<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, 1997
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 Pennsylvania Power & Light Company 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 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,
164,188,649 shares outstanding at
April 30, 1997
Pennsylvania Power & Light Co. Common stock, no par value,
157,300,382, shares outstanding and
all held by PP&L Resources, Inc. at
April 30, 1997
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PP&L RESOURCES, INC.
AND
PENNSYLVANIA POWER & LIGHT COMPANY
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PP&L Resources, Inc.
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Pennsylvania Power & Light Company
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Notes to Financial Statements
PP&L Resources, Inc. and Pennsylvania
Power & Light Company
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PP&L Resources, Inc. and Pennsylvania Power
& Light Company
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, 1997 and December 31, 1996, and the
Consolidated Statement of Income and Consolidated Statement of Cash Flows for
the periods ended March 31, 1997 and 1996. PP&L Resources is the parent
holding company of PP&L, PMDC, and Spectrum. PP&L comprises 97 percent
of PP&L Resources' assets. All nonutility operating transactions are included
in "Other Income and Deductions--Net" in PP&L Resources' Consolidated
Statement of Income.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(Millions of Dollars, except per share data)
<CAPTION>
Three Months
Ended March 31,
1997 1996
<S> <C> <C>
Operating Revenues ..................................... $786 $789
Operating Expenses
Operation
Fuel................................................ 111 124
Power purchases..................................... 116 91
Other............................................... 117 122
Maintenance........................................... 35 40
Depreciation (including amortized depreciation)....... 92 90
Income taxes ......................................... 88 89
Taxes, other than income ............................. 56 57
615 613
Operating Income........................................ 171 176
Other Income and (Deductions) - Net..................... 7 1
Income Before Interest Charges and Dividends on
Preferred Stock ...................................... 178 177
Interest Charges
Long-term debt........................................ 51 52
Short-term debt and other............................. 3 2
54 54
Preferred Stock Dividend Requirements................... 7 7
Net Income.............................................. $117 $116
Earnings Per Share of Common Stock (a).................. $0.72 $0.73
Average Number of Shares Outstanding (thousands)........163,192 159,890
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 BALANCE SHEET
(Millions of Dollars)
<CAPTION>
March 31, December 31,
1997 1996
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Property, Plant and Equipment
Electric utility plant in service - at original cost.......... $9,895 $9,824
Accumulated depreciation ................................... (3,407) (3,337)
6,488 6,487
Construction work in progress - at cost....................... 149 172
Nuclear fuel owned and leased - net of amortization .......... 176 170
Other leased property - net of amortization .................. 74 76
Electric utility plant - net................................ 6,887 6,905
Other property - (net of depreciation, amortization
and depletion 1997, $55; 1996, $54)......................... 54 55
6,941 6,960
Investments
Investment in and advances to electric energy
projects - at equity ....................................... 240 224
Affiliated companies - at equity ............................. 17 17
Nuclear plant decommissioning trust fund ..................... 131 128
Financial investments......................................... 129 133
Other - at cost or less ...................................... 20 18
537 520
Current Assets
Cash and cash equivalents .................................... 72 101
Current financial investments ................................ 22 73
Accounts receivable (less reserve: 1997, $20; 1996, $25)
Customers ................................................ 210 196
Other..................................................... 17 19
Unbilled revenues............................................. 83 85
Fuel, materials and supplies - at average cost................ 194 201
Deferred income taxes ........................................ 27 21
Other......................................................... 334 53
959 749
Regulatory Assets and Other Noncurrent Assets ................... 1,465 1,407
$9,902 $9,636
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,
1997 1996
(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES
Capitalization
Common equity
Common stock ................................................... $2 $2
Capital in excess of par value ................................ 1,608 1,590
Earnings reinvested............................................. 1,192 1,143
Capital stock expense and other ................................ 2 10
2,804 2,745
Preferred stock
With sinking fund requirements ................................. 295 295
Without sinking fund requirements .............................. 171 171
Long-term debt ................................................... 2,802 2,802
6,072 6,013
Current Liabilities
Commercial paper ................................................. 80
Bank loans ....................................................... 144 144
Long-term debt due within one year ............................... 30 30
Capital lease obligations due within one year .................... 80 81
Accounts payable ................................................. 114 133
Taxes accrued .................................................... 84 19
Interest accrued ................................................. 61 61
Dividends payable ................................................ 75 75
Other ............................................................ 90 78
758 621
Deferred Credits and Other Noncurrent Liabilities
Deferred investment tax credits ................................. 207 209
Deferred income taxes ............................................ 2,058 2,052
Capital lease obligations ........................................ 173 166
Other ............................................................ 634 575
3,072 3,002
Commitments and Contingent Liabilities ............................................
$9,902 $9,636
See accompanying Notes to Financial Statements.
</TABLE>
<TABLE>
PP&L RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Millions of Dollars)
<CAPTION>
Three Months
Ended March 31,
1997 1996
<S> <C> <C>
Net cash provided by operating activities................... $202 $220
Cash Flows From Investing Activities
Property, plant and equipment expenditures................. (72) (68)
Proceeds from sale of nuclear fuel to trust................ 21 3
Purchases of available-for-sale securities................. (28) (152)
Sales and maturities of available-for-sale securities...... 68 138
Investment in electric energy projects..................... (13)
Other investing activities - net.................................... 1
Net cash used in investing activities................ (24) (78)
Cash Flows From Financing Activities
Issuance of long-term debt................................. 116
Issuance of common stock................................... 17 17
Retirement of long-term debt........................................ (115)
Funds deposited for retirement of long-term debt .......... (210)
Payments on capital lease obligations...................... (19) (22)
Common and preferred dividends paid........................ (75) (73)
Net increase(decrease) in short-term debt.................. 80 (63)
Net cash used in financing activities................ (207) (140)
Net Increase (Decrease) In Cash and Cash Equivalents ....... (29) 2
Cash and Cash Equivalents at Beginning of Period ........... 101 20
Cash and Cash Equivalents at End of Period ................. $72 $22
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest (net of amount capitalized)...................... $51 $55
Income taxes.............................................. $15 $14
See accompanying Notes to Financial Statements.
</TABLE>
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<TABLE>
PENNSYLVANIA POWER & LIGHT COMPANY 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, 1997 and December 31, 1996, and the
Consolidated Statement of Income and Consolidated Statement of Cash Flows
for the periods ended March 31, 1997 and 1996. All nonutility operating
transactions are included in "Other Income and Deductions--Net" in
PP&L's Consolidated Statement of Income.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(Millions of Dollars)
<CAPTION>
Three Months
Ended March 31,
1997 1996
<S> <C> <C>
Operating Revenues .................................. $786 $789
Operating Expenses
Operation
Fuel............................................ 111 124
Power purchases................................. 116 91
Other........................................... 117 122
Maintenance........................................ 35 40
Depreciation (including amortized depreciation) ... 92 90
Income taxes....................................... 88 89
Taxes, other than income........................... 56 57
615 613
Operating Income ..................................... 171 176
Other Income and (Deductions) - Net .................. 2 3
Income Before Interest Charges........................ 173 179
Interest Charges
Long-term debt..................................... 51 52
Short-term debt and other.......................... 2 2
53 54
Net Income............................................ 120 125
Dividends on Preferred Stock.......................... 7 7
Earnings Available to PP&L Resources, Inc. .......... $113 $118
See accompanying Notes to Financial Statements.
</TABLE>
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<TABLE>
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
<CAPTION>
March 31, December 31,
1997 1996
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Property, Plant and Equipment
Electric utility plant in service - at original cost.......... $9,895 $9,824
Accumulated depreciation ................................... (3,407) (3,337)
6,488 6,487
Construction work in progress - at cost ...................... 149 172
Nuclear fuel owned and leased - net of amortization .......... 176 170
Other leased property - net of amortization .................. 74 76
Electric utility plant - net ................................ 6,887 6,905
Other property - (net of depreciation, amortization
and depletion 1997, $55; 1996, $54) ........................ 54 55
6,941 6,960
Investments
Affiliated companies - at equity ............................. 17 17
Nuclear plant decommissioning trust fund ..................... 131 128
Financial investments ........................................ 129 133
Other - at cost or less ...................................... 10 10
287 288
Current Assets
Cash and cash equivalents .................................... 45 95
Current financial investments ................................ 22 51
Accounts receivable (less reserve: 1997, $20; 1996, $25)
Customers .................................................. 210 196
Other ...................................................... 11 14
Unbilled revenues............................................. 83 85
Fuel, material and supplies - at average cost ................ 194 201
Deferred income taxes ........................................ 27 21
Other ........................................................ 334 53
926 716
Regulatory Assets and Other Noncurrent Assets .................. 1,464 1,407
$9,618 $9,371
See accompanying Notes to Financial Statements.
</TABLE>
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<TABLE>
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Millions of Dollars)
<CAPTION>
March 31, December 31,
1997 1996
(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES
Capitalization
Common equity
Common stock ........................................... $1,476 $1,476
Additional paid-in capital ............................. 57 57
Earnings reinvested .................................... 1,138 1,094
Capital stock expense and other ....................... (10) (10)
2,661 2,617
Preferred stock
With sinking fund requirements ......................... 295 295
Without sinking fund requirements ...................... 171 171
Long-term debt ........................................... 2,802 2,802
5,929 5,885
Current Liabilities
Commercial paper ......................................... 80
Bank loans ............................................... 10 10
Long-term debt due within one year ....................... 30 30
Capital lease obligations due within one year ............ 80 81
Accounts payable ......................................... 112 132
Taxes accrued ............................................ 86 21
Interest accrued ......................................... 61 60
Dividends payable ........................................ 75 75
Other .................................................... 90 78
624 487
Deferred Credits and Other Noncurrent Liabilities
Deferred investment tax credits .......................... 207 209
Deferred income taxes .................................... 2,052 2,050
Capital lease obligations ............................... 173 166
Other .................................................... 633 574
3,065 2,999
Commitments and Contingent Liabilities ....................
$9,618 $9,371
See accompanying Notes to Financial Statements.
</TABLE>
<TABLE>
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Millions of Dollars)
<CAPTION>
Three Months
Ended March 31,
1997 1996
<S> <C> <C>
Net cash provided by operating activities................... $206 $222
Cash Flows From Investing Activities
Property, plant and equipment expenditures................ (72) (68)
Proceeds from sales of nuclear fuel to trust.............. 21 3
Purchases of available-for-sale securities ............... (28) (49)
Sales and maturities of available-for-sale securities .... 46 48
Other investing activities -- net......................... 1 2
Net cash used in investing activities............... (32) (64)
Cash Flows From Financing Activities
Issuance of long-term debt................................ 116
Retirement of long-term debt....................................... (115)
Funds deposited for retirement of long-term debt.......... (210)
Payments on capital lease obligations..................... (19) (22)
Common and preferred dividends paid....................... (75) (74)
Net increase (decrease) in short-term debt................ 80 (63)
Other financing activities - net .................................. 2
Net cash used in financing activities............... (224) (156)
Net Increase (Decrease) in Cash and Cash Equivalents (50) 2
Cash and Cash Equivalents at Beginning of Period............ 95 15
Cash and Cash Equivalents at End of Period.................. $45 $17
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for
Interest (net of amount capitalized).................... $49 $55
Income taxes............................................ $16 $14
<FN>
See accompanying Notes to Financial Statements.
</TABLE>
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PP&L Resources, Inc. and Pennsylvania Power & Light Company
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, 1996.
Certain amounts in the March 31, 1996 financial statements have been
reclassified to conform to the presentation in the March 31, 1997 financial
statements.
2. PUC Restructuring Filing
In December 1996, Pennsylvania enacted the Customer Choice Act to
restructure its electric utility industry in order to create retail access
to a competitive market for the generation of electricity. In accordance
with that legislation, PP&L filed its restructuring plan with the PUC on
April 1, 1997. The PUC is required to take action on PP&L's filing by
January 1998.
Under the Customer Choice Act, the PUC is authorized to determine the
amount of PP&L's stranded costs to be recovered through a non-bypassable
competitive transition charge (CTC) to be paid by all PUC-jurisdictional
customers who receive transmission and distribution service from PP&L.
Stranded costs are defined in the Customer Choice Act as "generation-
related costs... which would have been recoverable under a regulated
environment but which may not be recoverable in a competitive generation
market and which the PUC determines will remain following mitigation by the
electric utility."
PP&L's restructuring plan includes a claim of $4.6 billion for
stranded costs. Pursuant to the Customer Choice Act, this claim is
comprised of the following categories:
1. Net plant investments and costs attributable to existing
generation plants and facilities, disposal of spent nuclear fuel,
retirement costs attributable to existing generating plants and
employee-related transition costs;
2. Prudently incurred costs related to the cancellation, buyout,
buydown or renegotiation of NUG contracts; and
3. Regulatory assets and other deferred charges typically
recoverable under current regulatory practice and cost obligations
under PUC-approved contracts with NUGs.
The following are the components of PP&L's stranded cost claim:
Amount
Category of Stranded Cost (Millions of Dollars)
Nuclear Generation(a) $2,852
Fossil Generation(a) 718
NUG Contracts 657
Regulatory Assets 384
$4,611
(a) Includes deferred income taxes related to generation assets.
In determining the appropriate amount of stranded cost recovery, the
Customer Choice Act requires the PUC to consider the extent to which an
electric utility has taken steps to mitigate stranded costs by appropriate
means that are reasonable under the circumstances. Mitigation efforts
undertaken over time prior to the enactment of the Customer Choice Act are
to be considered of equal importance by the PUC in determining an electric
utility's stranded costs as actions taken after the passage of the Customer
Choice Act. In its restructuring plan, PP&L described its extensive
efforts to mitigate its stranded costs, resulting in a reduction in its
stranded cost claim of over $1 billion.
The ultimate impact of the Customer Choice Act on PP&L's financial
health will depend on numerous factors, including:
1. The amount of stranded cost recovery approved by the PUC, the
PUC's overall treatment of PP&L's filing and the effect of the rate cap
imposed under the provisions of the Customer Choice Act;
2. The actual market price of electricity over the transition period;
3. Future sales levels; and
4. The extent to which the regulatory framework established by the
Customer Choice Act will continue to be applied.
Under the Customer Choice Act, PP&L's rates to PUC-jurisdictional
customers are capped at the level in effect on January 1, 1997 through mid-
2001 for transmission and distribution services and through the year 2005
for generation customers. By applying the CTC proposed by PP&L in its
restructuring plan (which is restricted by the rate cap) through the year
2005, PP&L anticipates collecting approximately $4 billion of its stranded
costs. Based on these projections, the remaining $600 million would be
reflected as lower cash flow to PP&L after the transition period than would
have occurred with continued regulated rates.
In this regard, it should be noted that PP&L's stranded cost claim
included in the restructuring plan is based on a projection of future
market prices and assumes a significant portion of PP&L's stranded costs
will be recovered by way of increased market prices for electricity. This
increase may or may not occur. To the extent that the market price of
electricity does not increase as projected, or other projections such as
future sales levels do not actually occur, PP&L could experience a greater
non-recovery of stranded costs.
If the PUC permits full recovery of PP&L's stranded costs, including
full recovery of all regulatory assets and above-market NUG costs over the
transition period, PP&L estimates that its net income over the transition
period would be reduced by about 5%.
However, the PUC may make adjustments to components or assumptions
included in the restructuring plan that could have an adverse effect on the
amount of the CTC or the categories of stranded costs that are recoverable
through the CTC. As a result of these uncertainties, PP&L cannot determine
whether and to what extent it may be subject to a write-off or a reduction
in earnings until the PUC issues an order with respect to the restructuring
plan. Based on the substantial amounts involved in the restructuring plan,
should PP&L be required to incur a write-off, it could be material in
amount. Accordingly, PP&L is unable to predict the ultimate effect of the
Customer Choice Act or the PUC's disposition of the restructuring plan on
its financial position, results of operation or its need to issue
securities to meet future capital requirements.
Finally, the Customer Choice Act permits the issuance of "transition
bonds" securitized by CTC revenues to finance the payment of stranded
costs. PP&L is still considering whether to seek to securitize some
portion of its stranded cost claim, which would require the approval of the
PUC in a qualified rate order.
In a related matter, a Pennsylvania state senator and two consumer
groups in March 1997 filed a suit in Pennsylvania Commonwealth Court
challenging the constitutionality of the Customer Choice Act.
3. Accounting for the Effects of Certain Types of Regulation
PP&L believes that the Customer Choice Act establishes a definitive
transition to market-based pricing for electric generation. This
transition includes cost-of-service based ratemaking during the transition
period. In addition, PP&L's stranded costs will be collected through a
non-bypassable CTC. Based on this structure, PP&L believes it will
continue to meet the requirements of SFAS No. 71 through the transition
period.
PP&L is aware that the SEC has begun inquiries regarding the
appropriateness of the continued application of SFAS No. 71 by utilities in
states that have enacted restructuring legislation similar to the Customer
Choice Act. As discussed above, PP&L believes it currently meets and will
continue to meet the requirements to apply SFAS No. 71 during the
transition period. In the event that the SEC concludes that the current
regulatory and legal framework in Pennsylvania no longer meets the
requirements to apply SFAS No. 71 to the generation business, PP&L would
reevaluate the impact on its financial statements, and a material write-off
could occur. The FASB's Emerging Issues Task Force is scheduled to address
the issue of whether SFAS 71 should continue to apply to utilities in
states that have enacted restructuring legislation.
Given the current regulatory environment, PP&L's electric transmission
and distribution businesses are expected to remain regulated and, as a
result, the provisions of SFAS No. 71 should continue to apply to those
businesses.
4. Rate Matters
Appeal of Base Rate Case
Reference is made to PP&L Resources' and PP&L's Annual Report to the
SEC on Form 10-K for the year ended December 31, 1996 regarding the PUC
Decision. The OCA has appealed certain aspects of the PUC Decision to the
Commonwealth Court. PP&L cannot predict the final outcome of this matter.
FERC - Major Utility Rates
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
four major electric utility customers (Atlantic, BG&E, JCP&L, and UGI).
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. This settlement is currently pending before the FERC for
approval.
5. Sales to Other Major Electric Utilities
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. FERC
acceptance of the contract is expected in mid-1997.
In March 1997, PP&L reached a new agreement with GPU Energy for
installed capacity credit sales for up to 200,000 kilowatts from July 1997
through December 1998, and in April 1997 PP&L signed a new agreement with
Atlantic Electric for installed capacity credit sales for up to 25,000
kilowatts from June 1997 through May 1998.
6. Financial Instruments
The carrying amount and fair value of financial investments decreased
by $55 million from December 31, 1996 to March 31, 1997, largely due to the
liquidation of long-term investments to make funds more readily available
for future investing activities. The carrying amount and fair value of
cash and cash equivalents decreased $29 million for the same period due to
the use of funds to retire long-term debt.
7. Credit Arrangements and Financing Activity
From January through April 1997, PP&L Resources obtained $33 million
from sales of common stock through the DRIP.
On April 1, 1997, PP&L redeemed $210 million principal amount of four
series of first mortgage bonds. Three of the series of first mortgage
bonds were redeemed under the maintenance and replacement fund provisions
of these bonds. These series of bonds consisted of $40 million principal
amount of the 7% series due 1999; $60 million principal amount of the
7-1/4% series due 2001; and $80 million principal amount of the 7-1/2%
series due 2003. The fourth series, $30 million principal amount of the 6-
3/4% series due 1997, was redeemed under the optional redemption provisions
of that series. The funds for these redemptions were required to be made
available to the Trustee on March 31, 1997.
In April 1997, PP&L instituted a short-term bond program in order to
meet certain short-term working capital requirements and to accomplish
other corporate purposes. Under this program, up to $800 million of short-
term bonds (having maturities not in excess of sixty days) may be issued
from time to time, with no more than $150 million of such bonds outstanding
at any one time.
PP&L Resources acquired 79.02% of the outstanding preferred stock of
PP&L in a tender offer between March 3 and April 4, 1997. PP&L Resources
acquired 52.58% of the 4-1/2% Preferred Stock and 82.42% of the Series
Preferred Stock. By obtaining a majority of the 4-1/2% Preferred Stock and
a majority of the combined amount of the 4-1/2% Preferred Stock and Series
Preferred Stock, PP&L Resources will be able to waive certain restrictive
provisions in the terms of the 4-1/2% Preferred Stock and Series Preferred
Stock, including limitations contained in PP&L's Articles of Incorporation
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 and issue additional shares of the Series
Preferred Stock.
To provide financing for a portion of this tender offer, PP&L, in
April 1997, arranged for the issuance by a Delaware statutory business
trust, PP&L Capital Trust, of $100 million of Trust Originated Preferred
Securities to the public at $25 per share, to provide investors with a
yield of 8.20%. These Preferred Securities were backed by Subordinated
Debentures of PP&L issued to the Trust, and PP&L guaranteed all of the
Trust's obligations under the Preferred Securities. The proceeds of the
sale of these Preferred Securities were loaned by PP&L to PP&L Resources
for the tender offer.
8. 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 1996 Form 10-K, except for the discussion below regarding loan
guarantees of affiliated companies and source of labor supply.
For discussion pertaining to PP&L Resources' and PP&L's financing
matters, see Financial Note 7.
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 March 31, 1997 was about $36 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 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 the 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 the EPA mandating additional NOx
and SO2 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, the EPA may mandate additional SO2
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" on page 32 of the 1996 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 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 these
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" on page 32 of the 1996 Form
10-K. In this regard, 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.
At March 31, 1997, 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.
Loan Guarantees of Affiliated Companies
PMDC has provided a parental guarantee of a subsidiary's pro rata
share of the outstanding portion of certain debt issuances of an investee.
At March 31, 1997, $14 million of such loans were guaranteed by PMDC. The
amount of debt guaranteed by PMDC is expected to grow to $19 million as the
investee draws down the balance of its debt facility.
In addition, Spectrum has a $1 million line of credit, which is
guaranteed by PP&L Resources.
Employee Relations
At March 31, 1997, PP&L had a total of 6,389 full-time employees.
Approximately 65 percent of these employees are represented by the IBEW.
The existing three-year agreement with the IBEW will expire in May 1997.
In April 1997, PP&L and the IBEW tentatively agreed to extend all
provisions of the current labor agreement through May 1998. The process by
which the IBEW has asked its membership to ratify this extension agreement
will continue through mid-May 1997.
9. New Accounting Standards
In February, the FASB issued SFAS 128, Earnings Per Share, and SFAS
129, Disclosure of Information about Capital Structure, both of which are
effective for financial statements issued for periods ending after December
15, 1997. The adoption of these statements is not expected to have a
significant impact on PP&L Resources' or PP&L's financial statements.
<PAGE>
PP&L Resources, Inc. and Pennsylvania Power & Light Company
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
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 treatment, especially the PUC's disposition of PP&L's April 1,
1997 restructuring filing; new state or federal legislation; national or
regional economic conditions; weather variations affecting customer 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.
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. All fluctuations, unless
specifically noted, are primarily due to activities of PP&L. All
nonutility operating transactions are included in "Other Income and
Deductions - Net" on the PP&L Resources' Consolidated Statement of Income.
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 Pennsylvania Power & Light Company" in PP&L Resources'
and PP&L's Annual Report to the SEC on Form 10-K for the year ended
December 31, 1996.
Terms and abbreviations appearing in Management's Discussion and
Analysis of Financial Condition and Results of Operations are explained in
the glossary.
Results of Operations
The following explains material changes in principal items on the
Consolidated Statement of Income comparing the three months ended March 31,
1997 to the comparable period ended March 31, 1996.
The Consolidated Statement of Income reflects the results of past
operations and is not intended as any representation of the results of
future operations. Future results of operations will necessarily be
affected by various and diverse factors and developments. Because results
for interim periods can be disproportionately influenced by various factors
and developments and by seasonal variations, the results of operations for
interim periods are not necessarily indicative of results or trends for the
year.
Earnings
Comparison of Earnings
Three Months Ended March 31,
1997 1996
Earnings per share - excluding
weather variances $.76 $.69
Weather impact - billed sales (.04) .04
Earnings per share - reported $.72 $.73
Earnings per share, excluding the effects of weather on billed sales,
improved by $.07 for the three months ended March 31, 1997 when compared
with the same period in 1996. Earnings improvement, excluding weather, was
primarily due to the following:
Three Months Ended
March 31, 1997 vs
March 31, 1996
Higher net unbilled revenues, primarily
due to weather impacts on unbilled sales $ .03
Reduction in earnings due to the phase-down
of the contract with JCP&L (.03)
Higher PMDC earnings, primarily from SWEB .03
Increased sales of reservation of electrical
output to other utilities and a reduction
in other operating costs .04
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, the Customer Choice Act, enacted to restructure the
state's 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 "PUC Restructuring Filing" for
additional information.
Electric Energy Sales
The increases (decreases) in PP&L's electric energy sales were
attributable to the following:
Three Months Ended
March 31, 1997 vs
March 31, 1996
(Millions of Kwh)
Electric energy sales
Residential (367)
Commercial (64)
Industrial 106
Other (including UGI) (48)
System sales (373)
Sales to other utilities 717
PJM energy sales (278)
Total 66
System, or service area, sales were 9.2 billion kwh for the three
months ended March 31, 1997, a decrease of 373 million KWH, or 3.9% from
the three months ended March 31, 1996. The decrease was primarily due to
milder than normal weather during the first quarter of 1997 as compared to
1996. If normal weather conditions had been experienced in the first
quarter of both 1996 and 1997, system sales for 1997 would have increased
by about 39 million kwh, or 0.4% over 1996.
Sales to other utilities were 3.4 billion kwh in the first quarter of
1997, an increase of 717 million kwh, or 26.8% from the same period of
1996, despite a reduction in PP&L's contractual bulk power sales to JCP&L.
These increases were primarily the result of an overall increased emphasis
on bilateral sales to other utilities and wholesale customers on the open
market.
Sales to PJM in the first quarter of 1997 decreased by 278 million
kwh, or 78.3%, from the first quarter of 1996. These lower PJM sales are
primarily the result of an increase in direct sales to other utilities and
wholesale customers.
PUC Restructuring Filing
In December 1996, Pennsylvania enacted the Customer Choice Act to
restructure its electric utility industry in order to create retail access
to a competitive market for the generation of electricity. In accordance
with that legislation, PP&L filed its restructuring plan with the PUC on
April 1, 1997. The PUC is required to take action on PP&L's filing by
January 1998.
Under the Customer Choice Act, the PUC is authorized to determine the
amount of PP&L's stranded costs to be recovered through a non-bypassable
competitive transition charge (CTC) to be paid by all PUC-jurisdictional
customers who receive transmission and distribution service from PP&L.
Stranded costs are defined in the Customer Choice Act as "generation-
related costs... which would have been recoverable under a regulated
environment but which may not be recoverable in a competitive generation
market and which the PUC determines will remain following mitigation by the
electric utility."
PP&L's restructuring plan includes a claim of $4.6 billion for
stranded costs. Pursuant to the Customer Choice Act, this claim is
comprised of the following categories:
1. Net plant investments and costs attributable to existing
generation plants and facilities, disposal of spent nuclear fuel,
retirement costs attributable to existing generating plants and
employee-related transition costs;
2. Prudently incurred costs related to the cancellation, buyout,
buydown or renegotiation of NUG contracts; and
3. Regulatory assets and other deferred charges typically
recoverable under current regulatory practice and cost obligations
under PUC-approved contracts with NUGs.
The following are the components of PP&L's stranded cost claim:
Amount
Category of Stranded Cost (Millions of Dollars)
Nuclear Generation(a) $2,852
Fossil Generation(a) 718
NUG Contracts 657
Regulatory Assets 384
$4,611
(a) Includes deferred income taxes related to generation assets.
In determining the appropriate amount of stranded cost recovery, the
Customer Choice Act requires the PUC to consider the extent to which an
electric utility has taken steps to mitigate stranded costs by appropriate
means that are reasonable under the circumstances. Mitigation efforts
undertaken over time prior to the enactment of the Customer Choice Act are
to be considered of equal importance by the PUC in determining an electric
utility's stranded costs as actions taken after the passage of the Customer
Choice Act. In its restructuring plan, PP&L described its extensive
efforts to mitigate its stranded costs, resulting in a reduction in its
stranded cost claim of over $1 billion.
The ultimate impact of the Customer Choice Act on PP&L's financial
health will depend on numerous factors, including:
1. The amount of stranded cost recovery approved by the PUC, the
PUC's overall treatment of PP&L's filing and the effect of the rate cap
imposed under the provisions of the Customer Choice Act;
2. The actual market price of electricity over the transition period;
3. Future sales levels; and
4. The extent to which the regulatory framework established by the
Customer Choice Act will continue to be applied.
Under the Customer Choice Act, PP&L's rates to PUC-jurisdictional
customers are capped at the level in effect on January 1, 1997 through mid-
2001 for transmission and distribution services and through the year 2005
for generation customers. By applying the CTC proposed by PP&L in its
restructuring plan (which is restricted by the rate cap) through the year
2005, PP&L anticipates collecting approximately $4 billion of its stranded
costs. Based on these projections, the remaining $600 million would be
reflected as lower cash flow to PP&L after the transition period than would
have occurred with continued regulated rates.
In this regard, it should be noted that PP&L's stranded cost claim
included in the restructuring plan is based on a projection of future
market prices and assumes a significant portion of PP&L's stranded costs
will be recovered by way of increased market prices for electricity. This
increase may or may not occur. To the extent that the market price of
electricity does not increase as projected, or other projections such as
future sales levels do not actually occur, PP&L could experience a greater
non-recovery of stranded costs.
If the PUC permits full recovery of PP&L's stranded costs, including
full recovery of all regulatory assets and above-market NUG costs over the
transition period, PP&L estimates that its net income over the transition
period would be reduced by about 5%.
However, the PUC may make adjustments to components or assumptions
included in the restructuring plan that could have an adverse effect on the
amount of the CTC or the categories of stranded costs that are recoverable
through the CTC. As a result of these uncertainties, PP&L cannot determine
whether and to what extent it may be subject to a write-off or a reduction
in earnings until the PUC issues an order with respect to the restructuring
plan. Based on the substantial amounts involved in the restructuring plan,
should PP&L be required to incur a write-off, it could be material in
amount. Accordingly, PP&L is unable to predict the ultimate effect of the
Customer Choice Act or the PUC's disposition of the restructuring plan on
its financial position, results of operation or its need to issue
securities to meet future capital requirements.
Finally, the Customer Choice Act permits the issuance of "transition
bonds" securitized by CTC revenues to finance the payment of stranded
costs. PP&L is still considering whether to seek to securitize some
portion of its stranded cost claim, which would require the approval of the
PUC in a qualified rate order.
In a related matter, a Pennsylvania state senator and two consumer
groups in March 1997 filed a suit in Pennsylvania Commonwealth Court
challenging the constitutionality of the Customer Choice Act.
Rate Matters
Reference is made to PP&L Resources' and PP&L's Annual Report to the
SEC on Form 10-K for the year ended December 31, 1996 regarding the PUC
Decision. The OCA has appealed certain aspects of the PUC Decision to the
Commonwealth Court. PP&L cannot predict the final outcome of this matter.
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
four major electric utility customers (Atlantic, BG&E, JCP&L, and UGI).
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. This settlement is currently pending before the FERC for
approval.
Fuel Expense
Fuel expense for the three months ended March 31, 1997 decreased $13
million from the comparable period in 1996. The decrease was primarily due
to lower generation at the Martins Creek oil/gas fired units as well as
Susquehanna SES. The Martins Creek units were in lower demand in the first
quarter of 1997, due to mild weather. Susquehanna's generation was down
due to the planned Unit 2 refueling outage and the forced outage of Unit 1.
The lower fuel costs, resulting from lower generation, were partially
offset by higher fuel prices for all units.
Power Purchases
Purchased power increased $25 million over the comparable period in
1996. The increase was primarily due to (i) greater quantities of power
purchased from PJM and other utilities to meet planned and unplanned
outages at Susquehanna SES, and (ii) attractive market prices for energy.
The increase was partially offset by lower purchases from non-utility
generating companies due to PP&L's buyout of the contract with Continental
Energy Associates.
PMDC Earnings
Other income and deductions increased by $6 million for PP&L Resources
for the three months ended March 31, 1997 from the comparable period in
1996. This increase resulted primarily from a $5 million improvement in
PMDC's net income. PMDC's earnings for the quarter ended March 31, 1997
are higher than the quarter ended March 31, 1996, largely due to the
acquisition of an interest in SWEB in July 1996.
Financial Condition
Financing Activities
The following financings have occurred to date in 1997:
o From January through April 1997, PP&L Resources obtained $33
million from sales of common stock through the DRIP.
o On April 1, 1997, PP&L redeemed $210 million principal amount of
four series of first mortgage bonds.
o PP&L Resources obtained 79.02% of the outstanding preferred stock
of PP&L pursuant to a tender offer conducted in March and April.
o To provide financing for a portion of this tender offer, PP&L
issued preferred securities through a Delaware statutory business
trust, PP&L Capital Trust. Specifically, in April 1997, PP&L
arranged for the Trust to issue $100 million of Trust Originated
Preferred Securities to the public at $25 per share, to provide
investors with a yield of 8.20%. These Preferred Securities were
backed by Subordinated Debentures issued by PP&L to the Trust.
Refer to Financial Note 7 for additional information.
Financing and Liquidity
The change in cash and cash equivalents for the three months ended
March 31, 1997 decreased $31 million for PP&L Resources from the comparable
period in 1996. This reflects an $18 million decrease in cash provided by
operating activities. This decrease was also due to a $67 million increase
in cash used in financing activities partially offset by a $54 million
decrease in cash used in investing activities. The increase in cash used
in financing activities was due to funds made available for the retirement
of $210 million of long-term debt in 1997 partially offset by a $143
million increase in short-term debt in 1997 from 1996. The decrease in
cash used in investing activities was due to several subsidiaries
liquidating long-term investments to make funds more readily available for
future investing activities.
PP&L's projected internally generated funds would be sufficient to
permit PP&L to retire about $550 million of its long-term debt during 1998-
2001.
Outside financing, in amounts not currently determinable, or the
liquidation of certain financial investments, may be required over the next
five years to finance investment opportunities in worldwide power projects
by PMDC.
Unregulated Investments
PMDC continues to pursue opportunities to develop and acquire electric
generation, transmission and distribution facilities in the United States
and abroad.
As of March 31, 1997, PMDC had investments and commitments in the
amount of approximately $370 million in distribution, transmission and
generation facilities in the United Kingdom, Bolivia, Peru, Argentina,
Spain, Portugal and Chile. PMDC's principal investment to date is its 25
percent interest in SWEB, a British regional electric utility company, for
approximately $189 million.
PMDC has executed a Share Purchase Agreement pursuant to which PMDC
will purchase a 25.05 percent interest in Emel for approximately $120
million. Emel is a Chilean holding company that has majority interests in
six electric distribution companies located in Chile and Bolivia. Emel's
electric distribution company holdings make it the third largest
distributor of electricity in Chile and the second largest in Bolivia,
serving a total of 535,000 customers in those countries. Contemporaneously
with financial closing, which is anticipated to occur in August 1997, PMDC
will enter into a shareholders' agreement that will enable PMDC and another
major shareholder, Las Espigas Group, to control the action taken with
respect to matters brought before Emel's board of directors. Financial
closing remains subject to certain regulatory and third party approvals,
and the outcome of a thirty-day "pre-emptive rights" period during which
Emel's existing shareholders will be entitled to purchase the shares in
Emel that PMDC intends to acquire. The $120 million purchase price is
included in the $370 million of investments and commitments discussed
above.
PP&L Resources' other unregulated subsidiary, Spectrum, offers energy-
related products and services to PP&L's existing customers and to others
outside of PP&L's service territory. 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 1996 Form 10-K, except for the discussions in Financial Note 8
- -- "Commitments and Contingent Liabilities" regarding loan guarantees of
affiliated companies and source of labor supply.
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 Filing" for a discussion of
PP&L's April 1, 1997 filing pursuant to the Customer Choice Act.
In response to a July 1996 PUC Report on achieving retail competition
in Pennsylvania, PP&L in October 1996 voluntarily filed for PUC approval of
a retail access pilot program. In January 1997, the PUC issued final
guidelines for pilot programs. Those guidelines required each major
electric utility in Pennsylvania to file a proposed pilot program in
accordance with the guidelines by March 1, 1997.
On February 28, 1997, PP&L submitted a revised retail access pilot
program in accordance with the applicable provisions of the Customer Choice
Act and the PUC's guidelines. Under its pilot program, approximately
54,000 PP&L residential, commercial and industrial customers --
representing about 5% of PP&L's average annual peak load -- will have an
opportunity to purchase energy and capacity from alternative suppliers.
PP&L will provide all transmission and distribution, customer service and
back-up energy supply services to participating customers. 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.
On May 9, 1997, the PUC issued an order approving and revising PP&L's
proposed pilot program. Comments regarding the PUC's proposed revisions
must be filed by May 22, 1997. PP&L currently is reviewing this order and
plans to file comments. The PUC is expected to conduct hearings on this
matter.
In addition, in April 1997 PP&L filed an application with the PUC for
a license to act as an electric generation supplier. Approval of this
application will permit PP&L to participate in the various retail access
pilot programs of other Pennsylvania utilities presently under review by
the PUC.
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 had to offer point-to-
point and network services, as well as ancillary services. A utility had
to offer these services to all eligible wholesale customers on a basis
comparable to the services the utility provides to itself. A utility must
take service under its 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 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.
The rules further 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
and implement such tariffs and agreements by March 1, 1997. In addition,
utilities had to separate their transmission and power marketing functions,
and implement an electronic bulletin board for transmission capacity
information by January 3, 1997. Finally, utilities were required to
"unbundle", or separately state, the transmission charges contained within
certain tariffs and bilateral coordination sales agreements.
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. The non-rate terms and conditions of
that tariff have been accepted by FERC. Several parties moved to intervene
and protested the new rates, and the FERC has not issued an order
concerning these rates.
In addition, PP&L has made filings to unbundle its tariffs and certain
of its bilateral coordination sales agreements, which have been accepted by
the FERC. PP&L plans to file to unbundle certain other agreements in the
near future. Finally, PP&L has requested FERC approval to cancel certain
agreements which duplicate the terms and conditions now contained in PP&L's
open access transmission tariff.
Under the new rules, 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. Based
upon a formula set forth in FERC Order 888 and applicable only to wholesale
customers, and based upon data unique to the agreements between PP&L and
these customers, PP&L estimated that the stranded costs associated with
service to these wholesale customers would be approximately $125 million.
As a result of a protest by these parties against such recovery, hearings
are currently being conducted regarding PP&L's right to recover these
stranded costs.
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 have (i)
established pool-wide transmission service tariffs to provide comparable,
open-access service for all wholesale transactions throughout PJM; (ii)
established a price-based bidding system, with the resulting regional
energy market open to all wholesale buyers and sellers of power; (iii)
created 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) developed 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. The FERC ordered the PJM companies to file a pool-wide tariff and
modified coordination agreements reflecting the removal of provisions which
the 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.
<PAGE>
PP&L RESOURCES, INC. AND
PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Notes to Financial Statements for information
concerning rate matters.
Reference is made to PP&L's 1996 Form 10-K for information concerning
a federal antitrust suit against PP&L by a group of fuel oil dealers in
PP&L's service area. This suit has now been settled on terms which do not
have a material effect on PP&L.
Reference is made to PP&L's 1996 Form 10-K for information concerning
a federal antitrust suit by SER, one of the non-utility generating
companies from which PP&L purchases power under PURPA, against PP&L in the
District Court for alleged improper curtailment of power purchases under
the power purchase agreement between the parties. In May 1997, the U.S.
Court of Appeals for the Third Circuit affirmed the District Court's
dismissal of this suit.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
Report dated March 3, 1997
Item 5. Other Events
Information regarding PP&L Resources' tender offer for any and
all of the outstanding 4-1/2% Preferred Stock and Series Preferred
Stock of PP&L.
<PAGE>
Glossary of Terms and Abbreviations
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
CTC - Competitive transition charge
Customer Choice Act - Electricity Generation Customer Choice and
Competition Act
DEP - Pennsylvania Department of Environmental Protection
District Court - United States District Court for the Eastern District of
Pennsylvania
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
EMEL - Empresas Emel, S.A., a Chilean electric distribution holding company
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) - government agency that
regulates interstate transmission and sale of electricity and related
matters
IBEW - International Brotherhood of Electrical Workers
ISO - Independent System Operator
JCP&L - Jersey Central Power & Light Company
LIBOR - London Inter-Bank Offered Rate
Major utilities - Atlantic, BG&E and JCP&L
NPDES - National Pollutant Discharge Elimination System
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.
OCA - Pennsylvania Office of Consumer Advocate
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
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
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
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
Superfund - Federal and state legislation that addresses remediation of
contaminated sites
SWEB - South Western Electricity plc, a British regional electric utility
company
UGI - UGI Corporation
<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)
Pennsylvania Power & Light Company
(Registrant)
Date: May 14, 1997 /s/ R. E. Hill
R. E. Hill
Senior Vice President-Financial
(PP&L Resources, Inc. and
Pennsylvania Power & Light Company)
/s/ J. J. McCabe
J. J. McCabe
Vice President & Controller (PP&L
Resources, Inc. and Pennsylvania
Power & Light Company)
<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, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
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<NAME> PP&L RESOURCES, INC.
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