-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LQj86wdrEN5Y4FKDSoRfG8mZT28bEHR9J5acBW6Vnj72DQuQWj43ENuDGdq4qWoT fGyjCk5LRSlk91GUPzE6zg== 0000922224-98-000019.txt : 19980514 0000922224-98-000019.hdr.sgml : 19980514 ACCESSION NUMBER: 0000922224-98-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980513 SROS: NYSE SROS: PHLX FILER: COMPANY DATA: COMPANY CONFORMED NAME: PP&L INC CENTRAL INDEX KEY: 0000317187 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 230959590 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-00905 FILM NUMBER: 98617462 BUSINESS ADDRESS: STREET 1: TWO N NINTH ST CITY: ALLENTOWN STATE: PA ZIP: 18101 BUSINESS PHONE: 6107745151 MAIL ADDRESS: STREET 1: TWO NORTH NINTH STREET CITY: ALLENTOWN STATE: PA ZIP: 18101-1179 FORMER COMPANY: FORMER CONFORMED NAME: PP & L INC DATE OF NAME CHANGE: 19970912 10-Q 1 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 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 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)
Three Months Ended March 31, 1998 1997 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.
PP&L RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Millions of Dollars)
Three Months Ended March 31, 1998 1997 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.
PP&L RESOURCES,INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Millions of Dollars)
March 31, December 31, 1998 1997 (Unaudited) (Audited) 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.
PP&L RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Millions of Dollars)
March 31, December 31, 1998 1997 (Unaudited) (Audited) 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.
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)
Three Months Ended March 31, 1998 1997 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.
PP&L, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Millions of Dollars)
Three Months Ended March 31, 1998 1997 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 See accompanying Notes to Financial Statements.
PP&L, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Millions of Dollars)
March 31, December 31, 1998 1997 (Unaudited (Audited) 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.
PP&L, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Millions of Dollars)
March 31, December 31, 1998 1997 (Unaudited) (Audited) 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.
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. 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. 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. 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.) EX-27 2
UT 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. 0000317187 PP&L, INC. 1,000,000 3-MOS DEC-31-1997 MAR-31-1998 PER-BOOK 6,752 685 867 1,342 0 9,646 1,476 44 1,119 2,639 295 171 2,734 0 0 139 150 0 98 58 3,362 9,646 861 85 630 715 231 12 158 49 109 12 97 0 0 186 0 0
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