<PAGE>
United States
Securities and Exchange Commission
Washington, DC 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Registrant; State of Incorporation; IRS Employer
Number Address; and Telephone No. Identification No.
1-11459 PP&L Resources, Inc. 23-2758192
(Pennsylvania)
Two North Ninth Street
Allentown, PA 18101
(610) 774-5151
1-905 PP&L, Inc. 23-0959590
(Pennsylvania)
Two North Ninth Street
Allentown, PA 18101
(610) 774-5151
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
PP&L Resources, Inc. Yes X No
PP&L, Inc. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
PP&L Resources, Inc. Common stock, $.01 par value,
167,562,113 shares outstanding at
April 30, 1998
PP&L, Inc. Common stock, no par value,
157,300,382, shares outstanding and
all held by PP&L Resources, Inc. at
April 30, 1998
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PP&L RESOURCES, INC.
AND
PP&L, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PP&L Resources, Inc.
Consolidated Statement of Income
Consolidated Statement of Cash Flows
Consolidated Balance Sheet
PP&L, Inc.
Consolidated Statement of Income
Consolidated Statement of Cash Flows
Consolidated Balance Sheet
Notes to Financial Statements
PP&L Resources, Inc. and PP&L, Inc.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PP&L Resources, Inc. and PP&L, Inc.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
GLOSSARY OF TERMS AND ABBREVIATIONS
SIGNATURES
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<TABLE>
PP&L RESOURCES, INC. AND SUBSIDIARIES
Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements
In the opinion of PP&L Resources, the unaudited financial statements included
herein reflect all adjustments necessary to present fairly the Consolidated Balance
Sheet as of March 31, 1998 and December 31, 1997, and the Consolidated Statement
of Income and Consolidated Statement of Cash Flows for the periods ended
March 31, 1998 and 1997. PP&L Resources is the parent holding company of PP&L,
PP&L Global, PP&L Spectrum, PP&L Capital Funding and H. T. Lyons. PP&L constitutes
substantially all of PP&L Resources' assets, revenues and earnings.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(Millions of Dollars, except per share data)
<CAPTION>
Three Months
Ended March 31,
1998 1997
<S> <C> <C>
Operating Revenues
Electric operations................................... $616 $655
Wholesale energy and trading activities............... 245 130
Energy related businesses............................. 19 10
Total Operating Revenues.............................. 880 795
Operating Expenses
Operation
Electric Fuel....................................... 113 111
Energy purchases.................................... 214 116
Other operating..................................... 117 117
Maintenance........................................... 38 35
Depreciation and amortization......................... 94 92
Taxes, other than income ............................. 54 56
Energy related businesses............................. 14 4
Total Operating Expenses.............................. 644 531
Operating Income........................................ 236 264
Other Income and (Deductions)........................... 7 2
Income Before Interest and Income Taxes................. 243 266
Interest Expense........................................ 52 54
Income Taxes............................................ 84 88
Income Before Dividends on Preferred Stock.............. 107 124
Preferred Stock Dividend Requirements................... 6 7
Net Income.............................................. $101 $117
Earnings Per Share of Common Stock - Basic and Diluted ( $0.60 $0.72
Average Number of Shares Outstanding (thousands)........166,734 163,192
Dividends Declared Per Share of Common Stock............$0.4175 $0.4175
(a) Based on average number of shares outstanding.
See accompanying Notes to Financial Statements.
</TABLE>
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<TABLE>
PP&L RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Millions of Dollars)
<CAPTION>
Three Months
Ended March 31,
1998 1997
<S> <C> <C>
Net Cash Provided by Operating Activities............... $174 $202
Cash Flows From Investing Activities
Property, plant and equipment expenditures............. (79) (72)
Proceeds from sale of nuclear fuel to trust............ 1 21
Purchases of available-for-sale securities............. (4) (28)
Sales and maturities of available-for-sale securities.. 4 68
Investment in electric energy projects................. (98) (13)
Other investing activities - net....................... (7)
Net cash used in investing activities............ (183) (24)
Cash Flows From Financing Activities
Issuance of long-term debt............................. 60
Issuance of common stock............................... 16 17
Funds deposited for retirement of long-term debt ............ (210)
Payments on capital lease obligations.................. (17) (19)
Common and preferred dividends paid.................... (76) (75)
Net increase in short-term debt........................ 124 80
Net cash provided by (used in) financing activities.. 107 (207)
Net Increase (Decrease) In Cash and Cash Equivalents ... 98 (29)
Cash and Cash Equivalents at Beginning of Period ....... 50 101
Cash and Cash Equivalents at End of Period ............. $148 $72
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest (net of amount capitalized).................. $50 $51
Income taxes.......................................... $16 $15
See accompanying Notes to Financial Statements.
</TABLE>
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<TABLE>
PP&L RESOURCES,INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
<CAPTION>
March 31, December 31,
1998 1997
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Property, Plant and Equipment
Electric utility plant in service - at original cost....... $10,005 $9,984
Accumulated depreciation .................................. (3,633) (3,570)
6,372 6,414
Construction work in progress - at cost.................... 215 185
Nuclear fuel owned and leased - net of amortization ....... 165 167
Electric utility plant - net............................. 6,752 6,766
Other property - (net of depreciation, amortization
and depletion 1998, $59; 1997, $57)...................... 54 54
6,806 6,820
Investments
Investment in and advances to electric energy
projects - at equity .................................... 465 360
Affiliated companies - at equity .......................... 17 17
Nuclear plant decommissioning trust fund .................. 179 163
Financial investments...................................... 48 52
Other - at cost or less ................................... 13 13
722 605
Current Assets
Cash and cash equivalents ................................. 148 50
Current financial investments ............................. 6 6
Accounts receivable (less reserve: 1998, $14; 1997, $16)
Customers ............................................. 193 190
Other.................................................. 70 48
Unbilled revenues
Customers.............................................. 81 90
Other.................................................. 45 37
Fuel, materials and supplies - at average cost............. 201 200
Prepayments ............................................... 102 28
Deferred income taxes ..................................... 21 22
Other...................................................... 27 24
894 695
Regulatory Assets and Other Noncurrent Assets ................ 1,356 1,365
$9,778 $9,485
See accompanying Notes to Financial Statements.
</TABLE>
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<TABLE>
PP&L RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
<CAPTION>
March 31, December 31,
1998 1997
(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES
Capitalization
Common equity
Common stock ....................................... $2 $2
Capital in excess of par value .................... 1,685 1,669
Earnings reinvested................................. 1,195 1,164
Capital stock expense and other .................... (26) (26)
2,856 2,809
Preferred stock
With sinking fund requirements ..................... 47 47
Without sinking fund requirements .................. 50 50
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely
company debentures.................................. 250 250
Long-term debt ....................................... 2,646 2,585
5,849 5,741
Current Liabilities
Short-term debt....................................... 261 135
Long-term debt due within one year ................... 150 150
Capital lease obligations due within one year ........ 58 58
Accounts payable ..................................... 144 140
Taxes accrued ........................................ 108 40
Interest accrued ..................................... 64 62
Dividends payable .................................... 76 76
Other ................................................ 105 108
966 769
Deferred Credits and Other Noncurrent Liabilities
Deferred investment tax credits ..................... 197 199
Deferred income taxes ................................ 2,026 2,022
Capital lease obligations ............................ 98 113
Other ................................................ 642 641
2,963 2,975
Commitments and Contingent Liabilities
$9,778 $9,485
See accompanying Notes to Financial Statements.
</TABLE>
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<TABLE>
PP&L, INC. AND SUBSIDIARIES
In the opinion of PP&L, the unaudited financial statements included herein
reflect all adjustments necessary to present fairly the Consolidated Balance Sheet
as of March 31, 1998 and December 31, 1997, and the Consolidated Statement of
Income and Consolidated Statement of Cash Flows for the periods ended
March 31, 1998 and 1997. All nonutility operating transactions are included
in "Other Income and (Deductions)" in PP&L's Consolidated Statement of Income.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(Millions of Dollars)
<CAPTION>
Three Months
Ended March 31,
1998 1997
<S> <C> <C>
Operating Revenues
Electric operations................................. $616 $655
Wholesale energy and trading activities............. 245 130
Total Operating Revenues............................ $861 $785
Operating Expenses
Operation
Electric Fuel..................................... 113 111
Energy purchases.................................. 214 116
Other............................................. 117 117
Maintenance......................................... 38 35
Depreciation and amortization....................... 94 92
Taxes, other than income ........................... 54 56
Total Operating Expenses............................ 630 527
Operating Income ..................................... 231 258
Other Income and (Deductions)......................... 12 2
Income Before Interest and Income Taxes............... 243 260
Interest Expense...................................... 49 53
Income Taxes.......................................... 85 87
Net Income............................................ 109 120
Dividends on Preferred Stock.......................... 12 7
Earnings Available to PP&L Resources, Inc. .......... $97 $113
See accompanying Notes to Financial Statements.
</TABLE>
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<TABLE>
PP&L, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Millions of Dollars)
<CAPTION>
Three Months
Ended March 31,
1998 1997
<S> <C> <C>
Net Cash Provided by Operating Activities............... $186 $206
Cash Flows From Investing Activities
Property, plant and equipment expenditures............ (79) (72)
Proceeds from sales of nuclear fuel to trust.......... 1 21
Purchases of available-for-sale securities ........... (4) (28)
Sales and maturities of available-for-sale securities 4 46
Other investing activities - net...................... 4 1
Net cash used in investing activities........... (74) (32)
Cash Flows From Financing Activities
Funds deposited for retirement of long-term debt...... (210)
Payments on capital lease obligations................. (17) (19)
Common and preferred dividends paid................... (81) (75)
Net increase in short-term debt....................... 94 80
Net cash used in financing activities........... (4) (224)
Net Increase (Decrease) in Cash and Cash Equivalents 108 (50)
Cash and Cash Equivalents at Beginning of Period........ 15 95
Cash and Cash Equivalents at End of Period.............. $123 $45
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest (net of amount capitalized)................ $48 $49
Income taxes........................................ $16 $16
<FN>
See accompanying Notes to Financial Statements.
</TABLE>
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<TABLE>
PP&L, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
<CAPTION>
March 31, December 31,
1998 1997
(Unaudited (Audited)
<S> <C> <C>
ASSETS
Property, Plant and Equipment
Electric utility plant in service - at original cost....... $10,005 $9,984
Accumulated depreciation .................................. (3,633) (3,570)
6,372 6,414
Construction work in progress - at cost ................... 215 185
Nuclear fuel owned and leased - net of amortization ....... 165 167
Electric utility plant - net ............................. 6,752 6,766
Other property - (net of depreciation, amortization
and depletion 1998, $59; 1997, $57) ..................... 53 54
6,805 6,820
Investments
Affiliated companies - at equity .......................... 17 17
Nuclear plant decommissioning trust fund .................. 179 163
Loan to parent............................................. 375 375
Financial investments ..................................... 48 52
Other - at cost or less ................................... 13 13
632 620
Current Assets
Cash and cash equivalents ................................. 123 15
Current financial investments ............................. 6 6
Accounts receivable (less reserve: 1998, $14; 1997, $16)
Customers ............................................... 191 188
Other ................................................... 78 64
Unbilled revenues
Customers................................................ 81 90
Other.................................................... 41 36
Fuel, material and supplies - at average cost ............. 201 200
Prepayments ............................................... 98 26
Deferred income taxes ..................................... 21 22
Other ..................................................... 27 23
867 670
Regulatory Assets and Other Noncurrent Assets ............... 1,342 1,362
$9,646 $9,472
See accompanying Notes to Financial Statements.
</TABLE>
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<TABLE>
PP&L, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
<CAPTION>
March 31, December 31,
1998 1997
(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES
Capitalization
Common equity
Common stock ....................................... $1,476 $1,476
Additional paid-in capital ......................... 64 64
Earnings reinvested ................................ 1,119 1,092
Capital stock expense and other ................... (20) (20)
2,639 2,612
Preferred stock
With sinking fund requirements ..................... 295 295
Without sinking fund requirements .................. 171 171
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely
company debentures.................................. 250 250
Long-term debt ....................................... 2,484 2,483
5,839 5,811
Current Liabilities
Short-term debt ...................................... 139 45
Long-term debt due within one year ................... 150 150
Capital lease obligations due within one year ........ 58 58
Accounts payable ..................................... 147 148
Taxes accrued ........................................ 107 40
Interest accrued ..................................... 63 59
Dividends payable .................................... 82 81
Other ................................................ 102 107
848 688
Deferred Credits and Other Noncurrent Liabilities
Deferred investment tax credits ...................... 197 199
Deferred income taxes ................................ 2,024 2,022
Capital lease obligations ........................... 98 113
Other ................................................ 640 639
2,959 2,973
Commitments and Contingent Liabilities ....................
$9,646 $9,472
See accompanying Notes to Financial Statements.
</TABLE>
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PP&L Resources, Inc. and PP&L, Inc.
Notes to Financial Statements
Terms and abbreviations appearing in Notes to Financial Statements are
explained in the glossary.
1. Interim Financial Statements
Certain information in footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted
accounting principles, has been condensed or omitted in this Form 10-Q
pursuant to the rules and regulations of the SEC. These financial
statements should be read in conjunction with the financial statements and
notes included in PP&L Resources' and PP&L's Annual Reports to the SEC on
Form 10-K for the year ended December 31, 1997.
Certain amounts in the March 31, 1997 and December 31, 1997 financial
statements have been reclassified to conform to the presentation in the
March 31, 1998 financial statements. The most significant
reclassifications have been made in the Consolidated Statement of Income.
This Statement has been modified to better reflect the changing nature of
the business from a regulated electric utility to a full-service provider
of retail and wholesale energy and related products and services. The
revenues and expenses of PP&L Global, PP&L Spectrum and H.T. Lyons are now
reflected in "Operating Income." Previously, the results of these non-
regulated affiliates were included in "Other Income and (Deductions)." In
addition, the revenues generated by PP&L's wholesale energy and trading
activities are now separately disclosed. Finally, income taxes are no
longer reflected as "Operating Expense," which was the traditional
disclosure used by utilities.
2. PUC Restructuring Proceeding
Reference is made to PP&L Resources' and PP&L's Annual Reports to the
SEC on Form 10-K for the year ended December 31, 1997, regarding PP&L's
April 1, 1997 filing of its restructuring plan with the PUC pursuant to the
Customer Choice Act. On April 7, 1998, the recommended decision of the
Administrative Law Judge was issued. The following are the major elements
of the recommended decision:
1. The recommended decision makes certain adjustments to PP&L's
stranded cost claim which had been proposed by the OTS. Although the
recommended decision does not quantify the level of stranded cost recovery
that would result from the recommended decision, PP&L estimates the impact
of the adjustments at approximately $350 million and the level of permitted
stranded cost recovery at $4.14 billion.
2. The recommended decision accepts PP&L's estimates of future
competitive market prices used to determine stranded costs.
3. The recommended decision accepts PP&L's proposed code of conduct
and rejects proposals to prohibit PP&L from using its corporate name in the
competitive marketplace.
4. The recommended decision accepts PP&L's proposed consumer
education program and universal service program.
5. The recommended decision adopts the schedule for retail customer
choice contained in the Customer Choice Act, phasing in all customers over
three years beginning on January 1, 1999.
On April 27, 1998, all of the major parties, including PP&L, filed
exceptions to the recommended decision. PP&L's exceptions generally
support the recommended decision, but contest several specific adjustments
made in the recommended decision to PP&L's stranded cost claim. The
parties' replies to these exceptions were filed on May 7. The PUC will
review the recommended decision, exceptions and replies to exceptions and
is expected to issue its final order in the proceeding on June 4, 1998.
The PUC's final order may result in changes to components or
assumptions in PP&L's restructuring plan or to findings or conclusions in
the recommended decision that could have an adverse effect on the level of
the CTC used to collect stranded costs from customers, the amount of
stranded costs that are recoverable through the CTC or the overall amount
of revenues to be collected from customers. Accordingly, PP&L Resources
and PP&L are unable to predict the ultimate effect of the Customer Choice
Act or the PUC's final order in the restructuring proceeding on their
financial position, their results of operation, future PP&L rate levels,
internally generated funds, the need or ability to issue securities to meet
future capital requirements or the ability to maintain the common stock
dividend at the current level.
3. Accounting for the Effects of Certain Types of Regulation
The FASB's Emerging Issues Task Force (EITF) has addressed the
appropriateness of the continued application of SFAS 71 by utilities in
states that have enacted restructuring legislation similar to the Customer
Choice Act. The EITF issued its statement 97-4 (Deregulation of the
Pricing of Electricity -- Issues Related to the Application of FASB
Statements 71 and 101), which concluded that utilities should discontinue
application of SFAS 71 for the generation portion of their business when a
deregulation plan is in place and its terms are known. For PP&L, this will
be upon the issuance of the PUC's restructuring order on June 4, 1998. One
of the EITF's key conclusions is that utilities should continue to carry on
their books some or all of their regulatory assets and liabilities that
originated in the generation portion of the business if the regulatory cash
flows to realize and settle them will be derived from the regulated portion
of the business (e.g., transmission and distribution). In addition, costs
or obligations of the generation portion of the business that are incurred
after application of SFAS 71 ceases and that are covered by the regulated
cash flows for the portion of the business that remains regulated on a cost
of service basis would also meet the criteria to be considered regulatory
assets or liabilities.
PUC Proceedings
The Customer Choice Act establishes a definitive process for
transition to market-based pricing for electric generation. This
transition effectively includes cost-of-service based ratemaking during the
transition period, subject to a rate cap. Rates will include a non-
bypassable CTC, which is designed to give utilities the opportunity to
recover their stranded costs during the transition period.
Given the current regulatory environment, PP&L's electric transmission
and distribution businesses are expected to remain regulated on a cost-of-
service basis and, as a result, the provisions of SFAS 71 should continue
to apply to those businesses. The impact of the discontinuance of
application of SFAS 71 to the generation portion of PP&L's business will
depend to a large degree upon the outcome of the restructuring proceeding
currently pending before the PUC. See Financial Note 2 for a discussion of
the potential financial impacts of that proceeding.
FERC Proceedings
Under FERC Order 888, 16 small utilities which have power supply
agreements with PP&L signed before July 11, 1994, requested and were
provided with PP&L's current estimate of its stranded costs applicable to
these customers if they were to terminate their agreements in 1999. PP&L
has now executed settlement agreements with these customers. Subject to
certain conditions, these settlement agreements provide for continued power
supply by PP&L to 15 of these small utilities through January 2004. The
agreements were filed for FERC approval in March 1998. If FERC approves
the agreements as filed, PP&L would be required to write off a portion of
its stranded costs applicable to these customers. The amount of this
write-off is currently estimated at approximately $28 million after-tax, or
17 cents per share of common stock. FERC action on this matter is expected
in mid-1998.
4. Rate Matters
Base Rate Filing with the PUC
Reference is made to PP&L Resources' and PP&L's Annual Reports to the
SEC on Form 10-K for the year ended December 31, 1997, regarding the PUC
Decision's treatment of the recovery of Pennsylvania Gross Receipts Tax
(GRT) on uncollectible revenues. PP&L had requested an allowance for GRT
on the full amount of revenue approved by the PUC, while the OCA had
proposed a $745,000 annualized adjustment to disallow GRT on revenues that
PP&L will not be able to collect. The PUC had rejected the OCA's proposed
adjustment. The Commonwealth Court reversed the PUC Decision and remanded
that issue to the PUC for adjustment of the allowance. The recommended
decision of the Administrative Law Judge in PP&L's PUC restructuring
proceeding (see Financial Note 2) accepted PP&L's proposal to reflect the
retail rate impacts associated with this item in the rates established in
that proceeding.
5. Sales to Other Electric Utilities
PP&L provided Atlantic with 125,000 kilowatts of capacity (summer
rating) and related energy from its wholly owned coal-fired stations.
Sales to Atlantic under that agreement expired in March 1998. PP&L expects
to be able to resell the returning capacity and energy at market prices.
PP&L will provide JCP&L with 378,000 kilowatts of capacity and related
energy from all of its generating units during 1998. This amount will
decline to 189,000 kilowatts in 1999. The agreement with JCP&L will
terminate on December 31, 1999. PP&L expects to be able to resell the
returning capacity and energy at market prices.
Under a separate agreement, PP&L is providing 150,000 kilowatts of
additional capacity and energy to JCP&L. This capacity and energy will
increase to 200,000 kilowatts in June 1998, and then to 300,000 kilowatts
in June 1999 through the end of the agreement in May 2004. Prices for this
capacity and energy reflect market conditions.
6. Credit Arrangements and Financing Activity
From January through April 1998, PP&L Resources issued $31 million of
common stock through the DRIP.
In March 1998, the 364-day revolving credit agreement for PP&L and
PP&L Capital Funding was increased from $150 million to $350 million. This
increase, when added to the $300 million five-year revolving credit
agreement of PP&L and PP&L Capital Funding, brings to $650 million the
total amount of revolving credit available to PP&L and PP&L Capital Funding
under these joint agreements. As of March 31, 1998, $122 million was
outstanding under the five-year revolving credit agreement.
In March 1998, PP&L Capital Funding sold $60 million of medium-term
notes having a five-year term. The proceeds from this sale were used to
repay $60 million of short-term borrowings under the revolving credit
facilities described above to provide interim financing for investments
made by PP&L Global. As of March 31, 1998, $162 million of these medium-
term notes were outstanding.
PP&L Capital Funding also established a commercial paper program in
March 1998. As with all PP&L Capital Funding debt, the commercial paper is
guaranteed by PP&L Resources. Through April 30, 1998, $108 million of this
commercial paper was issued, to pay off borrowings under the five-year
revolving credit agreement. Proceeds from future commercial paper
issuances will be used to provide financing for the working capital needs
of PP&L Resources and its subsidiaries.
On April 1, 1998, PP&L retired $150 million principal amount of First
Mortgage Bonds, 5-1/2% series that matured on that date.
On May 5, 1998 PP&L issued $200 million First Mortgage Bonds, 6-1/8%
Reset Put Securities Series due 2006. In connection with this issuance,
PP&L assigned to a third party the option to call the bonds from the
holders on May 1, 2001. These bonds will mature on May 1, 2006, but will
be required to be surrendered by the existing holders on May 1, 2001 either
through the exercise of the call option by the callholder or, if such
option is not exercised, through the automatic exercise of a mandatory put
by the trustee on behalf of the bondholders. If the call option is
exercised, the bonds will be remarketed and the interest rate will be reset
for the remainder of their term to the maturity date. If the call option
is not exercised, the mandatory put will be exercised and PP&L will be
required to repurchase the bonds at 100% of their principal amount on May
1, 2001. Proceeds from the sale of the bonds were used to retire $116
million of unsecured term loans and to reduce outstanding commercial paper
balances.
Refer to PP&L Resources' and PP&L's Annual Reports to the SEC on Form
10-K for the year ended December 31, 1997 for additional information on
credit arrangements and financing activities.
7. Commitments and Contingent Liabilities
There have been no material changes related to PP&L Resources' or
PP&L's commitments and contingent liabilities since the companies filed
their joint 1997 Form 10-K.
For discussion pertaining to PP&L Resources' and PP&L's credit
arrangements and financing activities, see Financial Note 6.
Nuclear Insurance
PP&L is a member of certain insurance programs which provide coverage
for property damage to members' nuclear generating stations. Facilities at
the Susquehanna station are insured against property damage losses up to
$2.75 billion under these programs. PP&L is also a member of an insurance
program which provides insurance coverage for the cost of replacement power
during prolonged outages of nuclear units caused by certain specified
conditions. Under the property and replacement power insurance programs,
PP&L could be assessed retroactive premiums in the event of the insurers'
adverse loss experience. At April 1, 1998, the maximum amount PP&L could
be assessed under these programs was about $29 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
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 of the Clean Air
Act by reducing nitrogen oxide emissions by nearly 50% through the use of
low nitrogen oxide burners. Further seasonal (i.e., 5 month) nitrogen
oxide reductions to 55% and 75% of 1990 levels for 1999 and 2003,
respectively, are specified under the Northeast Ozone Transport Region's
Memorandum of Understanding. The PA DEP has finalized regulations which
require PP&L to reduce its ozone seasonal NOx by 57% beginning in 1999.
The EPA has finalized new national standards for ambient levels of
ground-level ozone and fine particulates. Based in part on the new ozone
standard, the EPA has proposed NOx emission limits for 22 states, including
Pennsylvania, which in effect require approximately an 80% reduction from
the 1990 level in Pennsylvania in the 2005-2012 timeframe. The new
particulates standard may require further reductions in both NOx and SO2
and may extend the reductions from seasonal to year round.
Under the Clean Air Act, the EPA has been studying the health effects
of hazardous air emissions from power plants and other sources, in order to
determine whether those emissions should be regulated. Recently, the EPA
released a technical report of its findings to-date. The EPA concluded
that mercury is the utility air toxic of greatest concern but that more
evaluation is needed before it can determine whether regulation of air
toxics from fossil fuel plants is necessary.
Expenditures to meet the 2000 acid rain and 1999 NOx reduction
requirements are included in the table of projected construction
expenditures in the section entitled "Financial Condition - Capital
Expenditure Requirements" in the Review of the Financial Condition and
Results of Operations in the 1997 Form 10-K. PP&L currently estimates that
additional capital expenditures and operating costs for environmental
compliance under the Clean Air Act will be incurred beyond 2002 in amounts
which are not now determinable but which could be material.
Water and Residual Waste
DEP residual waste regulations set forth requirements for existing ash
basins at PP&L's coal-fired generating stations. Any new ash disposal
facility must meet the rigid siting and design standards set forth in the
regulations. To address these DEP regulations, PP&L has installed dry fly
ash handling systems at most of its power stations, which eliminate the
need for ash basins. In other cases, PP&L has modified the existing
facilities to allow continued operation of the ash basins under a new DEP
permit. Any groundwater contamination caused by the basins must also be
addressed.
Groundwater degradation related to fuel oil leakage from underground
facilities and seepage from coal refuse disposal areas and coal storage
piles has been identified at several PP&L generating stations. Remedial
work related to oil leakage is substantially completed at two generating
stations. At this time, the only other remedial work being planned is to
abate a localized groundwater degradation problem associated with a waste
disposal impoundment at the Montour plant.
The recently issued final NPDES permit for the Montour plant contains
stringent limits for iron and chlorine discharges. Depending on the
results of a toxic reduction study to be conducted, additional water
treatment facilities or operational changes may be needed at this plant.
Capital expenditures through the year 2002 to comply with the residual
waste regulations, to correct groundwater degradation at fossil-fueled
generating stations, and to address waste water control at PP&L facilities
are included in the table of construction expenditures in the section
entitled "Financial Condition - Capital Expenditure Requirements" in the
Review of the Financial Condition and Results of Operations in the 1997
Form 10-K. In this regard, PP&L currently estimates that $6.5 million of
additional capital expenditures may be required in the next four years to
close some of the ash basins and address other ash basin issues at various
generating plants. Additional capital expenditures could be required
beyond the year 2002 in amounts which are not now determinable but which
could be material. Actions taken to correct groundwater degradation, to
comply with the DEP's regulations and to address waste water control are
also expected to result in increased operating costs in amounts which are
not now determinable but which could be material.
Superfund and Other Remediation
In 1995, PP&L entered into a consent order with the DEP to address a
number of sites where PP&L may be liable for remediation of contamination.
This may include potential PCB contamination at certain PP&L substations
and pole sites; potential contamination at a number of coal gas
manufacturing facilities formerly owned and operated by PP&L; and oil or
other contamination which may exist at some of PP&L's former generating
facilities. As of March 31, 1998, PP&L has completed work on slightly more
than half of the sites included in the consent order.
At March 31, 1998, PP&L had accrued $8.1 million, representing the
amount PP&L can reasonably estimate it will have to spend to remediate
sites involving the removal of hazardous or toxic substances, including
those covered by the consent order mentioned above. Future cleanup or
remediation work at sites currently under review, or at sites not currently
identified, may result in material additional operating costs which PP&L
cannot estimate at this time. In addition, certain federal and state
statutes, including Superfund and the Pennsylvania Hazardous Sites Cleanup
Act, empower certain governmental agencies, such as the EPA and the DEP, to
seek compensation from the responsible parties for the lost value of
damaged natural resources. The EPA and the DEP may file such compensation
claims against the parties, including PP&L, held responsible for cleanup of
such sites. Such natural resource damage claims against PP&L could result
in material additional liabilities.
General
Due to the environmental issues discussed above or other environmental
matters, PP&L may be required to modify, replace or cease operating certain
facilities to comply with statutes, regulations and actions by regulatory
bodies or courts. In this regard, PP&L also may incur capital
expenditures, operating expenses and other costs in amounts which are not
now determinable but which could be material.
Source of Labor Supply
At March 31, 1998, PP&L had a total of 6,337 full-time employees.
Approximately 65 percent of these full-time employees are represented by
the IBEW. The labor agreement with the IBEW expires on May 17, 1998.
Representatives of PP&L and the IBEW are currently meeting to negotiate a
new agreement.
8. New Accounting Standards
In February 1998, the FASB issued SFAS 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" which is effective for
fiscal years beginning after December 15, 1997. The adoption of this
statement is not expected to have a material impact on the financial
statements of PP&L Resources or PP&L.
<PAGE>
PP&L Resources, Inc. and PP&L, Inc.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The financial condition and results of operations of PP&L are
currently the principal factors affecting the financial condition and
results of operations of PP&L Resources. Unless specifically noted,
fluctuations are primarily due to activities of PP&L. This discussion
should be read in conjunction with the section entitled "Review of the
Financial Condition and Results of Operations of PP&L Resources, Inc. and
PP&L, Inc." in PP&L Resources' and PP&L's Annual Report to the SEC on Form
10-K for the year ended December 31, 1997.
Terms and abbreviations appearing in Management's Discussion and
Analysis of Financial Condition and Results of Operations are explained in
the glossary.
Forward-looking Information
Certain statements contained in this Form 10-Q concerning
expectations, beliefs, plans, objectives, goals, strategies, future events
or performance and underlying assumptions and other statements which are
other than statements of historical facts, are "forward-looking statements"
within the meaning of the federal securities laws. Although PP&L Resources
and PP&L believe that the expectations reflected in these statements are
reasonable, there can be no assurance that these expectations will prove to
have been correct. These forward-looking statements involve a number of
risks and uncertainties, and actual results may differ materially from the
results discussed in the forward-looking statements. The following are
among the important factors that could cause actual results to differ
materially from the forward-looking statements: state and federal
regulatory developments, especially the PUC's final order on PP&L's
April 1, 1997 restructuring filing; new state or federal legislation;
national or regional economic conditions; weather variations affecting
customer energy usage; competition in retail and wholesale power markets;
the need for and effect of any business or industry restructuring; PP&L
Resources' and PP&L's profitability and liquidity; new accounting
requirements or new interpretations or applications of existing
requirements; system conditions and operating costs; performance of new
ventures; political, regulatory or economic conditions in foreign
countries; exchange rates; and PP&L Resources' and PP&L's commitments and
liabilities. Any such forward-looking statements should be considered in
light of such important factors and in conjunction with PP&L Resources' and
PP&L's other documents on file with the SEC.
Results of Operations
The following discussion explains material changes in principal items
on the Consolidated Statement of Income comparing the three months ended
March 31, 1998, to the comparable period ended March 31, 1997.
The Consolidated Statement of Income reflects the results of past
operations and is not intended as any indication of the results of future
operations. Future results of operations will necessarily be affected by
various and diverse factors and developments. Furthermore, because results
for interim periods can be disproportionately influenced by various factors
and developments and by seasonal variations, the results of operations for
interim periods are not necessarily indicative of results or trends for the
year.
Earnings
Three Months Ended March 31,
1998 1997
Earnings per share - excluding
weather variances $0.71 $0.76
Weather variances on billed sales (0.11) (0.04)
Earnings per share - reported $0.60 $0.72
Excluding the impact of weather, earnings per share were $.05 lower
for the three months ended March 31, 1998, when compared with the same
period in 1997. Earnings changes for these periods, excluding weather
variances, were primarily the net effect of the following:
Three Months Ended
March 31, 1998 vs.
March 31, 1997
(Per Share)
o Lower retail electric revenues, due to lower
unbilled revenues and lower sales volume,
partially due to the closing of a steel plant; $ (0.02)
o Higher sales of reservation of electrical
output and capacity credits to other utilities; 0.05
o Lower earnings from PP&L Global,
primarily due to higher interest costs related
to additional investments; (0.02)
o Net reduction in revenues due to the
phase-down of the contract with JCP&L; (0.02)
o Higher other operating costs, primarily due
to increased costs associated with computer
information systems and the timing of plant
maintenance work; and (0.03)
o Higher depreciation expense due to nuclear
plant additions and an increase in nuclear
plant removal charges. (0.01)
Earnings Change $(0.05)
The costs of establishing the organization and programs to meet retail
competition in Pennsylvania are estimated to be approximately $35 million
more in 1998 than in 1997. These expenses will adversely affect 1998
earnings. In addition, the settlement agreements with 16 small utilities,
if approved by the FERC as filed, would require PP&L to write off a portion
of its stranded costs applicable to these customers. The amount of this
write-off is currently estimated at approximately $28 million after-tax, or
17 cents per share of common stock. See Financial Note 3 for additional
information. The reduction in contractual bulk power sales to JCP&L and
other major utilities will also continue to adversely impact earnings over
the next few years. However, the efforts of the Energy Marketing Center to
resell the returning electric energy and capacity on the open market, along
with its other energy trading activities, is expected to continue to offset
the loss in revenues from declining contractual sales. Finally, the
Customer Choice Act and the regulatory and business developments related
thereto could have a major impact on the future financial performance of
PP&L.
PUC Restructuring Proceeding
Reference is made to PP&L Resources' and PP&L's Annual Reports to the
SEC on Form 10-K for the year ended December 31, 1997, regarding PP&L's
April 1, 1997 filing of its restructuring plan with the PUC pursuant to the
Customer Choice Act. On April 7, 1998, the recommended decision of the
Administrative Law Judge was issued. The following are the major elements
of the recommended decision:
1. The recommended decision makes certain adjustments to PP&L's
stranded cost claim which had been proposed by the OTS. Although the
recommended decision does not quantify the level of stranded cost recovery
that would result from the recommended decision, PP&L estimates the impact
of the adjustments at approximately $350 million and the level of permitted
stranded cost recovery at $4.14 billion.
2. The recommended decision accepts PP&L's estimates of future
competitive market prices used to determine stranded costs.
3. The recommended decision accepts PP&L's proposed code of conduct
and rejects proposals to prohibit PP&L from using its corporate name in the
competitive marketplace.
4. The recommended decision accepts PP&L's proposed consumer
education program and universal service program.
5. The recommended decision adopts the schedule for retail customer
choice contained in the Customer Choice Act, phasing in all customers over
three years beginning on January 1, 1999.
On April 27, 1998, all of the major parties, including PP&L, filed
exceptions to the recommended decision. PP&L's exceptions generally
support the recommended decision, but contest several specific adjustments
made in the recommended decision to PP&L's stranded cost claim. The
parties' replies to these exceptions were filed on May 7. The PUC will
review the recommended decision, exceptions and replies to exceptions and
is expected to issue its final order in the proceeding on June 4, 1998.
The PUC's final order may result in changes to components or
assumptions in PP&L's restructuring plan or to findings or conclusions in
the recommended decision that could have an adverse effect on the level of
the CTC used to collect stranded costs from customers, the amount of
stranded costs that are recoverable through the CTC or the overall amount
of revenues to be collected from customers. Accordingly, PP&L Resources
and PP&L are unable to predict the ultimate effect of the Customer Choice
Act or the PUC's final order in the restructuring proceeding on their
financial position, their results of operation, future PP&L rate levels,
internally generated funds, the need or ability to issue securities to meet
future capital requirements or the ability to maintain the common stock
dividend at the current level.
Electric Energy Sales
The increases (decreases) in PP&L's electric energy sales were
attributable to the following:
March 31, 1998 vs. March 31, 1997
Three Months Ended
(Millions of kWh)
Change % Change
Retail Electric Sales:
Residential (278) (7.6)%
Commercial (67) (2.5)
Industrial (44) (1.8)
Other 3 8.0
Total (386) (4.4)
Wholesale Energy 4,960 128.1
The decrease in retail electric sales was primarily due to milder
weather during the first quarter of 1998 as compared to 1997. If normal
weather conditions had been experienced in the first quarter of both 1997
and 1998, total retail electric sales for the first three months of 1998
would have decreased by about 43 million kWh, or 0.5%, from 1997;
residential sales would have decreased by 0.1%; and commercial sales would
have increased by 0.1%. The decrease in energy delivered to industrial
customers was primarily due to a steel plant closing. If the steel
industry is excluded, energy delivered to industrial customers would have
increased 0.8% in the first quarter of 1998, and total retail electric
sales would have increased 0.2% in the same period.
The increase in wholesale energy sales, which include sales to other
utilities and energy marketers through contracts, spot market transactions
or power pool arrangements, was primarily the result of increased
generation from PP&L units and the increased activity of the Energy
Marketing Center.
Operating Revenues: Electric Operations
The decrease in operating revenues from electric operations was
attributable to the following:
March 31, 1998 vs. March 31, 1997
Three Months Ended
(Millions of Dollars)
Retail Electric Revenues
Weather effect $(26)
Sales volume and sales mix effect (10)
Unbilled revenues (6)
Other, net 3
$(39)
Operating revenues from electric operations decreased by $39 million,
or 6.0%, for the three months ended March 31, 1998 when compared to the
same period in 1997. Most of the decrease can be attributed to the milder
weather in the Northeast during the first quarter of 1998. This period saw
the largest weather impact on earnings in the 27 years PP&L has tracked
weather effects.
Weather-normalized retail electric revenues also declined during the
first quarter of 1998. This was due in part to a steel plant closing.
Operating Revenues: Wholesale Energy and Trading Activities
The increase in total operating revenues from wholesale energy and
trading activities was attributable to the following:
March 31, 1998 vs. March 31, 1997
Three Months Ended
(Millions of Dollars)
Market-based transactions $ 85
PJM 18
Cost-based contracts (7)
Reservation/capacity credits 15
Other 4
$115
Revenues from wholesale energy and trading activities increased by
$115 million for the three months ended March 31, 1998 when compared to the
same period in 1997, despite the phase-down of the capacity and energy
sales agreement with JCP&L. The first quarter market-based transactions
increased $85 million over the same period in 1997. This increase reflects
PP&L's continued emphasis on competing in wholesale markets. This emphasis
is also reflected in the $15 million increase in revenues from the sales of
reservation charges and capacity credits in 1998. PP&L was also able to
supply PJM with more energy in the first quarter of 1998 due to warm
weather, which resulted in lower PP&L customer load, and increased
availability of generating units.
Energy Related Businesses
Energy related businesses contributed $5 million and $6 million to
Operating Income for the three months ended March 31, 1998 and 1997,
respectively. These results were primarily from PP&L Global's investments
in world-wide energy projects. Energy related businesses - PP&L Global,
PP&L Spectrum and H.T. Lyons - are expected to provide an increasing share
of PP&L Resources' earnings in the future.
Energy Purchases
Energy purchases for the three months ended March 31, 1998 increased
$98 million over the comparable period in 1997. This increase was
primarily due to greater quantities of energy purchased from other
utilities to meet increased trading activities of the Energy Marketing
Center. This increase was slightly offset by a decrease in purchases from
PJM, due to less costly generation available from other power sources and
the buyout of certain NUG contracts.
Financial Condition
After the PUC issues its final order in PP&L's restructuring
proceeding (see "PUC Restructuring Proceeding" on page 19), PP&L Resources
plans to conduct an overall assessment of its financial position in order
to identify additional measures to be taken to meet the challenges of the
competitive marketplace. Among other things, this assessment will include
a review of operating expenses, capital expenditures and the book value of
generating assets. It also will include an examination of the appropriate
level of PP&L Resources' common stock dividend to determine the dividend
payout ratio that allows PP&L Resources to properly balance current returns
to shareowners through dividends with the opportunity for growth in
shareowner value through the reinvestment of retained earnings.
Financing Activities
The following financing activities have occurred to date in 1998:
o From January through April 1998, PP&L Resources issued $31 million
of common stock through the DRIP.
o In March 1998, the 364-day revolving credit agreement for PP&L and
PP&L Capital Funding was increased from $150 million to $350
million. This increase, when added to the $300 million five-year
revolving credit agreement of PP&L and PP&L Capital Funding,
brings to $650 million the total amount of revolving credit
available to PP&L and PP&L Capital Funding under these joint
agreements. As of March 31, 1998, $122 million was outstanding
under the five-year revolving credit agreement.
o In March 1998, PP&L Capital Funding sold $60 million of medium-
term notes having a five-year term.
o PP&L Capital Funding also established a commercial paper program
in March 1998. Through April 30, 1998, $108 million of commercial
paper was issued to pay off borrowings under the five-year
revolving credit agreement.
o On April 1, 1998, PP&L retired $150 million principal amount of
First Mortgage Bonds, 5-1/2% series that matured on that date.
o On May 5, 1998 PP&L issued $200 million First Mortgage Bonds, 6-
1/8% Reset Put Securities Series due 2006. In connection with
this issuance, PP&L assigned to a third party the option to call
the bonds from the holders on May 1, 2001. These bonds will
mature on May 1, 2006, but will be required to be surrendered by
the existing holders on May 1, 2001 either through the exercise of
the call option by the callholder or, if such option is not
exercised, through the automatic exercise of a mandatory put by
the trustee on behalf of the bondholders. If the call option is
exercised, the bonds will be remarketed and the interest rate will
be reset for the remainder of their term to the maturity date. If
the call option is not exercised, the mandatory put will be
exercised and PP&L will be required to repurchase the bonds at
100% of their principal amount on May 1, 2001.
Refer to Financial Note 6 for additional information on credit
arrangements and financing activities.
Financing and Liquidity
The change in cash and cash equivalents for PP&L Resources for the
three months ended March 31, 1998 increased $127 million from the
comparable period in 1997. The reasons for this change were:
o A $28 million decrease in cash provided by operating activities,
partially due to a revenue loss associated with the energy
credits mandated for pilot program customers and to payments for
a buyout of a contract with a non-utility generator.
o A $159 million increase in cash used in investing activities,
primarily due to an increase in the amount of investment in
electric energy projects by PP&L Global. Fewer purchases and
sales of available-for-sale securities and lower proceeds from
the sale of nuclear fuel resulted in less cash being provided by
investing activities.
o A $314 million increase in cash provided by financing activities
as a result of a $60 million increase in the issuance of long-
term debt and a $210 decrease in the retirement of long-term
debt. In addition, the increase in short-term debt was $44
greater in the first quarter of 1998 than in the comparable
period in 1997.
PP&L's projected internally generated funds would be sufficient to
permit PP&L to retire about $391 million of its long-term debt during 1999-
2002.
Outside financing, in amounts not currently determinable, or the
liquidation of certain financial investments, may be required over the next
five years to finance investments in world-wide energy projects by PP&L
Global.
Financial Indicators
The ratio of PP&L Resources pre-tax income to interest charges was 4.4
and 4.6 for the three months ended March 31, 1998 and 1997, respectively.
The annual per share dividend rate on common stock remained unchanged at
$1.67 per share. The ratio of the market price to book value of common
stock was 137% at March 31, 1998, compared with 118% at March 31, 1997.
Unregulated Investments
PP&L Global continues to pursue opportunities to develop and acquire
electric generation, transmission and distribution facilities in the United
States and abroad.
As of March 31, 1998, PP&L Global had investments and commitments of
approximately $465 million in distribution, transmission and generation
facilities in the United Kingdom, Bolivia, Peru, Argentina, Spain,
Portugal, Chile and El Salvador. PP&L Global's major investments to date
are SWEB, Emel and DelSur.
During the first quarter of 1998, PP&L Global acquired an additional
369,000 shares of Emel at a cost of approximately $6 million, increasing
its ownership interest to 27.6%. In February 1998, PP&L Global and Emel
acquired a 75% interest in DelSur, an electric distribution company serving
193,000 customers in El Salvador, for approximately $180 million. Under
the purchase agreement, PP&L Global directly acquired 37.5% of DelSur and
Emel acquired the other 37.5%. DelSur is one of five electricity
distribution companies in El Salvador that are being privatized by the
government.
PP&L Resources has two other unregulated subsidiaries. PP&L Spectrum
offers energy-related products and services. H.T. Lyons is a heating,
ventilating and air-conditioning firm. Other subsidiaries may be formed by
PP&L Resources to take advantage of new business opportunities.
Commitments and Contingent Liabilities
There have been no material changes related to PP&L Resources' or
PP&L's commitments and contingent liabilities since the companies filed
their joint 1997 Form 10-K.
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 "PUC Restructuring Proceeding" for a discussion
of PP&L's April 1997 filing of its restructuring plan pursuant to the
Customer Choice Act.
In February 1997, PP&L filed a proposed retail access pilot program
with the PUC in accordance with the applicable provisions of the Customer
Choice Act and PUC guidelines. A number of the major parties, including
PP&L, entered into a joint settlement agreement resolving all of the issues
in the Pennsylvania utilities' pilot proceedings. In August 1997, the PUC
issued an order modifying this settlement and modifying and approving
PP&L's pilot program. In October 1997, PP&L submitted its pilot program
compliance filing to the PUC. Retail customers participating in the PP&L
and other pilot programs began to receive power from their supplier of
choice in November 1997. Under its pilot program, approximately 60,000
PP&L residential, commercial and industrial customers have chosen their
electric supplier. PP&L will continue to provide all transmission and
distribution, customer service and back-up energy supply services to
participating customers in its service area.
Only those alternative suppliers licensed by the PUC and in compliance
with the state tax obligations set forth in the Customer Choice Act may
participate in the pilot programs. To date, approximately 50 suppliers have
obtained such licenses to participate in the pilot programs.
In June 1997, the PUC approved PP&L's application for a license to act
as an electric generation supplier. This license permits PP&L to
participate in the various retail access pilot programs of PP&L and of the
other Pennsylvania utilities, and PP&L currently is offering electric
supply to the participating customers of those utilities throughout the
state.
Federal Activities
Reference is made to Financial Note 3 for a discussion of PP&L's
settlement with 16 small utilities.
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 rules also provided that
utilities are entitled to recover from certain wholesale requirements
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 if the utility wishes to seek such
recovery. For requirements contracts signed before that 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 required that power pools file pool-wide open access transmission
tariffs and modified bilateral coordination agreements reflecting the
removal of discriminatory provisions by December 31, 1996.
In March 1997, the FERC issued Orders 888-A and 889-A. Among other
things, these orders required utilities to make certain changes to the non-
rate terms and conditions of their open access transmission tariffs. In
compliance with Order 888-A, in July 1997 PP&L filed a revised open access
transmission tariff.
In December 1996, the PJM companies submitted a 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 FERC accepted the PJM tariff and proposed rates, subject to refund, and
they went into effect on March 1, 1997. In June 1997, all of the PJM
companies except PECO (the PJM Supporting Companies) filed proposals with
the FERC to amend the PJM tariff and restructure the PJM pool. PECO filed
a separate request with the FERC to amend the PJM tariff. Furthermore,
PECO and certain electric marketers submitted significantly different
proposals to restructure the PJM pool.
In November 1997, the FERC approved, with certain modifications, the
PJM Supporting Companies' proposals for transforming the PJM into an ISO.
In summary, the FERC order: (i) approved the PJM's open access
transmission rates based on geographic zones, but required PJM to file a
single PJM system-wide rate proposal by 2002; (ii) accepted the PJM
Supporting Companies' methodology to price transmission when the system is
congested and to charge these congestion costs to system users in addition
to the open access transmission rates, but ordered PJM to file an
additional proposal to address concerns raised over price certainty for
buyers and sellers during periods of congestion; (iii) determined that the
ISO is to operate both the transmission system and the power exchange which
provides for the purchase and sale of spot energy within the PJM market;
and (iv) accepted the PJM Supporting Companies' proposal regarding
mandatory installed capacity obligations for all entities serving firm
retail and wholesale load within PJM, but rejected their proposal for
allocating the capacity benefits which result from PJM's ability to import
power from other regional power pools.
The PJM Supporting Companies and numerous other parties have filed
requests for amendment and/or rehearing of virtually every portion of the
FERC's PJM ISO order. PP&L also has filed its own request for amendment
and/or rehearing. PP&L's primary issue with the FERC's order relates to a
requirement that existing wholesale contracts for sales service and
transmission service be modified to have the new PJM transmission tariff
applied to service under these existing contracts. If PP&L were required
to modify these existing contracts and apply the PJM tariff to them, PP&L
could lose as much as $3-4 million in transmission revenues in 1998 -- but
a lesser amount in the following years -- from several wholesale sales and
transmission service contracts that were negotiated prior to industry
deregulation.
In July 1997, the FERC accepted a new wholesale power tariff that
permits PP&L to sell capacity and energy at market-based rates, both inside
and outside the PJM area, subject to certain conditions. This tariff
allows PP&L to become more active in the wholesale market with utilities
and other entities, and removes pricing restrictions which in the past had
limited PP&L to charging at or below cost-based rates.
In September 1997, PP&L filed a request with the FERC to lower the
applicable PP&L revenue requirement currently set forth in the PJM open
access transmission tariff. The new revenue requirement results from
PP&L's use of the same test year and cost support data used in the PUC
restructuring proceeding. PP&L requested that the new revenue requirement
take effect on November 1, 1997. In February 1998, the FERC accepted the
proposed rates, subject to refund, and set the amount of the decrease in
the revenue requirement for hearing.
In September 1997, PP&L also filed a request with the FERC to approve
new revenue requirements and rates for the PP&L open access transmission
tariff under FERC Order 888. No customers currently take service under
that tariff. As with the PJM tariff filing, the new revenue requirements
and rates requested by PP&L are based on the same test year and cost
support data used by PP&L in its PUC restructuring proceeding. In February
1998, the FERC rejected PP&L's tariff as unnecessary, in light of the PJM
open access transmission tariff.
In January 1998, the United States Department of Energy approved
PP&L's application for an export license to sell capacity and/or energy to
electric utilities in Canada. This export license allows PP&L to sell
either its own capacity and energy not required to serve domestic
obligations or power purchased from other utilities.
Year 2000 Computer Issue
PP&L Resources and its subsidiaries utilize computer-based systems
throughout their businesses. In the year 2000, these systems will face a
potentially serious problem with recognizing calendar dates. Without
corrective action, this problem could result in computer shutdown or
erroneous calculations. Plans and procedures have been developed to
achieve Year 2000 compliance by assessing and remediating the problem in
application software, hardware, plant control systems and devices
containing embedded microprocessors. It is anticipated that this project
will be completed on a timely basis, with all major computer systems to be
fully Year 2000 compliant by mid-1999. Efforts are also underway with
respect to compliance by critical suppliers and business partners. Based
upon present assessments, PP&L Resources estimates that it will incur
approximately $15 million in Year 2000 remediation costs. These costs are
being expensed as incurred.
<PAGE>
PP&L RESOURCES, INC. AND
PP&L, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Notes to Financial Statements for information
concerning rate matters and PP&L's restructuring proceeding before the PUC
under the Customer Choice Act.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
Report dated January 28, 1998
Item 5. Other Events
Information regarding the retirement of the Senior Vice
President-Financial of PP&L Resources, Inc. and PP&L, Inc.
GLOSSARY OF TERMS AND ABBREVIATIONS
Atlantic - Atlantic City Electric Company
Clean Air Act (Federal Clean Air Act Amendments of 1990) - legislation
enacted to address environmental issues including acid rain, ozone and
toxic air emissions.
CTC - Competitive transition charge
Customer Choice Act - (Pennsylvania Electricity Generation Customer Choice
and Competition Act) - legislation enacted to restructure the state's
electric utility industry to create retail access to a competitive market
for generation of electricity
DelSur - Distributidora de Electricidad del Sur, an electric distribution
company in El Salvador
DEP - Pennsylvania Department of Environmental Protection
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.
EITF - Emerging Issues Task Force
Emel - Empresas Emel, S.A., a Chilean electric distribution holding company
Energy Marketing Center - organization within PP&L responsible for
marketing and trading wholesale energy
EPA - Environmental Protection Agency
FASB (Financial Accounting Standards Board) - a rulemaking organization
that establishes financial accounting and reporting standards.
FGD - Flue gas desulfurization equipment installed at coal-fired power
plants to reduce sulfur dioxide emissions.
FERC (Federal Energy Regulatory Commission) - federal agency that regulates
interstate transmission and sale of electricity and related matters.
GRT - Gross Receipts Tax
H.T. Lyons - H.T. Lyons, Inc., a PP&L Resources unregulated subsidiary
specializing in heating, ventilating and air-conditioning.
IBEW - International Brotherhood of Electrical Workers
ISO - Independent System Operator
JCP&L - Jersey Central Power & Light Company
NOx - Nitrogen oxide
NPDES - National Pollutant Discharge Elimination System
NUG (Non-Utility Generator) - generating plants not owned by regulated
utilities. If the NUG meets certain criteria, its electrical output must
be purchased by public utilities as required by PURPA.
OCA - Pennsylvania Office of Consumer Advocate
OTS - PUC Office of Trial Staff
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 (PJM Interconnection, L.L.C.) - operates the electric transmission
network and electric energy market in the mid-Atlantic region of U.S.
PP&L - PP&L, Inc.
PP&L Capital Funding - PP&L Capital Funding, Inc., PP&L Resources'
financing subsidiary
PP&L Global - PP&L Global, Inc., a PP&L Resources unregulated subsidiary
which invests in and develops world-wide power projects
PP&L Resources - PP&L Resources, Inc., the parent holding company of PP&L,
PP&L Global, PP&L Spectrum and other subsidiaries
PP&L Spectrum - PP&L Spectrum, Inc., a PP&L Resources unregulated
subsidiary which offers energy-related products and services
PUC (Pennsylvania Public Utility Commission) - state agency that regulates
certain ratemaking, services, accounting, and operations of Pennsylvania
utilities
PUC Decision - final order issued by the PUC on September 27, 1995
pertaining to PP&L's base rate case filed in December 1994.
SEC - Securities and Exchange Commission
SFAS (Statement of Financial Accounting Standards) - accounting and
financial reporting rules issued by the FASB.
SO2 - Sulfur dioxide
Superfund - Federal and state legislation that addresses remediation of
contaminated sites.
SWEB - South Western Electricity plc, a British regional electric utility
company.
Year 2000 - A set of date-related problems that may be experienced by a
software system or application.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized. The signature for each
undersigned company shall be deemed to relate only to matters having
reference to such company or its subsidiary.
PP&L Resources, Inc.
(Registrant)
PP&L, Inc.
(Registrant)
Date: May 13, 1998 /s/ John R. Biggar
John R. Biggar
Senior Vice President - Financial
(PP&L Resources, Inc. and PP&L, Inc.)
/s/ Joseph J. McCabe
Joseph J. McCabe
Vice President & Controller
(PP&L Resources, Inc. and PP&L, Inc.)
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated statement of income, consolidated balance sheet, and consolidated
statement of cash flows for the form 10-Q dated March 31, 1998 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
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