends are paid on
the first day of April, July, October and January. Dividend checks are mailed
in advance of those dates with the intention that they arrive as close as
possible to the payment dates. The 1997 record dates for dividends are
expected to be the 10th day of March, June, September and December.
DIRECT DEPOSIT OF DIVIDENDS: Shareowners may choose to have their dividend
checks deposited directly into their checking or savings account. Quarterly
dividend payments are electronically credited on the dividend date, or the
first business day thereafter.
DIVIDEND REINVESTMENT PLAN: Shareowners may choose to have dividends on
their preferred stock reinvested in PP&L Resources common stock instead of
receiving the dividend by check.
CERTIFICATE SAFEKEEPING: Shareowners participating in the Dividend
Reinvestment Plan may choose to have their common stock certificates forwarded
to PP&L for safekeeping.
LOST DIVIDEND OR INTEREST CHECKS: Dividend or interest checks lost by
investors, or those that may be lost in the mail, will be replaced if the
check has not been located by the 10th business day following the payment
date.
TRANSFER OF STOCK OR BONDS: Stock or bonds may be transferred from one name
to another or to a new account in the name of another person. Please contact
Investor Services regarding transfer instructions.
BONDHOLDER INFORMATION: Much of the information and many of the procedures
detailed here for shareowners also apply to bondholders. Questions related to
bondholder accounts should be directed to Investor Services.
LOST STOCK OR BOND CERTIFICATES: Please contact Investor Services for an
explanation of the procedure to replace lost stock or bond certificates.
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 list. If your stock is held in street name and you wish to receive
company information on a more timely basis, write, call or E-mail Investor
Services at the addresses or number listed below. We will add your name to our
direct mailing list.
SHAREOWNERS' NEWSLETTER--an easy-to-read newsletter containing current items
of interest to shareowners--published and mailed at the beginning of each
quarter.
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: The summary annual report and other investor
publications are mailed to each investor account. If you have more than one
account, or if there is more than one investor in your household, you may
contact Investor Services to request that only one publication be delivered to
your address. Please provide account numbers for all duplicate mailings.
A-39
<PAGE>
INVESTOR SERVICES: For any questions you have or additional information you
require about PP&L and its subsidiaries, please call the toll-free number
listed below, or write to:
George I. Kline
Manager--Investor Services
Pennsylvania Power & Light Co.
Two North Ninth Street
Allentown, PA 18101
TOLL-FREE PHONE NUMBER: For information regarding your investor account, or
other inquiries, call toll-free: 1-800-345-3085.
INTERNET ACCESS: For updated information throughout the year, check out our
home page at http://www.papl.com. You may also contact Investor Services via
E-mail at [email protected].
SECURITY ANALYST AND INSTITUTIONAL INVESTOR INQUIRIES: Members of the
financial community seeking additional information may contact:
Timothy J. Paukovits
Investor Relations Manager
Phone: (610) 774-4124
Fax: (610) 774-5106
E-mail: [email protected]
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
South St. Paul, MN 55075
Pennsylvania Power & Light Co.
Investor Services Department
PENNSYLVANIA POWER & LIGHT CO.: DIVIDEND DISBURSING OFFICE AND
4 1/2% Preferred Stock DIVIDEND REINVESTMENT PLAN AGENT
(Code: PPLPRB) Pennsylvania Power & Light Co.
4.40% Series Preferred Stock Investor Services Department
(Code: PPLPRA)
MORTGAGE BOND TRUSTEE
Bankers Trust Co.
PHILADELPHIA STOCK EXCHANGE Attn: Security Transfer Unit
PP&L RESOURCES, INC.: P.O. Box 291569
Common Stock Nashville, TN 37229
BOND INTEREST PAYING AGENT
PENNSYLVANIA POWER & LIGHT CO.: Pennsylvania Power & Light Co.
4 1/2% Preferred Stock Investor Services Department
3.35% Series Preferred Stock
4.40% Series Preferred Stock
4.60% Series Preferred Stock
A-40
<PAGE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED (A)
---------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- -------
<S> <C> <C> <C> <C>
1996
Operating revenues............................ $789 $669 $715 $737
Operating income.............................. 176 120 136 124
Net income.................................... 125 69 86 77
Earnings available to PP&L Resources.......... 118 62 79 70
1995
Operating revenues............................ $728 $609 $682 $733
Operating income.............................. 162 104 179 129
Net income.................................... 108 52 95 97
Earnings available to PP&L Resources.......... 101 45 88 90
</TABLE>
- -------
(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.
A-41
<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 Co. and PP&L Resources file a joint Form 10-K Report with the
Securities and Exchange Commission. The Form 10-K Report for 1996 is available
without charge by writing to the 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>
[LETTERHEAD OF PP&L APPEARS HERE]
March 14, 1997
Dear Shareowner:
It is a pleasure to invite you to attend the 1997 Annual Meeting of
Shareowners, which will be held at 1 p.m. on Wednesday, April 23, 1997, at
Lehigh University's Stabler Arena, at the Goodman Campus Complex, located in
Lower Saucon Township outside Bethlehem, preceding the Annual Meeting of
Shareowners of PP&L Resources, Inc. ("PP&L 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.
If you plan to attend the meeting, please detach and return your proxy now and
bring the admission ticket printed on the back of this sheet with you to the
meeting.
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 PP&L Resources, and the company's preferred stock is
the only class of stock outstanding in the hands of the public. PP&L Resources
owns all of the company's common stock.
Sincerely yours,
/s/ William F. Hecht
William F. Hecht
Chairman, President
and Chief Executive Officer
- --------------------------------------------------------------------------------
[LETTERHEAD OF PP&L APPEARS HERE]
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR ANNUAL MEETING OF
SHAREOWNERS, APRIL 23, 1997
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 Shareowners of Pennsylvania Power & Light Company
to be held on April 23, 1997, 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>
ADMISSION TICKET
Pennsylvania Power & Light Company
Annual Meeting of Shareowners
1 p.m., April 23, 1997
Lehigh University's Stabler Arena
Bethlehem, Pennsylvania
------------------------------------------------------------------------
Detach your proxy and mail it in the enclosed envelope. If you plan
to attend the meeting, bring this ticket with you.
------------------------------------------------------------------------
[MAP APPEARS HERE]
Tear along perforation and return in the enclosed envelope
- --------------------------------------------------------------------------------
Indicate your vote by placing an (X) in the appropriate box
-------------------------------------------------------------------------
1. ELECTION OF DIRECTORS: Nominees for terms ending in 2000.
(1) E. Allen Deaver (3) Elmer D. Gates
(2) Nance K. Dicciani (4) Norman Robertson
(*) TO WITHHOLD AUTHORITY TO VOTE FOR For All Withhold
ANY INDIVIDUAL NOMINEE, STRIKE For All Except (*) For All
A LINE THROUGH THE NOMINEE'S NAME [_] [_] [_]
IN THE LIST ABOVE AND MARK AN (X)
IN THE "FOR ALL EXCEPT" BOX.
-------------------------------------------------------------------------
Date Please date and sign
----------------------------- ---------------- your name(s) exactly
as shown at left and
mail promptly in the
enclosed envelope.
Date
----------------------------- ---------------- IMPORTANT: When sign-
ing as attorney,
executor, administra-
tor, trustee or
guardian, please give
your full title as
such. In the case of
JOINT HOLDERS, all
should sign.
PROXY
