-----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, CS/f+52HBreC7K1j/ujsWves1MC5mSePyRoDiHdUsldOJgygINn5z+Xte4LitRab xbOOS/SOcHZ2vlQRp77Ajg== 0001036050-99-001065.txt : 19990514 0001036050-99-001065.hdr.sgml : 19990514 ACCESSION NUMBER: 0001036050-99-001065 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990513 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: 99620973 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 FORM 10-Q 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, 1999 ---------------- 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, 157,694,305 shares outstanding at April 30, 1999, excluding 16,995,957 shares held as treasury stock PP&L, Inc. Common stock, no par value, 157,300,382 shares outstanding and all held by PP&L Resources, Inc. at April 30, 1999 PP&L RESOURCES, INC. AND PP&L, INC. ---------- FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999 INDEX ----- PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements PP&L RESOURCES, INC. Consolidated Statement of Income 2 Consolidated Statement of Cash Flows 3 Consolidated Balance Sheet 4 PP&L, INC. Consolidated Statement of Income 6 Consolidated Statement of Cash Flows 7 Consolidated Balance Sheet 8 Notes to Consolidated Financial Statements PP&L Resources, Inc. and PP&L, Inc. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PP&L Resources, Inc. and PP&L, Inc. 21 Item 3. Quantitative and Qualitative Disclosures About Market Risk 36 PART II. OTHER INFORMATION Item 1. Legal Proceedings 37 Item 6. Exhibits and Reports on Form 8-K 37 GLOSSARY OF TERMS AND ABBREVIATIONS 38 SIGNATURES 40 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 41 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, 1999 and December 31, 1998, and the Consolidated Statement of Income and Consolidated Statement of Cash Flows for the periods ended March 31, 1999 and 1998. PP&L Resources is the parent holding company of PP&L, PP&L Global, PP&L Spectrum, PP&L Capital Funding, Penn Fuel Gas, McClure, McCarl's and H.T. Lyons. The financial condition and results of operations of PP&L and PP&L Global are currently the principal factors affecting PP&L Resources' financial condition and results of operations. CONSOLIDATED STATEMENT OF INCOME (Unaudited) (Millions of Dollars, except per share data)
Three Months Ended March 31, ----------------------------------- 1999 1998 -------------- -------------- OPERATING REVENUES Electric operations................................................................. $ 667 $ 616 Gas and propane operations.......................................................... 45 Wholesale energy and trading activities............................................. 297 245 Energy related businesses........................................................... 58 19 -------------- -------------- Total Operating Revenues............................................................ 1,067 880 -------------- -------------- OPERATING EXPENSES Operation Cost of electric fuel............................................................. 123 115 Cost of natural gas and propane................................................... 23 Energy purchases.................................................................. 255 214 Other operating................................................................... 166 112 Amortization of recoverable transition costs...................................... 45 Maintenance......................................................................... 39 38 Depreciation and amortization....................................................... 60 97 Taxes, other than income............................................................ 53 54 Energy related businesses........................................................... 41 14 -------------- -------------- Total Operating Expenses............................................................ 805 644 -------------- -------------- OPERATING INCOME...................................................................... 262 236 -------------- -------------- Other Income.......................................................................... 7 -------------- -------------- INCOME BEFORE INTEREST AND INCOME TAXES............................................... 262 243 Interest Expense...................................................................... 62 52 Income Taxes.......................................................................... 74 84 -------------- -------------- INCOME BEFORE DIVIDENDS ON PREFERRED STOCK............................................ 126 107 Preferred Stock Dividend Requirements................................................. 6 6 -------------- -------------- NET INCOME............................................................................ $ 120 $ 101 ============== ============== Earnings Per Share of Common Stock Basic and Diluted (a)............................................................... $ 0.76 $ 0.60 Dividends Declared Per Share of Common Stock.......................................... $ 0.2500 $ 0.4175 (a) Based on average number of shares outstanding (thousands) 157,621 166,734
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. 2 PP&L RESOURCES, INC. AND SUBSIDIARIES - ------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Millions of Dollars)
Three Months Ended March 31, 1999 1998 ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES......................... $122 $174 CASH FLOWS FROM INVESTING ACTIVITIES Property, plant and equipment expenditures....................... (66) (79) Proceeds from sale of nuclear fuel to trust...................... 11 1 Purchases of available-for-sale securities....................... (4) Sales and maturities of available-for-sale securities............ 4 Investment in unconsolidated affiliates.......................... (98) Other investing activities - net................................. (15) (7) ---------- ---------- Net cash used in investing activities.......................... (70) (183) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of long-term debt....................................... 60 Issuance of common stock......................................... 8 16 Retirement or reacquisition of long-term debt.................... (25) Payments on capital lease obligations............................ (14) (17) Common and preferred dividends paid.............................. (46) (76) Net increase(decrease)in short-term debt......................... (30) 124 ---------- ---------- Net cash provided by (used in) financing activities............ (107) 107 ---------- ---------- NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS............... (55) 98 Cash and Cash Equivalents at Beginning of Period.................. 195 50 ---------- ---------- Cash and Cash Equivalents at End of Period........................ $140 $148 ---------- ---------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest (net of amount capitalized)............................ $ 52 $ 50 Income taxes.................................................... $ 9 $ 16
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. 3 PP&L RESOURCES, INC. AND SUBSIDIARIES - ------------------------------------- CONSOLIDATED BALANCE SHEET (Millions of Dollars)
March 31, December 31, 1999 1998 (Unaudited) (Audited) ----------- --------- ASSETS PROPERTY, PLANT AND EQUIPMENT Electric utility plant in service - net Transmission and distribution............................. $2,179 $2,179 Generation................................................ 1,616 1,601 General and intangible.................................... 219 223 ----------- --------- 4,014 4,003 Construction work in progress - at cost..................... 106 117 Nuclear fuel owned and leased - net ........................ 154 162 ----------- --------- Electric utility plant - net.............................. 4,274 4,282 Gas and oil utility plant - net............................. 175 175 Other property - net........................................ 27 23 ----------- --------- 4,476 4,480 ----------- --------- INVESTMENTS Investment in unconsolidated affiliates - at equity......... 696 688 Nuclear plant decommissioning trust fund.................... 215 206 Other....................................................... 13 12 ----------- --------- 924 906 ----------- --------- CURRENT ASSETS Cash and cash equivalents................................... 140 195 Accounts receivable (less reserve: 1999, $18; 1998, $14) Utility customers ...................................... 225 173 Other................................................... 116 125 Unbilled revenues Utility customers....................................... 123 106 Other................................................... 73 64 Fuel, materials and supplies - at average cost.............. 200 207 Prepayments ................................................ 93 15 Unrealized mark-to-market energy trading gains.............. 53 2 Other....................................................... 61 61 ----------- --------- 1,084 948 ----------- --------- REGULATORY ASSETS AND OTHER NONCURRENT ASSETS Recoverable transition costs................................ 2,774 2,819 Other....................................................... 471 454 ----------- --------- 3,245 3,273 ----------- --------- $9,729 $9,607 =========== =========
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. 4 PP&L RESOURCES, INC. AND SUBSIDIARIES - ------------------------------------- CONSOLIDATED BALANCE SHEET (Millions of Dollars)
March 31, December 31, 1999 1998 (Unaudited) (Audited) ------------ ------------ LIABILITIES CAPITALIZATION Common equity Common stock...................................................... $ 2 $ 2 Capital in excess of par value.................................... 1,874 1,866 Treasury stock.................................................... (419) (419) Earnings reinvested............................................... 453 372 Capital stock expense and other................................... (38) (31) ------------ ------------ 1,872 1,790 ------------ ------------ 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...................................................... 2,962 2,983 ------------ ------------ 5,181 5,120 ------------ ------------ CURRENT LIABILITIES Short-term debt..................................................... 606 636 Long-term debt due within one year.................................. 1 1 Capital lease obligations due within one year....................... 61 59 Above market NUG purchases due within one year...................... 103 105 Accounts payable.................................................... 258 197 Taxes and interest accrued.......................................... 118 95 Dividends payable................................................... 46 46 Unrealized mark-to-market energy trading losses..................... 43 9 Other............................................................... 128 128 ------------ ------------ 1,364 1,276 ------------ ------------ DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES Deferred income taxes and investment tax credits.................... 1,572 1,574 Above market NUG purchases.......................................... 750 775 Capital lease obligations........................................... 104 109 Other............................................................... 758 753 ------------ ------------ 3,184 3,211 ------------ ------------ COMMITMENTS AND CONTINGENT LIABILITIES................................ ------------ ------------ $ 9,729 $ 9,607 ============ ============
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. 5 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, 1999 and December 31, 1998, and the Consolidated Statement of Income and Consolidated Statement of Cash Flows for the periods ended March 31, 1999 and 1998. All nonutility operating transactions are included in "Other Income" in PP&L's Consolidated Statement of Income. CONSOLIDATED STATEMENT OF INCOME (Unaudited) (Millions of Dollars)
Three Months Ended March 31, -------------------------- 1999 1998 ----------- ----------- OPERATING REVENUES Electric operations..................................... $667 $616 Wholesale energy and trading activities................. 297 245 Energy related businesses .............................. 4 ----------- ----------- Total Operating Revenues................................ 968 861 ----------- ----------- OPERATING EXPENSES Operation Cost of electric fuel................................. 123 115 Energy purchases...................................... 255 214 Other operating....................................... 158 112 Amortization of recoverable transition costs.......... 45 Maintenance............................................. 38 38 Depreciation and amortization .......................... 58 97 Taxes, other than income................................ 50 54 Energy related businesses .............................. 4 ----------- ----------- Total Operating Expenses................................ 731 630 ----------- ----------- OPERATING INCOME.......................................... 237 231 ----------- ----------- Other Income.............................................. 7 12 ----------- ----------- INCOME BEFORE INTEREST AND INCOME TAXES................... 244 243 Interest Expense.......................................... 48 49 Income Taxes ............................................. 76 85 ----------- ----------- NET INCOME BEFORE DIVIDENDS ON PREFERRED STOCK............ 120 109 Dividends on Preferred Stock.............................. 12 12 ----------- ----------- EARNINGS AVAILABLE TO PP&L RESOURCES, INC................. $108 $ 97 =========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. 6 PP&L, INC. AND SUBSIDIARIES - --------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Millions of Dollars)
Three Months Ended March 31, ------------------------ 1999 1998 ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES............... $147 $186 CASH FLOWS FROM INVESTING ACTIVITIES Property, plant and equipment expenditures............ (63) (79) Proceeds from sales of nuclear fuel to trust.......... 11 1 Purchases of available-for-sale securities ........... (4) Sales and maturities of available-for-sale securities 4 Other investing activities - net...................... 4 4 ------- ------- Net cash used in investing activities........... (48) (74) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Payments on capital lease obligations................. (14) (17) Common and preferred dividends paid................... (89) (81) Net increase in short-term debt....................... 10 94 ------- ------- Net cash used in financing activities........... (93) (4) ------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS 6 108 Cash and Cash Equivalents at Beginning of Period........ 31 15 ------- ------- Cash and Cash Equivalents at End of Period.............. $ 37 $123 ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest (net of amount capitalized)................ $ 46 $ 48 Income taxes........................................ $ 12 $ 16
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. 7 PP&L, INC. AND SUBSIDIARIES - --------------------------- CONSOLIDATED BALANCE SHEET (Millions of Dollars)
March 31, December 31, 1999 1998 (Unaudited) (Audited) ----------- ------------ ASSETS PROPERTY, PLANT AND EQUIPMENT Electric utility plant in service Transmission and distribution................................................... $2,179 $2,179 Generation...................................................................... 1,616 1,601 General and intangible.......................................................... 219 223 ----------- ------------ 4,014 4,003 Construction work in progress - at cost........................................... 106 117 Nuclear fuel owned and leased - net............................................... 154 162 ----------- ------------ Electric utility plant - net.................................................... 4,274 4,282 Gas and oil utility plant - net................................................... 27 28 Other property - net.............................................................. 21 21 ----------- ------------ 4,322 4,331 ----------- ------------ INVESTMENTS Loan to parent.................................................................... 429 429 Nuclear plant decommissioning trust fund.......................................... 215 206 Investment in unconsolidated affiliate at equity.................................. 17 17 Other............................................................................. 13 13 ----------- ------------ 674 665 ----------- ------------ CURRENT ASSETS Cash and cash equivalents......................................................... 37 31 Accounts receivable (less reserve: 1999, $17; 1998, $14) Utility customers............................................................... 207 163 Other........................................................................... 63 67 Unbilled revenues Utility customers............................................................... 121 104 Other........................................................................... 69 59 Fuel, material and supplies - at average cost..................................... 194 196 Prepayments....................................................................... 91 14 Unrealized mark-to-market energy trading gains.................................... 53 2 Other............................................................................. 55 58 ----------- ------------ 890 694 ----------- ------------ REGULATORY ASSETS AND OTHER NONCURRENT ASSETS Recoverable transition costs...................................................... 2,774 2,819 Other............................................................................. 337 329 ----------- ------------ 3,111 3,148 ----------- ------------ $8,997 $8,838 =========== ============
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. 8 PP&L, INC. AND SUBSIDIARIES - --------------------------- CONSOLIDATED BALANCE SHEET (Millions of Dollars)
March 31, December 31, 1999 1998 (Unaudited) (Audited) ----------- ------------ LIABILITIES CAPITALIZATION Common equity Common stock....................................................................... $1,476 $1,476 Additional paid-in capital......................................................... 70 70 Earnings reinvested................................................................ 241 210 Capital stock expense and other.................................................... (26) (26) ----------- ----------- 1,761 1,730 ----------- ----------- 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....................................................................... 2,569 2,569 ----------- ----------- 5,046 5,015 ----------- ----------- CURRENT LIABILITIES Short-term debt...................................................................... 91 80 Long-term debt due within one year Capital lease obligations due within one year........................................ 61 59 Above market NUG purchases due within one year....................................... 103 105 Accounts payable..................................................................... 278 189 Taxes and interest accrued........................................................... 116 86 Dividends payable.................................................................... 12 12 Unrealized mark-to-market energy trading losses...................................... 43 9 Other................................................................................ 102 114 ----------- ----------- 806 654 ----------- ----------- DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES Deferred income taxes and investment tax credits..................................... 1,558 1,561 Above market NUG purchases........................................................... 750 775 Capital lease obligations............................................................ 104 109 Other................................................................................ 733 724 ----------- ----------- 3,145 3,169 ----------- ----------- COMMITMENTS AND CONTINGENT LIABILITIES................................................. ----------- ----------- $8,997 $8,838 =========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. 9 PP&L RESOURCES, INC. AND PP&L, INC. Notes to Consolidated Financial Statements ------------------------------------------ Terms and abbreviations appearing in Notes to Consolidated 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, 1998. Certain amounts in the March 31, 1998 and December 31, 1998 financial statements have been reclassified to conform to the presentation in the March 31, 1999 financial statements. 2. Summary of Significant Accounting Policies Reference is made to the "Summary of Significant Accounting Policies" in PP&L Resources' and PP&L's Form 10-K for the year ended December 31, 1998. Following are updates to the accounting policies described therein. Amortization of Recoverable Transition Costs Pursuant to the PUC Final Order, PP&L began amortizing the recoverable transition (or stranded) costs over an eleven-year transition period beginning on January 1, 1999. This amortization is shown as a component of Operation Expense on the Consolidated Statement of Income of PP&L Resources and PP&L. Reference is made to Note 3 to the Financial Statements in PP&L Resources' and PP&L's Form 10-K for the year ended December 31, 1998 for the "Annual Stranded Cost Amortization and Return Schedule." This schedule is subject to revision for actual CTC collections. Amortization of Liability for Above Market NUG Purchases As of June 30, 1998, PP&L recorded an $854 million estimated liability for above-market purchases under existing NUG contracts. This liability was recorded as part of the PUC restructuring adjustments. For more information, refer to Note 4 to the Financial Statements in PP&L Resources' and PP&L's Form 10-K for the year ended December 31, 1998. Effective January 1, 1999, PP&L began amortizing this liability as an offset to "Energy Purchases" on the Consolidated Statement of Income. The amortization is based on the estimated timing of the purchases from the NUGs, and projected market prices for this generation. This amortization 10 will continue through 2014, when the existing NUG contracts expire. This liability, and the corresponding amortization, are subject to future revision if the underlying estimates change. Accounting For Price Risk Management PP&L Resources has entered into forward starting swaps to hedge the interest rate risk associated with anticipated debt financing later in 1999. These interest rate swaps are accounted for under the accrual method. Accordingly, the gains or losses on these swaps will be recognized over the life of the debt. 3. Securitization As part of its approval of the settlement of PP&L's restructuring proceeding in August 1998, the PUC issued a Qualified Rate Order permitting PP&L to issue transition bonds to securitize up to $2.85 billion of its stranded costs. PP&L is planning to pursue such securitization later in 1999. In March 1999, a registration statement for the issuance of transition bonds was filed with the SEC, and in April 1999, PP&L requested the PUC to issue a supplemental Qualified Rate Order to approve various procedures related to securitization. The proceeds of securitization are expected to be used by PP&L to retire outstanding debt and to repurchase equity from PP&L Resources. PP&L Resources currently plans to use this cash from securitization to repurchase its own stock in the open market, retire its own debt and possibly invest in new projects. 4. PUC Restructuring Decision In August 1998, the PUC entered its Final Order approving the settlement of PP&L's restructuring proceeding under Pennsylvania's Customer Choice Act. Among other things, that Order: o permitted PP&L to recover $2.97 billion (on a net present value basis) in stranded costs over 11 years - i.e., from January 1, 1999 through December 31, 2009. PP&L's stranded costs are those which would have been recoverable under traditional rate regulation, but may not be recoverable in the competitive marketplace. PP&L is permitted a return of 10.86% on the unamortized balance of these stranded costs. o authorized PP&L to issue transition bonds to securitize up to $2.85 billion of its stranded costs. o required PP&L to reduce rates to all retail customers by four percent effective January 1, 1999, through December 31, 1999. o required PP&L to unbundle its retail electric rates beginning on January 1, 1999, to reflect separate prices for the transmission and distribution charges, the CTC (and if applicable, the ITC), 11 and the generation charge. The CTC is a charge to be paid by all customers who receive delivery service from PP&L, to recover PP&L's stranded costs. The ITC, which would offset the CTC on customer bills, is a charge paid by delivery customers to reflect the securitization of stranded costs. o required PP&L to transfer its retail marketing function to a new subsidiary, PP&L EnergyPlus. PP&L EnergyPlus has a PUC license to act as a Pennsylvania EGS. This license permits PP&L EnergyPlus to offer retail electric supply to participating customers in PP&L's service territory and in the service territories of other Pennsylvania utilities. In 1999, PP&L EnergyPlus is offering such supply to industrial and commercial customers throughout the state. At this time, PP&L EnergyPlus has determined not to pursue residential customers in the competitive marketplace based on economic considerations. o permits, but does not require, PP&L to transfer ownership and operation of its generating facilities to a separate corporate entity at book value. 5. Segment and Related Information PP&L Resources' principal business segment is PP&L, which provides electricity delivery service in eastern and central Pennsylvania, sells retail electricity throughout Pennsylvania, and markets wholesale electricity in 28 states and Canada. PP&L Resources' other reported business segment, PP&L Global, invests in and develops worldwide power projects with the majority of its investments located in the U.K., Chile, and El Salvador. PP&L Global's revenue represents equity earnings in investments. Other operating revenues represent gas distribution, mechanical contracting and engineering, and unregulated energy services. Financial data for PP&L Resources' business segments are as follows (millions of dollars):
THREE MONTHS ENDED MARCH 31, 1999 - --------------------------------- OTHER PP&L AND ELIMIN- PP&L PP&L GLOBAL ATIONS RESOURCES ---- ------------ ----------- ----------- Income statement data: Operating revenues $968 $21 $78 $1,067 Interest expense 48 8 6 62 Depreciation and amortization 58 2 60 Income taxes 76 (2) 74 Net income 108 9 3 120 CASH FLOW DATA: Property, plant and equipment expenditures 63 3 66 Investments in unconsolidated affiliates
12
THREE MONTHS ENDED MARCH 31, 1998 - --------------------------------- OTHER PP&L AND ELIMIN- PP&L PP&L GLOBAL ATIONS RESOURCES ------ ------ ---------- --------- Income statement data: Operating revenues $ 861 $ 8 $ 11 $ 880 Interest expense 49 3 52 Depreciation and amortization 97 97 Income taxes 85 1 (2) 84 Net income 97 2 2 101 CASH FLOW DATA: Property, plant and equipment expenditures 79 79 Investments in unconsolidated affiliates 98 98 OTHER PP&L AND ELIMIN- PP&L PP&L GLOBAL ATIONS RESOURCES ------ ------ ----------- --------- MARCH 31, 1999 - -------------- Balance sheet data: Cumulative net investment in unconsolidated affiliates $ 17 $679 $ 696 Total assets 8,997 778 $(46) 9,729 DECEMBER 31, 1998 - ----------------- Balance sheet data: Cumulative net investment in unconsolidated affiliates $ 17 $671 $ 688 Total assets 8,838 757 $ 12 9,607
6. Sales to Other Electric Utilities Under an existing power purchase contract, PP&L will provide JCP&L with 189,000 kilowatts of capacity and related energy from all of its generating units during 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 through its Energy Marketing Center. Under a separate agreement, PP&L is providing additional capacity and energy to JCP&L. This capacity and energy sale increased from 150,000 kilowatts to 200,000 kilowatts in June 1998, and will increase to 300,000 kilowatts in June 1999 through the end of the agreement in May 2004. Prices for this capacity and energy are market-based. In February 1999, PP&L and UGI executed new interconnection and power supply agreements, which will be submitted for review and acceptance by the FERC. Under the new power supply agreement beginning in 1999, UGI 13 will purchase capacity from PP&L equal to UGI's PJM capacity obligation less the capacity reserve value of UGI's owned generation and an existing power purchase agreement. In 2000, UGI will purchase a firm block of energy in addition to the capacity. The power supply agreement ends in February 2001. The new interconnection agreement reflects UGI's independent, full membership in the PJM Interconnection. 7. Financial Instruments During March 1999, PP&L Resources entered into forward starting interest rate swaps with various counterparties to hedge these interest rate risk associated with anticipated debt issuances. These interest rate swap agreements involve the exchange of floating rate interest rate payments for fixed rate interest payments over the life of the agreements. PP&L Resources agreed to pay fixed rates between 5.815% and 5.8725% on notional amounts of $180 million with maturity dates of July 30, 2004 and 2005. PP&L Resources also agreed to pay fixed rates between 6.04% and 6.08% on notional amounts of $120 million with a maturity date of September 15, 2009. PP&L Resources will receive a variable interest payment based on the 6-month LIBOR rate through the maturity dates of the agreements. The estimated fair value of the forward interest rate swaps, which represents the estimated amount PP&L Resources would receive if it terminated these agreements on March 31, 1999, was $700,000. Subsequent to March 31, 1999, PP&L Resources entered into additional forward starting interest rate swap agreements. PP&L Resources agreed to pay fixed rates between 5.665% and 5.815% on notional amounts of $520 million with maturity dates of August 2, 2004, and September 15, 2004. PP&L Resources also agreed to pay fixed rates between 5.92% and 6.00% on notional amounts of $140 million with a maturity date of September 15, 2009. PP&L Resources will receive a variable interest payment based on 3 or 6-month LIBOR rates through the maturity dates of these agreements. 8. Credit Arrangements and Financing Activities PP&L issues commercial paper and, from time to time, borrows from banks to provide short-term funds for PP&L's general corporate purposes. Bank borrowings generally bear interest at rates negotiated at the time of the borrowing. At March 31, 1999, PP&L had $91 million of commercial paper outstanding. PP&L Capital Funding, whose purpose is to provide debt funding for PP&L Resources and its subsidiaries other than PP&L, also issues commercial paper. As with all PP&L Capital Funding debt, this commercial paper is guaranteed by PP&L Resources. As of March 31, 1999, PP&L Capital Funding had $515 million of commercial paper outstanding. Proceeds from the commercial paper program were primarily used to fund PP&L Resources' 1998 common stock tender offer and to provide interim financing for PP&L Global's investment activities. 14 In order to enhance liquidity, PP&L and PP&L Capital Funding share a joint credit facility with a group of banks. This joint credit facility is comprised of a 364-day revolving credit agreement and a five-year revolving credit agreement. PP&L Capital Funding also maintains five separate $80 million, 364- day credit facilities with five banks. PP&L Resources guarantees all obligations of PP&L Capital Funding under these credit facilities. As of March 31, 1999, no borrowings were outstanding under any revolving credit agreements. PP&L Capital Funding registered $400 million of debt securities with the SEC in early January 1999. It is expected that these debt securities will be issued from time to time as medium-term notes to provide long-term debt financing for PP&L Resources and its subsidiaries other than PP&L. Under the PUC restructuring order of August 27, 1998, PP&L is permitted to issue transition bonds to securitize up to $2.85 billion of its stranded costs. PP&L is planning to pursue such securitization later in 1999. The proceeds are expected to be used by PP&L to retire outstanding debt and to repurchase equity from PP&L Resources. PP&L Resources currently plans to use this cash from securitization to repurchase its own stock in the open market, to retire its own debt and possibly to invest in new projects. Effective March 1, 1999, the DRIP was changed from a new issue to an open market purchase program. In January and February 1999, PP&L Resources issued $8 million of new common stock through the DRIP. In September 1998, PP&L Resources obtained authorization from the Board of Directors to purchase up to three million shares of its common stock on the open market. In connection with this program, PP&L Resources has entered into a forward purchase agreement with a third party. The agreement will be settled from time to time at PP&L Resources' election, on either a physical, net share or net cash basis. The amount at which this agreement can be settled is dependent primarily upon the market price of PP&L Resources' common stock at the settlement date as compared to the average forward purchase price per share and the number of shares to be settled. If the forward purchase agreement had been settled on a net share basis on March 31, 1999, PP&L Resources would have had to issue approximately 80,000 shares of its common stock. The issuance of these shares would not have impacted the earnings per share calculation for PP&L Resources. The third party has completed this three million share purchase. PP&L Resources and the third party will settle this forward purchase agreement by no later than September 1, 1999. In April 1999, PP&L Resources' Board of Directors authorized the purchase of an additional four million shares of common stock on the open market from time to time. 15 9. 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 1998 Form 10-K, except for loan guarantees described below. For discussion pertaining to PP&L Resources' and PP&L's credit arrangements and financing activities, see Note 8. 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 March 31, 1999, the maximum amount PP&L could be assessed under these programs was about $25 million. PP&L's public liability for claims resulting from a nuclear incident at the Susquehanna station is limited to about $9.7 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 $168 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 1995 Phase I acid rain provisions by installing continuous emission monitors on all units, burning lower sulfur coal and installing low NOx burners on most units. To comply with the year 2000 Phase II 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 1995 ambient ozone requirements of the Clean Air Act by reducing NOx emissions by nearly 50% through the use of low NOx burners. Further seasonal (i.e., 5 month) NOx 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 DEP has 16 finalized regulations which require PP&L to reduce its ozone seasonal NOx by 57% beginning in 1999. PP&L plans to comply with this reduction with operational initiatives that rely, to a large extent, on the existing low NOx burners. 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 finalized NOx emission limits for 22 states, including Pennsylvania, which in effect require approximately an 80% reduction from the 1990 level in Pennsylvania by May 2003; the state is required by September 1999 to develop plans for implementing this reduction. Pursuant to Section 126 of the Clean Air Act, several Northeast states have petitioned the EPA to find that major sources of NOx emissions, including PP&L's power plants, are significantly contributing to non-attainment in those states. The EPA has proposed to find such contribution and require emissions reductions at those sources if the states in which those sources are located fail to develop plans by September 1999 to implement the proposed 2003 limits. PP&L estimates that compliance with these emissions reduction requirements could require installation of NOx emissions removal systems on PP&L's three largest coal-fired units, at a capital cost of approximately $35 million per unit. The new particulates standard may require further reductions in SO2 and may expand the planned seasonal NOx reductions to year round in the 2010-2012 timeframe. 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. The EPA released a technical report of its findings to date and concluded that mercury is the power plant 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. The EPA is now seeking mercury and chlorine sampling and other data from electric generating units including PP&L's. In addition, the EPA has announced a new enforcement initiative against older coal-fired plants. Several of PP&L's coal-fired plants could fall into this category. These EPA initiatives could result in compliance costs for PP&L in amounts which are not now determinable but which could be material. 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 1998 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. 17 Water and Residual Waste ------------------------ PP&L has installed dry fly ash handling systems at most of its power stations, which reduces waste water discharge. In other cases, PP&L has modified the existing facilities to allow continued operation of the ash basins under a DEP residual waste permit. Any groundwater contamination caused by the basins must also be addressed under DEP's residual waste regulations. 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 final NPDES permit for the Montour plant contains stringent limits for iron and chlorine discharges. Depending on the results of a toxic reduction study, additional water treatment facilities or operational changes may be needed at this plant. Capital expenditures through the year 2003 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 1998 Form 10-K. In this regard, PP&L currently estimates that $5.5 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 2003 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. Remediation Under Multi-Site Consent Orders ------------------------------------------- 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, 1999, PP&L has completed work on slightly more than half of the sites included in the consent order. 18 In 1996, Penn Fuel Gas entered into a similar consent order with the DEP to address a number of its sites where Penn Fuel Gas may be liable for remediation of contamination. The sites primarily include former coal gas manufacturing facilities. Prior to PP&L Resources acquiring Penn Fuel Gas on August 21, 1998, Penn Fuel Gas had obtained a "no further action" determination from the DEP for two of the 20 sites covered by the order. At March 31, 1999, PP&L had accrued approximately $6 million and Penn Fuel Gas had accrued $15 million, representing the respective amounts PP&L and Penn Fuel Gas can reasonably estimate they will have to spend to remediate sites involving the removal of hazardous or toxic substances, including those covered by each company's consent orders 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 for PP&L or Penn Fuel Gas, which neither company can 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 or Penn Fuel Gas, held responsible for cleanup of such sites. Such natural resource damage claims against PP&L or Penn Fuel Gas 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. LOAN GUARANTEES OF AFFILIATED COMPANIES PP&L Resources provides certain guarantees for its subsidiaries. Specifically, PP&L Resources guarantees all of the debt of PP&L Capital Funding. As of March 31, 1999, PP&L Resources had guaranteed (as shown on its Consolidated Balance Sheet) consisting of $397 million of medium-term notes and $515 million of commercial paper issued by PP&L Capital Funding and $19 million of notes of North Penn Gas Co., a subsidiary of Penn Fuel Gas. In addition, PP&L Resources provided $13 million of loan guarantees to a PP&L Global subsidiary. PP&L Resources also has guaranteed certain obligations of PP&L EnergyPlus for up to $157 million under certain power purchase and sales agreements. At March 31, 1999, PP&L provided a guarantee in the amount of $12 million in support of one of its subsidiaries. 19 10. Acquisitions In February 1999, PP&L Resources acquired McCarl's; and in April 1999, PP&L Spectrum acquired Burns Mechanical. These mechanical contractor and engineering firms were purchased for amounts that were not material. In September 1998, PP&L Global announced an agreement to acquire most of Bangor Hydro-Electric Company's generating assets (100% of its hydroelectric assets) and certain transmission rights, as well as its interest in an oil-fired generation facility, for $89 million. All necessary regulatory approvals have been obtained and a May 1999 closing is anticipated. PP&L Global also has signed definitive agreements with Montana Power Company, Portland General Electric Company and Puget Sound Energy, Inc. to acquire 13 Montana power plants, with 2,614 MW of generating capacity, for a purchase price of $1.586 billion. The acquisition is subject to several conditions, including the receipt of required state and federal regulatory approvals and third-party consents. In this regard, PP&L Global will own 100% of Colstrip units 1 and 2 and 75% of Colstrip units 3 and 4 as both PacifiCorp and Avista Corporation will maintain their existing ownership percentages. PP&L Global expects to complete this acquisition by the end of 1999. About 65% of the acquisition cost is expected to be financed on a project credit basis, non- recourse to PP&L Global and PP&L Resources. The balance of the acquisition cost is expected to be financed through a combination of debt and equity issued by PP&L Resources. The agreements also provide for PP&L Global's acquisition of related transmission assets for an additional $182 million, subject to certain conditions, including federal regulatory approval. 20 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 and PP&L Global 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, 1998. 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, including, but not limited to, statements with respect to future earnings growth, are "forward-looking statements" within the meaning of the federal securities laws. Although PP&L Resources and PP&L believe that the expectations and assumptions 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; new state or federal legislation; national or regional economic conditions; market demand and prices for energy, capacity and fuel; 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; operating performance of plants and other facilities; environmental conditions and requirements; system conditions (including actual results in achieving Year 2000 compliance by PP&L Resources, its subsidiaries and others) and operating costs; performance of new ventures; political, regulatory or economic conditions in foreign countries where PP&L Global makes investments; foreign 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. 21 New factors that could cause actual results to differ materially from those described in forward-looking statements emerge from time to time, and it is not possible for PP&L Resources or PP&L to predict all of such factors, or the extent to which any such factor or combination of factors may cause actual results to differ from those contained in any forward-looking statement. Any forward-looking statement speaks only as of the date on which such statement is made, and neither PP&L Resources nor PP&L undertakes any obligation to update the information contained in such statement to reflect subsequent developments or information. 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, 1999, to the comparable period ended March 31, 1998. 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, ----------------------------- 1999 1998 ------ ------ Earnings per share - excluding weather variances $ 0.79 $ 0.71 Weather variances on billing-adjusted sales (0.03) (0.11) ------ ------ Earnings per share - reported $ 0.76 $ 0.60 ====== ======
Excluding the impact of weather, earnings per share were eight cents higher for the three months ended March 31, 1999, when compared with the same period in 1998. The earnings improvement reflects higher margins on wholesale energy marketing and trading activities, higher first quarter earnings of PP&L Global, and the contribution of Penn Fuel Gas, which was acquired by PP&L Resources in August 1998. Depreciation and income tax expense were lower in the first three months of 1999 compared with 1998, a direct result of the restructuring adjustments recorded by PP&L in June 1998. PP&L Resources' September 1998 common stock purchase program also had a favorable impact on earnings per share. These earnings gains were partially offset by a four percent rate reduction for electricity delivery customers effective January 1, 1999 through December 31, 1999. PP&L revenues were further impacted by the loss of commercial and industrial customers who chose alternate suppliers for their generation 22 supply. In addition, PP&L incurred higher operating expenses associated with the move to a competitive market, and lost the benefit of certain regulatory treatment that improved earnings during the first three months of 1998. In 1998, PP&L was able to defer the loss of revenue experienced during the customer choice pilot program. Moreover, PP&L was permitted to recoup a portion of its undercollected energy costs as part of its restructuring filing. PP&L Resources has forecasted earnings per share of $2.15 for 1999, $2.40 for 2000 and $2.60 for 2001. Adjusted earnings per share for 1998 were $2.07. PP&L Resources has made certain assumptions in this forecast. Major assumptions include the following: o The market clearing price of generation will be about 12% and 7% higher for 1999 and 2000, respectively, than previous forecasts (which were 2.85 and 3.10 cents per kWh in 1999 and 2000, respectively). o Annual growth in electricity delivered by PP&L will be 1.5% in each of 2000 and 2001. o Commencing January 1999, certain PP&L customers were able to choose their electricity supplier. It is assumed that the percentage of total customer load that will "shop" for electricity will be 29% in 1999 and 32% in each of 2000 and 2001. It is also assumed that PP&L will retain 55% of such shopping load each year. o The average number of common stock shares outstanding in 1999, 2000 and 2001 will be 159, 170 and 171 million, respectively. The foregoing forecast and assumptions do not reflect the effects of any securitization of transition costs by PP&L under the Customer Choice Act. PP&L expects to securitize up to $2.85 billion of its stranded costs later in 1999, subject to PUC approval of PP&L's petition for a supplementary Qualified Rate Order. Assuming PUC approval of this petition as filed, PP&L Resources expects the 2000 earnings forecast to improve by five cents per share to $2.45, and the 2001 forecast to improve by 10 cents per share to $2.70. 23 Electric Energy Sales Electricity sales for 1999 and 1998 were as follows:
Three Months Ended March 31, ---------------------------- 1999 1998 ------------- ------------- (Millions of kWh) Electricity delivered to retail customers by PP&L (a) 9,180 8,456 Less: Electricity supplied under competition by others 1,394 491 ----- ----- Electricity supplied to retail customers by PP&L 7,786 7,965 Electricity supplied to retail customers by PP&L EnergyPlus under competition 1,240 231 ----- ----- Total electricity supplied to retail customers (a) 9,026 8,196 Wholesale Energy Sales 9,119 8,830
(a) kWh for customers residing in PP&L's service territory who are receiving energy from PP&L or EnergyPlus will be reflected in both of these categories. Under Pennsylvania's Electric Choice program, customers were allowed to choose the supplier of their electricity beginning on January 1, 1999. Customers making this choice continue to have the utility that serves their territory deliver electricity from the supplier of choice. "Electricity delivered to retail customers by PP&L" is the amount of electricity delivered by PP&L to customers in its service territory. "Electricity supplied to retail customers by PP&L" represents the amount of electricity supplied to PP&L service territory customers who are not participating in the Electric Choice program. "Electricity supplied to retail customers by PP&L EnergyPlus under competition" is electricity supplied to customers within and outside PP&L's service territory who participate in the Electric Choice program and chose EnergyPlus as their energy supplier. Electricity delivered to retail customers increased in the three months ended March 31, 1999, by 724 million kWh, or 8.6%, from the comparable period in 1998. If normal weather had been experienced in 1999 and 1998, deliveries would have increased 3.1%. Total electricity supplied to retail customers has increased by 830 million kWh in the three months ended March 31, 1999, from the comparable period in 1998. This increase is due to the increased market share 24 EnergyPlus has captured among customers participating in the Energy Choice program, and the impact of mild weather on sales in the first quarter of 1998. The increase in wholesale energy sales, which includes sales to other utilities and energy marketers through contracts, spot market transactions or power pool arrangements, was primarily the result of increased activity of the Energy Marketing Center. See "Operating Revenues: Wholesale Energy Marketing and Trading Activities" for more information. Energy Marketing and Trading Activities PP&L purchases and sells electric capacity and energy at the wholesale level under its FERC market-based tariff. PP&L has entered into agreements to sell firm capacity or energy under its market-based tariff to certain entities located inside and outside of the PJM power pool. PP&L enters into these agreements to market available energy and capacity from its generating assets and to profit from market price fluctuations. PP&L is actively managing its portfolio to attempt to capture the opportunities and limit its exposure to volatile prices. PP&L purchases and sells energy futures contracts in accordance with its risk management objectives and strategies. PP&L has entered into an agreement to provide wholesale energy marketing, trading and risk management services an energy cooperative organization that provides energy-related services to public power entities. The market risk associated with this type of activity is not material. PP&L expects to expand its activities by entering into similar agreements with other counterparties. Quantitative and Qualitative Disclosures About Market Risk The effects of PP&L Resources' and PP&L's market risks associated with commodity prices, foreign currency exchange rates, equity prices, and interest rates for debt recorded on the Consolidated Balance Sheet have not changed materially since December 31, 1998. However, during March 1999, PP&L Resources entered into forward starting interest rate swaps with various counterparties to hedge the interest rate risk associated with anticipated debt issuances. These interest rate swap agreements involve the exchange of floating rate interest rate payments for fixed rate interest payments over the life of the agreements. PP&L Resources agreed to pay fixed rates between 5.815% and 5.8725% on notional amounts of $180 million with maturity dates of July 30, 2004 and 2005. PP&L Resources also agreed to pay fixed rates between 6.04% and 6.08% on notional amounts of $120 million with a maturity date of September 15, 2009. PP&L Resources will receive a variable interest payment based on the 6-month LIBOR rate through the maturity dates of the agreements. The estimated fair value of the forward interest rate swaps, which represents the estimated amount PP&L Resources would receive if it terminated these agreements on March 31, 1999, was $700,000. PP&L Resources is exposed to changes in the fair value of the forward starting interest rate swaps. At March 31, 1999, PP&L Resources, based on 25 historical trends, estimated its potential maximum exposure to a change in the fair value of its forward starting interest rate swaps through a downward movement in interest rates over a one-day period, based on a confidence level of 97.5%, at $2.2 million. Market events that are inconsistent with historical trends could cause actual results to exceed estimated exposure levels. Operating Revenues Electric Operations - ------------------- The increase (decrease) in revenues from electric operations was attributable to the following:
Three Months Ended ---------------------------------- March 31, 1999 vs. March 31, 1998 ---------------------------------- (Millions of Dollars) Retail Electric Revenue PP&L: Weather effect $ 23 Sales volume and sales mix (38) Unbilled (17) PP&L EnergyPlus: Sales volume and sales mix 50 Unbilled 27 Other 6 ---- $51
Operating revenues for electric operations increased by $51 million, or 8.3%, for the three months ended March 31, 1999, when compared to the same period in 1998. Excluding the effects of weather in both periods, revenue increased by $28 million in 1999 over 1998. Although weather unfavorably impacted revenues for the first quarter of 1999, the same period in 1998 saw the largest unfavorable weather impact on earnings in the 27 years PP&L has tracked such weather effects. Weather-normalized retail sales by PP&L were $55 million lower in the first quarter of 1999 when compared to the same period in 1998. In connection with the PUC's Final Order in PP&L's restructuring proceeding, retail rates were reduced by four percent effective January 1, 1999 through December 31, 1999. Additionally, PP&L revenues were impacted by the loss of commercial and industrial customers who chose alternate suppliers for their generation supply. A portion of the revenue collected from customers is applied to amortize the recoverable transition costs established as part of the restructuring filing. This amortization is reflected as a separate line on the income statement under "Operating Expenses". 26 PP&L EnergyPlus, an unregulated subsidiary of PP&L marketing retail energy in Pennsylvania, provided $77 million of billed and unbilled revenues in the first quarter of 1999. These revenues were partially offset by increased power purchases to meet these sales. Gas and Propane Operations - -------------------------- PP&L Resources acquired Penn Fuel Gas in August, 1998. The results of Penn Fuel Gas, including revenues and the associated costs from gas and propane operations, have been recorded subsequent to acquisition. Wholesale Energy Marketing and Trading Activities - ------------------------------------------------- The increase (decrease) in revenues from wholesale energy and trading activities was attributable to the following: Three Months Ended ------------------ March 31, 1999 vs. March 31, 1998 --------------------------------- (Millions of Dollars) Bilaterial Sales $ 21 PJM 13 Cost-based contracts (14) Oil & gas sales 32 --- $ 52 === Revenues from wholesale energy and trading activities increased by $52 million for the three months ended March 31, 1999, when compared to the same period in 1998. Revenues have continued to increase despite the phase-down of the capacity and energy agreements with JCP&L and Atlantic. This increase reflects PP&L's continued emphasis on competing in wholesale markets. Energy purchases have also increased to meet these increased sales. Refer to "Energy Purchases" for more information. Energy-related Businesses Energy-related businesses contributed $17 million and $5 million to the operating income of PP&L Resources for the three months ended March 31, 1999 and 1998, respectively. These results reflect higher equity earnings from PP&L Global's investment in SWEB, which were partially offset by higher interest expense. Energy-related businesses including PP&L Global, PP&L Spectrum, H.T. Lyons, McClure, and McCarl's are expected to provide an increasing share of PP&L Resources' future earnings. Energy Purchases Energy purchases increased by $41 million for the three months ended March 31, 1999, over the comparable period in 1998. This increase was primarily due to purchases of energy to support PP&L EnergyPlus sales, as well as purchases of gas and capacity from other utilities to meet activities of the Energy Marketing Center. These costs were slightly offset by the mark-to-market accounting related to energy trading 27 activities as well as the amortization of the above market NUG purchases. See Financial Note 15 of PP&L Resources' 1998 Form 10-K for additional information. Other Operation Expenses Other operation expenses increased by $54 million for the three months ended March 31, 1999, compared with the same period in 1998. About $15 million of the increase was due to certain regulatory credits that were no longer effective in 1999. In 1998, PP&L was able to defer the loss of revenue experienced during the customer choice pilot program. In 1998, PP&L also was permitted to defer undercollected energy costs. These regulatory credits were recorded as offsets to Other Operating Expense in the first quarter of 1998. The remaining increase was due to increased transmission charges and selling expenses associated with supplying energy to customers throughout Pennsylvania participating in the state's Electric Choice program, an increase in wage and benefit costs, and the operating costs of Penn Fuel Gas, which was acquired in August 1998. Power Plant Operations On April 29, 1999, PP&L's Holtwood coal-fired generating station was closed. The adjacent hydroelectric plant will continue to operate. The closing, which was announced in August 1998, is part of an effort to reduce operating costs and position PP&L for the competitive marketplace. In addition, PP&L currently is negotiating for the sale of its Sunbury coal-fired generating station. Depreciation and Amortization Expenses Depreciation and amortization expenses decreased by $37 million for the three months ended March 31, 1999, compared with the same period in 1998. This decrease was mainly due to the write-down of generation-related assets in connection with the restructuring adjustments recorded in June 1998. See Financial Note 4 of PP&L Resources' and PP&L's 1998 Form 10-K for additional information. Income Taxes For the three months ended March 31, 1999, income tax expense decreased by $10 million, or 11.9%, from the comparable period in 1998. This decrease was primarily due to tax changes relating to the second quarter 1998 restructuring write-off. 28 Financial Condition ------------------- Financing Activities The following financing activities have occurred to date in 1999: o Effective March 1, 1999, the DRIP was changed from a new issue to an open market purchase program. In January and February 1999, PP&L Resources issued $8 million of new common stock through the DRIP. o In September 1998, PP&L Resources obtained authorization from the Board of Directors to purchase up to three million shares of its common stock on the open market. PP&L Resources has entered into a forward purchase agreement with a third party to acquire these shares. The third party has completed this three million share repurchase. o In April 1999, PP&L Resources' Board of Directors authorized the purchase of an additional four million shares of common stock on the open market from time to time. Refer to Financial Note 8 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, 1999, decreased $153 million from the comparable period in 1998. The reasons for this change were: o A $52 million decrease in cash provided by operating activities, primarily due to the decline in net income when adjusted for the impact of certain non-cash items. Earnings in 1999 benefited from a net unrealized mark-to-market gain on trading activities, amortization of the liability for above-market NUG purchases and lower depreciation. The decrease also reflects lower margins on retail revenues and an increase in operating expenses as a result of the move to a competitive market. The decline in cash provided by operating activities is also attributable to higher interest expenses in the first quarter of 1999 compared with the same period in 1998. o A $113 million decrease in cash used in investing activities, primarily due to a decrease in PP&L Global's investment in unconsolidated affiliates. o A $214 million decrease in cash from financing activities. This decrease was due to issuance of $60 million of long-term debt in 1998 and a decrease in short-term debt of $30 million in the first quarter of 1999, as compared with an increase of $124 million in the first quarter of 1998. 29 Financial Indicators The results for the twelve months ended March 31, 1999 and 1998 were impacted by extraordinary items (i.e. regulatory restructuring charges taken in the second quarter of 1998), other one-time adjustments and weather. The following financial indicators for PP&L Resources reflect the elimination of these impacts from earnings, and provide a better measure of the underlying earnings performance of PP&L Resources and its subsidiaries.
12 Months Ended March 31, -------------------------- 1999 1998 ---- ---- Earnings per share, as adjusted $ 2.14 $ 1.99 Return on average common equity 12.47% 11.53% Ratio of pre-tax income to interest charges 3.55 3.50 Dividends declared per share $1.1675 $ 1.67 Book value per share $ 17.67 $17.01 Ratio of market price per share to book value per share 146% 138%
Acquisitions In February 1999, PP&L Resources acquired McCarl's; and in April 1999, PP&L Spectrum acquired Burns Mechanical. These mechanical contractor and engineering firms were purchased for amounts that were not material. In September 1998, PP&L Global announced an agreement to acquire most of Bangor Hydro-Electric Company's generating assets (100% of its hydroelectric assets) and certain transmission rights, as well as its interest in an oil-fired generation facility, for $89 million. All necessary regulatory approvals have been obtained and a May 1999 closing is anticipated. PP&L Global also has signed definitive agreements with Montana Power Company, Portland General Electric Company and Puget Sound Energy, Inc. to acquire 13 Montana power plants, with 2,614 MW of generating capacity, for a purchase price of $1.586 billion. The acquisition is subject to several conditions, including the receipt of required state and federal regulatory approvals and third-party consents. In this regard, PP&L Global will own 100% of Colstrip units 1 and 2 and 75% of Colstrip units 3 and 4 as both PacifiCorp and Avista Corporation will maintain their existing ownership percentages. PP&L Global expects to complete this acquisition by the end of 1999. About 65% of the acquisition cost is expected to be financed on a project credit basis, non- recourse to PP&L Global and PP&L Resources. The balance of the acquisition cost is expected to be financed through a 30 combination of debt and equity issued by PP&L Resources. The agreements also provide for PP&L Global's acquisition of related transmission assets for an additional $182 million, subject to certain conditions, including federal regulatory approval. 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, 1999, PP&L Global had investments of $674 million in distribution, transmission and generation facilities in the U.K., Bolivia, Peru, Argentina, Brazil, Spain, Portugal, Chile and El Salvador. PP&L Global's major investments to date are SWEB, Emel and DelSur. 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 1998 Form 10-K, except for loan guarantees discussed in Note 9 to the Financial Statements. 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. Pennsylvania Activities ----------------------- Reference is made to Note 3 to the Financial Statements in PP&L Resources' and PP&L's Form 10-K for the year ended December 31, 1998 for a discussion of PP&L's PUC restructuring proceeding under the Customer Choice Act. Reference is also made to Note 3 to the Financial Statements in PP&L Resources' and PP&L's Form 10-K for the year ended December 31, 1998 regarding PP&L's transfer of its retail electric marketing function to a separate, affiliated corporation. PP&L formed a new subsidiary, PP&L EnergyPlus, for this purpose. PP&L EnergyPlus has a PUC license to act as a Pennsylvania EGS. This license permits PP&L EnergyPlus to offer retail electric supply to participating customers in PP&L's service territory and in the service territories of other Pennsylvania utilities. In 1999, PP&L EnergyPlus is offering such supply to industrial and commercial customers throughout the state. At this time, PP&L EnergyPlus has determined not to pursue residential customers in the competitive marketplace based on economic considerations. 31 Federal Activities ------------------ 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. The FERC has not yet taken action on these filings. 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 and the requirement that PP&L modify these contracts to ensure that customers are not assessed multiple transmission charges. In March 1999, the FERC approved the request of the PJM Supporting Companies to permit generators to use market-based bids instead of cost-based bids when selling into the PJM Interchange Market. The existing $1000 per MWH cap on bids was retained. Accordingly, beginning on April 1, 1999, the hourly price of energy purchased on the PJM Interchange Market will be a market-based rate not exceeding $1000 per MWH. In September 1998, PP&L filed its EGS Coordination Tariff with the FERC. The EGS Coordination Tariff applies to entities licensed to serve retail electricity customers under the Commonwealth of Pennsylvania's retail access program. The purpose of the EGS Coordination Tariff is to permit PP&L to provide EGSs' with certain FERC-jurisdictional services which will facilitate the ability of EGS' to meet their obligations under the PJM Open Access Transmission Tariff and related agreements of the PJM. 32 The FERC accepted the EGS Coordination Tariff for filing in October 1998 but in a later order stated that it would issue a decision holding that the EGS Coordination Tariff did not need to be filed with the FERC. That decision has not yet been issued. Reference is made to "Pennsylvania Activities" above for a discussion of PP&L's retail electric marketing subsidiary, PP&L EnergyPlus. PP&L EnergyPlus has authority from the FERC to sell electric energy and capacity at market-based rates and to sell, assign or transfer transmission rights and associated ancillary services. PP&L has a FERC-filed code of conduct governing its relationship with such affiliates that engage in the sale and/or transmission of electric energy. Year 2000 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, the most reasonable worst case scenario regarding Year 2000 issues could result in computer shutdown or erroneous calculations causing operational problems at the generating stations; diminished ability to monitor, control and coordinate generation with the transmission and distribution systems; and adverse impacts on the operation of various monitoring and metering equipment utilized throughout PP&L's system. A Company-wide Year 2000 coordination committee was formed to raise the awareness of the Year 2000 issue, share information and review the progress towards compliance. A seven-step approach was developed to achieve Year 2000 compliance by assessing and remediating the problem in application software, hardware, plant control systems and devices containing embedded microprocessors. The seven steps in the plan include awareness, inventory, assessment, remediation, testing, implementation, and contingency planning. PP&L Resources has identified and communicated with critical suppliers, such as fuel suppliers, in order to obtain assurances that they are in compliance with Year 2000 issues. The majority of the responses from these parties are favorable, with some responses still being evaluated and followed-up as appropriate. Delivery of electricity is dependent on the overall reliability of the electric grid. PP&L is cooperating and coordinating with the North American Electric Reliability Council and the PJM Interconnection regarding Year 2000 remediation efforts. As of March 31, 1999, PP&L Resources estimates that approximately 83% of mainframe applications that will remain in production have been determined as being Year 2000 compliant. It is anticipated that all mission-critical systems (i.e. mainframe, embedded technologies, and client server applications) will be Year 2000 ready by July 1, 1999 and all systems ready by November 30, 1999. Year 2000 compliant means computer systems or equipment with date-sensitive chips will accurately process date and time data. Year 2000 ready means that the computer systems or equipment with date-sensitive chips can be used on January 1, 2000, and beyond, but are not fully year 2000 compliant. 33 PP&L has basic contingency plans in place to address issues such as blackouts on the electrical grid, cold starts of generating facilities and disaster recovery procedures for the computing environment. PP&L recognizes that additional contingency plans are necessary and, as part of the seven-step remediation process, continues to develop additional contingency plans that may be needed. The additional plans that have been developed address loss of telecommunications, loss of off-site power to various generating stations, degradation of emergency planning capabilities, running out of consumables, electrical system disturbance or failure, power plant control system failures, fuel delivery problems, problems with various relays or programming logic control, and staffing concerns. In May 1998, the NRC issued a notification requirement under which nuclear utilities are required to inform the NRC, in writing, that they are working to solve the Year 2000 computer problem. In addition, nuclear utilities have until July 1, 1999, to inform the NRC that their computers are Year 2000 compliant/ready or to submit a status report summarizing the on-going work. PP&L filed its written response with the NRC in August 1998, detailing its Year 2000 compliance activities. PP&L plans a further NRC filing by July 1, 1999, concerning the year 2000 readiness of the nuclear power plant. In February 1999, an independent assessment of the Nuclear Department's Year 2000 Program Readiness Plan was performed with no significant adverse findings identified. The results of that assessment are being incorporated into the overall Year 2000 Program Readiness Plan for the Nuclear Department. In May 1999, the NRC will be conducting an audit of PP&L's nuclear-related Year 2000 compliance activities. This audit will be observed by the PUC. In July 1998, the PUC initiated a non-adversarial investigation to be conducted by the Office of Administrative Law Judge "to accurately assess any and all steps taken and proposed to be taken to resolve the Year 2000 compliance issue by all jurisdictional fixed utilities and mission-critical service providers such as the PJM." The PUC required all jurisdictional utilities to file a written response to a list of questions concerning Year 2000 compliance; and that, if mission-critical systems cannot be made Year 2000 compliant on or before March 31, 1999, to file a detailed contingency plan by that date. PP&L filed its written response to the PUC questions in August 1998 and in November 1998 submitted testimony to the PUC that PP&L would have its mission-critical systems Year 2000 ready by July 1, 1999, and all systems ready by November 30, 1999. On March 31, 1999, PP&L filed its contingency plans with the PUC and will continue to update these plans on an ongoing basis. In early March 1999, the PUC conducted an audit of PP&L's Year 2000 compliance activities. In conjunction with this audit, PP&L submitted to the PUC an update to its November 1998 testimony. On March 26, 1999, the Company filed its Year 2000 testing schedule with the PUC; meanwhile 34 the PUC staff has been on-site observing some of the testing being performed. PP&L, along with utilities throughout the country, participated in an emergency exercise that simulated the loss of normal communications on the power grid as the result of Year 2000 computer problems. The results of the exercise demonstrated that all backup communication systems operated properly. An internal audit performed during the first quarter of 1999 evaluated the approaches used by each business entity within PP&L to address Year 2000 issues. This review indicated some improvements are required by certain business entities to improve their Year 2000 efforts to ensure that all mission-critical systems are either Year 2000 compliant or Year 2000 ready by July 1, 1999. The audit recommendations are being incorporated into the respective business entities' Year 2000 remediation efforts. PP&L also plans to follow-up on the status of the remediation efforts of mission-critical systems in order to ensure they will be Year 2000 compliant or Year 2000 ready by July 1, 1999. At this time, PP&L has achieved the following completion percentages on the seven steps referenced above for Year 2000 compliance: awareness, 94%; inventory, 99%; assessment, 98%; remediation, 83%; testing, 84%; implementation, 66%; and additional contingency plans (beyond the basic plans referenced above), 35%. Based upon present assessments, PP&L Resources estimates that it will incur approximately $14 million in Year 2000 remediation costs. Through March 31, 1999, PP&L Resources spent approximately $10 million in remediation costs, which included assistance from outside consultants. These costs are being funded through internally generated funds and are being expensed as incurred. 35 PP&L Resources, Inc. and PP&L, Inc. ----------------------------------- Item 3. Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------- Reference is made to "Quantitative and Qualitative Disclosures About Market Risk." 36 PP&L RESOURCES, INC. AND ------------------------ PP&L, INC. AND SUBSIDIARIES --------------------------- PART II. OTHER INFORMATION Item 1. Legal Proceedings - -------------------------- Reference is made to "Increasing Competition" for information regarding pending FERC proceedings. Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibits 3(i) - Amended and Restated Articles of PP&L, Inc. 12 - Computation of Ratio of Earnings to Fixed Charges 27 - Financial Data Schedule (b) Reports on Form 8-K Report dated February 18, 1999 ------------------------------ Item 5. Other Events Information regarding PP&L Resources' projected earnings for 1999 through 2001. Report dated March 10, 1999 --------------------------- Item 5. Other Events Information regarding PP&L Capital Funding's registration of $400 million of debt securities. 37 GLOSSARY OF TERMS AND ABBREVIATIONS Atlantic - Atlantic City Electric Company Bangor Hydro - Bangor Hydro-Electric Company Burns Mechanical - Burns Mechanical, Inc., a PP&L Spectrum unregulated subsidiary specializing in mechanical contracting and engineering. 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 Electricidad del Sur S.A., an electric distribution company in El Salvador 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. EGS - electric generation supplier 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 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. H.T. Lyons - H.T. Lyons, Inc., a PP&L Resources unregulated subsidiary specializing in mechanical contracting and engineering. ISO - Independent System Operator ITC - intangible transition charge JCP&L - Jersey Central Power & Light Company LIBOR - London Interbank Offering Rate McCarl's - McCarl's Inc., a PP&L Resources unregulated subsidiary specializing in mechanical contracting and engineering. McClure - McClure Company, a PP&L Resources unregulated subsidiary specializing in mechanical contracting and engineering. NO/x/ - nitrogen oxide NPDES - National Pollutant Discharge Elimination System NRC (Nuclear Regulatory Commission) - federal agency that regulates operation of nuclear power facilities 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. PCB (Polychlorinated Biphenyl) - additive to oil used in certain electrical equipment up to the late-1970s. Now classified as a hazardous chemical. 38 PECO - PECO Energy Company Penn Fuel Gas - Penn Fuel Gas, Inc., a PP&L Resources regulated subsidiary specializing in natural gas distribution, transmission and storage services, and the sale of propane. PJM (PJM Interconnection, LLC) - operates the electric transmission network and electric energy market in the mid-Atlantic region of the U.S. PP&L - PP&L, Inc. PP&L Capital Funding - PP&L Capital Funding, Inc., PP&L Resources' financing subsidiary. PP&L EnergyPlus - Refers to PP&L, Inc. d/b/a PP&L EnergyPlus, and PP&L EnergyPlus Co., a PP&L, Inc. unregulated subsidiary which is involved in retail electric generating supply. During 1998, PP&L, Inc. d/b/a PP&L EnergyPlus provided retail electric generating supply in the Pennsylvania retail pilot program. As a result of the PUC restructuring settlement, PP&L EnergyPlus became a separate subsidiary of PP&L, Inc. in September 1998. As of January 1999, PP&L EnergyPlus Co. is providing retail electric generating supply to customers throughout Pennsylvania. 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 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 Final Order - Final order issued by the PUC on August 27, 1998, approving the settlement of PP&L, Inc.'s restructuring proceeding. SEC - Securities and Exchange Commission SO/2/ - Sulfur dioxide SUPERFUND - federal and state legislation that addresses remediation of contaminated sites. SWEB - South Western Electricity plc, a British regional electric utility company. U.K. - United Kingdom YEAR 2000 - a set of date-related problems that may be experienced by software systems or applications. 39 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, 1999 /s/ John R. Biggar -------------------------------------- John R. Biggar Senior Vice President and Chief Financial Officer (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.) 40 EXHIBIT 12 PP&L RESOURCES, INC. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Millions of Dollars)
12 Months Ended 12 Months Ended March 31, December 31, ------------------------------------------------ 1999(a) 1998(a) 1997 1996 1995 1994 ------ ------ ------ ------ ------ ------ Fixed charges, as defined: Interest on long-term debt......................... $ 207 $ 203 $ 196 $ 207 $ 213 $ 214 Interest on short-term debt and other interest.............................. 37 33 26 17 18 18 Amortization of debt discount, expense and premium - net................................ 2 2 2 2 2 2 Interest on capital lease obligations Charged to expense............................. 8 8 9 13 15 12 Capitalized.................................... 2 2 2 2 2 1 Estimated interest component of operating rentals................................ 18 18 15 8 8 6 Proportionate share of fixed charges of 50-percent-or-less-owned persons.......................................... 1 1 1 1 1 1 ------ ------ ------ ------ ------ ------ Total fixed charges........................ $ 275 $ 267 $ 251 $ 250 $ 259 $ 254 ------ ------ ------ ------ ------ ------ Earnings, as defined: Net income......................................... $ 398 $ 379 $ 296 $ 329 $ 323 $ 216 Preferred and Preference Stock Dividend Requirements............................ 26 25 24 28 28 28 Less undistributed income of less than 50-percent-owned persons.................... - - - - - - ------ ------ ------ ------ ------ ------ 424 404 320 357 351 244 Add (Deduct): Income taxes....................................... 249 259 238 253 286 180 Amortization of capitalized interest................ on capital leases.................................. 2 2 2 4 5 9 Total fixed charges as above (excluding capitalized interest on capital lease obligations).................... 273 265 248 248 257 253 ------ ------ ------ ------ ------ ------ Total earnings............................. $ 948 $ 930 $ 808 $ 862 $ 899 $ 686 ====== ====== ====== ====== ====== ====== Ratio of earnings to fixed charges............................................ 3.45 3.48 3.22 3.45 3.47 2.70 ====== ====== ====== ====== ====== ======
(a) Excluding extraordinary items. 41 EX-3.1 2 AMENDED AND RESTATED ARTICLES OF INCORPORATION EXHIBIT 3(i) PP&L, INC. AMENDED AND RESTATED ARTICLES OF INCORPORATION ARTICLE I. The name of the Corporation is PP&L, INC. ARTICLE II. The location and post office address of the registered office of the Corporation in this Commonwealth is Two North Ninth Street Allentown, Pennsylvania 18101 ARTICLE III. The purpose or purposes for which the Corporation is incorporated under the Business Corporation Law of the Commonwealth of Pennsylvania are to engage in, and do any lawful act concerning, any or all lawful business for which a corporation may be incorporated under said Business Corporation Law, including but not limited to: 1. The supply of light, heat or power to the public by means of electricity or by any other means. 2. The production, generation, manufacture, transmission, storage, distribution or furnishing of artificial or natural gas, electricity or steam or air conditioning or refrigerating services, or any combination thereof to or for the public. 3. The diverting, pumping or impounding of water for the development or furnishing of hydroelectric power to or for the public. 4. The transportation of artificial or natural gas, electricity, petroleum or petroleum products or water or any combination of such substances for the public. 5. The diverting, developing, pumping, impounding, distributing or furnishing of water from either surface or subsurface sources to or for the public. 6. Manufacturing, processing, owning, using and dealing in personal property of every class and description, engaging in research and development, the furnishing of services, and acquiring, owning, using and disposing of real property of every nature whatsoever. ARTICLE IV. The term for which the Corporation is to exist is perpetual. ARTICLE V. The aggregate number of shares which the Corporation shall have authority to issue is 185,629,936 shares, divided into 629,936 shares of 4-1/2% Preferred Stock, par value $100 per share; 10,000,000 shares of Series Preferred Stock, par value $100 per share; 5,000,000 shares of Preference Stock, without nominal or par value; and 170,000,000 shares of Common Stock, without nominal or par value. ARTICLE VI. The designations, preferences, qualifications, limitations, restrictions, and the special or relative rights in respect of the shares of each class shall be as follows: -1- DIVISION A -- 4-1/2% PREFERRED STOCK Section 1. Dividend Rate. The 4-1/2% Preferred Stock shall be entitled to dividends, as provided in Division C, at the rate of four and one-half percent (4-1/2%) per annum, such dividends to be cumulative from the date of issuance thereof. Section 2. Restrictions on Certain Corporate Action. (A) Upon the vote of a majority of all the Directors of the Corporation and of a majority of the total number of shares of stock then issued and outstanding and entitled to vote, the Corporation may from time to time create or authorize one or more other classes of stock with such designations, rights, privileges, limitations, preferences, voting powers, prohibitions, restrictions or qualifications of the voting and other rights and powers and terms as to redemption as may be determined by said vote, which may be the same or different from the designations, rights, privileges, limitations, preferences, voting powers, prohibitions, restrictions or qualifications of the classes of stock of the Corporation then authorized; provided, however, that no new class of stock shall hereafter be created or authorized which is entitled to dividends or shares in distribution of assets on a parity with or in priority to the 4-1/2% Preferred Stock, nor shall there be created or authorized any securities convertible into shares of any such stock, unless the holders of record of not less than two- thirds of the number of shares of 4-1/2% Preferred Stock then outstanding shall consent thereto in writing or by voting therefor in person or by proxy at the meeting of shareholders at which the creation or authorization of such new class of stock or such convertible securities is considered. Any such vote may authorize any shares of any class then authorized but unissued to be issued as shares of such new class or classes. (B) The expressed rights, privileges, terms and conditions of the 4-1/2% Preferred Stock then outstanding shall not be amended, altered, changed or repealed in a manner substantially prejudicial to the holders thereof unless the holders of record of not less than two-thirds of the number of shares of the 4- 1/2% Preferred Stock then outstanding shall consent thereto in writing or by voting therefor in person or by proxy at the meeting of shareholders at which such amendment, alteration, change or repeal is considered. DIVISION B -- SERIES PREFERRED STOCK Section 1. Division into Series. (A) All shares of Series Preferred Stock shall be identical except that the dividend rate, the amount to which such shares shall be entitled upon redemption and upon liquidation, the sinking fund, if any, as well as the provisions, if any, with respect to convertibility may vary between different series. The Series Preferred Stock may be divided into, and issued from time to time, in one or more series, each of such series to have such distinctive designation, terms, relative rights, privileges, limitations, preferences and voting powers and such prohibitions, restrictions, and qualifications of the voting and other rights and powers as are fixed and determined in this Article VI or in a resolution or resolutions providing for the issue of such series adopted by the Board of Directors as provided in this Division B. (B) Authority is hereby expressly granted to the Board of Directors to establish one or more series of Series Preferred Stock and with respect to each series to fix and determine by resolution or resolutions providing for the issue of such series: (1) the number of shares to constitute such series and the distinctive designation thereof to distinguish the shares thereof from the shares of all other series and classes; (2) the dividend rate on the shares of such series, and the date or dates from which dividends shall be cumulative; (3) the amount to which shares of such series shall be entitled upon redemption; (4) the amount to which shares of such series shall be entitled upon liquidation; (5) the amount of the sinking fund, if any, for the purchase or redemption of shares of such series; and -2- (6) the terms and conditions, if any, upon which the shares of such series may be converted into other securities of the Corporation. Section 2. Restrictions on Certain Corporate Action. (A) Upon the vote of a majority of all of the Directors of the Corporation and of a majority of the total number of shares of stock then issued and outstanding and entitled to vote, the Corporation may from time to time create or authorize one or more classes of stock in addition to the Series Preferred Stock, the 4-1/2% Preferred Stock, the Preference Stock and the Common Stock, with such designations, rights, privileges, limitations, preferences, voting powers, prohibitions, restrictions or qualifications of the voting and other rights and powers and terms as to redemption as may be determined by said vote, which may be the same or different from the designations, rights, privileges, limitations, preferences, voting powers, prohibitions, restrictions or qualifications of the classes of stock of the Corporation then authorized; provided, however, that no new class of stock shall hereafter be created or authorized which is entitled to dividends or shares in distribution of assets on a parity with or in priority to the Series Preferred Stock, nor shall there be created or authorized any securities convertible into shares of any such stock, unless the holders of record of not less than two-thirds of the number of shares of the Series Preferred Stock and the 4-1/2% Preferred Stock then outstanding (consenting or voting as a single class separate from the holders of the Preference Stock and the Common Stock) shall consent thereto in writing or by voting therefor in person or by proxy at the meeting of shareholders at which the creation or authorization of such new class of stock or such convertible securities is considered. Any such vote may authorize any shares of any class then authorized but unissued to be issued as shares of such new class or classes. (C) The provisions of this Section 2 of this Division B requiring the approval of a specified percentage of the holders of the Series Preferred Stock and the 4-1/2% Preferred Stock voting or consenting as a class shall be construed as in addition to and not in substitution for, any provisions of Division A of this Article VI requiring the approval of the holders of a specified percentage of the 4-1/2% Preferred Stock. (D) The expressed rights, privileges, terms and conditions of the Series Preferred Stock then outstanding, insofar as they are set forth in the foregoing subsections of this Section 2 shall not be amended, altered, changed or repealed in a manner substantially prejudicial to the holders thereof unless (1) the holders of record of not less than two-thirds of the number of shares of the Series Preferred Stock and the 4-1/2% Preferred Stock then outstanding (consenting or voting as a single class separate from the holders of the Preference Stock and the Common Stock) shall consent thereto in writing or by voting therefor in person or by proxy at the meeting of shareholders at which such amendment, alteration, change or repeal is considered, and (2) the expressed rights, privileges, terms and conditions of the 4-1/2% Preferred Stock, are, at the same time, similarly amended, altered, changed or repealed. The expressed rights, privileges, terms and conditions of the Series Preferred Stock then outstanding, other than those set forth in the foregoing subsections of this Section 2, shall not be amended, altered, changed or repealed in a manner substantially prejudicial to the holders thereof unless the holders of record of not less than two-thirds of the number of shares of the Series Preferred Stock then outstanding shall consent thereto in writing or by voting therefor in person or by proxy at the meeting of shareholders at which such amendment, alteration, change or repeal is considered. Section 3. Variations Among Series of Series Preferred Stock. (A) 4.60% Series Preferred Stock. The terms of the "4.60% Series Preferred Stock," in the respects in which the shares of such series may vary from shares of other series of the Series Preferred Stock shall be as follows: the dividend rate shall be 4.60% per annum, and dividends on each share of such series shall be cumulative from the date or dates of initial issue of shares of such series; the redemption price shall be $103 per share at any time; $103 per share shall be payable upon any voluntary liquidation, dissolution or winding up of the Corporation and $100 per share shall be payable upon any involuntary liquidation, dissolution or winding up of the Corporation. The number of shares of this series authorized is 63,000 shares. (B) 4.40% Series Preferred Stock. The terms of the "4.40% Series Preferred Stock" in the respects in which the shares of such series may vary from shares of other series of the Series Preferred Stock shall be as follows: the dividend rate shall be 4.40% per annum, and dividends on each share of such series shall be cumulative from the date or dates of the initial issue of shares of such series; the redemption price shall be $102 per share at any time; $102 per share shall be payable upon any voluntary liquidation, dissolution or winding up of the Corporation and -3- $100 per share shall be payable upon any involuntary liquidation, dissolution or winding up of the Corporation. The number of shares of this series authorized is 229,214 shares. (C) 3.35% Series Preferred Stock. The terms of the "3.35% Series Preferred Stock" in the respects in which the shares of such series may vary from shares of other series of the Series Preferred Stock shall be as follows: the dividend rate shall be 3.35% per annum and dividends on each share of such Series shall be cumulative from the date or dates of the initial issue of shares of such series; the redemption price shall be $103.50 per share at any time; $103.50 per share shall be payable upon any voluntary liquidation, dissolution or winding up of the Corporation and $100 per share shall be payable upon any involuntary liquidation, dissolution or winding up of the Corporation. The number of shares of this series authorized is 53,248 shares. (D) 6.75% Series Preferred Stock. The terms of the "6.75% Series Preferred Stock" in the respects in which the shares of such series may vary from shares of other series of the Series Preferred Stock shall be as follows: (1) The dividend rate shall be 6.75% per annum and dividends on each share of such Series shall be cumulative from the date or dates of the initial issue of shares of such series; (2) Shares of this Series are not redeemable prior to October 1, 2003. On or after October 1, 2003, the Corporation may, by resolution of the Board of Directors or the Executive Committee of the Board of Directors, redeem all, or from time to time, any part of the outstanding shares of this Series, at the following redemption prices per share:
IF REDEEMED DURING TWELVE MONTH REDEMPTION ------------------------------- ---------- PERIOD ENDING SEPTEMBER 30 PRICES ------------------------------- ------ 2004.............................................. 103.38% 2005.............................................. 103.04 2006.............................................. 102.70 2007.............................................. 102.36 2008.............................................. 102.03 2009.............................................. 101.69 2010.............................................. 101.35 2011.............................................. 101.01 2012.............................................. 100.68 2013.............................................. 100.34
and thereafter at $100.00 per share. Any shares of this Series which are redeemed, repurchased or otherwise reacquired by the Corporation shall, until further action by the Board of Directors or the Executive Committee of the Board of Directors, have the status of authorized and unissued shares of Series Preferred Stock, without designation as to series. (3) $100.00 per share shall be payable upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation. The shares of this Series shall not be convertible into shares of any other class or classes or into any other securities of the Corporation. The number of shares of this series authorized is 850,000 shares. (E) 6.125% Series Preferred Stock. The terms of the "6.125% Preferred Stock" in the respects in which the shares of such series may vary from shares of other series of the Series Preferred Stock shall be as follows: (1) The dividend rate shall be 6.125% per share per annum and dividends on each share of such Series shall be cumulative from the date or dates of the initial issue of shares of such Series; (2) So long as any shares of this Series remain outstanding, the Corporation, after full dividends on all outstanding shares of the 4-1/2% Preferred Stock and the Series Preferred Stock, including this Series, for all past dividend periods shall have been paid or set aside, shall redeem as and for a sinking fund for the retirement of this Series (the "6.125% Sinking Fund"), out of funds legally available therefor, (i) annually on October 1 in -4- each of the years 2003 through 2007, 57,500 shares of this Series, and (ii) on October 1, 2008, the remaining shares of this Series. The Corporation's obligation to make redemptions for the 6.125% Sinking Fund on any such October 1 as provided in this subparagraph (2) (such obligations on each such date being herein called the "6.125% Sinking Fund Obligation") shall be cumulative so that if on any such October 1 the funds of the Corporation legally available for the 6.125% Sinking Fund shall be insufficient to permit the Corporation to discharge its 6.125% Sinking Fund Obligation on such date, or if for any other reason such 6.125% Sinking Fund Obligation shall not have been discharged in full on such date, then such 6.125% Sinking Fund Obligation, to the extent not discharged, shall become an additional 6.125% Sinking Fund Obligation for each succeeding October 1 until fully discharged. The price at which shares of this Series shall be called for redemption through the 6.125% Sinking Fund shall be $100 per share, plus an amount equal to accumulated and unpaid dividends to the date of such redemption computed as provided in Section 5 of Division C of Article VI of these Amended and Restated Articles of Incorporation. The Corporation's 6.125% Sinking Fund Obligation may be discharged, in whole or part, by the application of any shares of this Series purchased or otherwise acquired by the Corporation on or before such date. If the Corporation shall for any reason fail to discharge in full its 6.125% Sinking Fund Obligation on any such October 1, the Corporation shall not thereafter, unless and until such 6.125% Sinking Fund Obligation and its 6.125% Sinking Fund Obligation for each and every prior October 1 shall have been discharged in full, declare or pay any dividend on, or make any other distribution of property with respect to, or purchase or otherwise acquire, any of its Common Stock. (3) Shares of this Series are not redeemable prior to October 1, 2003. On and after October 1, 2003, the Corporation may, by resolution of the Board of Directors or the Executive Committee of the Board of Directors, redeem all, or from time to time, any part of the outstanding shares of this Series at $100 per share. Any shares of this Series which are redeemed, repurchased or otherwise reacquired by the Corporation shall, until further action by the Board of Directors or the Executive Committee of the Board of Directors, have the status of authorized and unissued shares of Series Preferred Stock, without designation as to series. (4) $100.00 per share shall be payable upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation. The shares of this Series shall not be convertible into shares of any other class or classes or into any other securities of the Corporation. The number of shares of this series authorized is 1,150,000 shares. (F) 6.33% Series Preferred Stock. The terms of the "6.33% Preferred Stock" in the respects in which the shares of such series may vary from shares of other series of the Series Preferred Stock shall be as follows: (1) The dividend rate shall be 6.33% per share per annum and dividends on each share of such Series shall be cumulative from the date or dates of the initial issue of shares of such Series; (2) So long as any shares of this Series remain outstanding, the Corporation, after full dividends on all outstanding shares of the 4-1/2% Preferred Stock and the Series Preferred Stock, including this Series, for all past dividend periods shall have been paid or set aside, shall redeem as and for a sinking fund for the retirement of this Series (the "6.33% Sinking Fund"), out of funds legally available therefor, (i) annually on July 1 in each of the years 2003 through 2007, 50,000 shares of this Series, and (ii) on July 1, 2008, the remaining shares of this Series. The Corporation's obligation to make redemptions for the 6.33% Sinking Fund on any such July 1 as provided in this subparagraph (2) (such obligations on each such date being herein called the "6.33% Sinking Fund Obligation") shall be cumulative so that if on any such July 1 the funds of the Corporation legally available for the 6.33% Sinking Fund shall be insufficient to permit the Corporation to discharge its 6.33% Sinking Fund obligation on such date, or if for any other reason such 6.33% Sinking Fund Obligation shall not have been discharged in full on such date, then such 6.33% Sinking Fund Obligation, to the extent not discharged, shall become an additional 6.33% Sinking Fund Obligation for each succeeding July 1 until fully discharged. The price at which shares of this Series shall be called for redemption through the 6.33% Sinking Fund shall be $100 per share, plus an amount equal to accumulated and unpaid dividends to the date of such redemption computed as provided in Section 5 of Division C of Article VI of these Amended and Restated Articles of Incorporation. The Corporation's 6.33% Sinking Fund Obligation may be discharged, in whole or part, by the application of any shares of this Series purchased or otherwise acquired by the Corporation on or -5- before such date. If the Corporation shall for any reason fail to discharge in full its 6.33% Sinking Fund Obligation on any such July 1, the Corporation shall not thereafter, unless and until such 6.33% Sinking Fund Obligation and its 6.33% Sinking Fund Obligation for each and every prior July 1 shall have been discharged in full, declare or pay any dividend on, or make any other distribution of property with respect to, or purchase or otherwise acquire, any of its Common Stock. (3) Shares of this Series are not redeemable prior to October 1, 2003. On and after October 1, 2003, the Corporation may, by resolution of the Board of Directors or the Executive Committee of the Board of Directors, redeem all, or from time to time, any part of the outstanding shares of this Series at $100 per share. Any shares of this Series which are redeemed, repurchased or otherwise reacquired by the Corporation shall, until further action by the Board of Directors or the Executive Committee of the Board of Directors, have the status of authorized and unissued shares of Series Preferred Stock, without designation as to series. (4) $100.00 per share shall be payable upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation. The shares of this Series shall not be convertible into shares of any other class or classes or into any other securities of the Corporation. The number of shares of this series authorized is 1,000,000 shares. (G) 5.95% Series Preferred Stock. The terms of the "5.95% Preferred Stock" in the respects in which the shares of such series may vary from shares of other series of the Series Preferred Stock shall be as follows: (1) The dividend rate shall be 5.95% per share per annum and dividends on each share of such Series shall be cumulative from the date or dates of the initial issue of shares of such Series; (2) The Corporation, after full dividends on all outstanding shares of the 4-1/2% Preferred Stock and the Series Preferred Stock including this Series, for all past dividend periods shall have been paid or set aside, shall redeem as and for a sinking fund for the retirement of this Series (the "5.95% Sinking Fund"), out of funds legally available therefor, on April 1, 2001, all of the outstanding shares of this Series. If on April 1, 2001, the required number of shares shall not be redeemed because of the lack of legally available funds, or for any other reason, the amount required to be redeemed shall be carried forward until such obligation is fully discharged. The price at which shares of this Series shall be called for redemption through the 5.95% Sinking Fund shall be $100 per share, plus an amount equal to accumulated and unpaid dividends to the date of such redemption computed as provided in Section 5 of Division C of Article VI of these Amended and Restated Articles of Incorporation. If the Corporation shall for any reason fail to discharge in full its 5.95% Sinking Fund obligation on April 1, 2001, the Corporation shall not thereafter, unless and until such 5.95% Sinking Fund obligation shall have been discharged in full, declare or pay any dividend on, or make any other distribution of property with respect to, or purchase or otherwise acquire, any of its Common Stock. Any shares of this Series which are redeemed, repurchased or otherwise reacquired by the Corporation shall, until further action by the Board of Directors or the Executive Committee of the Board of Directors, have the status of authorized and unissued shares of Series Preferred Stock, without designation as to series. (3) The amount per share for this Series payable to the holders thereof upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation shall be $100. The shares of this Series shall not be convertible into shares of any other class or classes or into any other securities of the Corporation. The number of shares of this Series authorized is 300,000 shares. (H) 6.05% Series Preferred Stock. The terms of the "6.05% Preferred Stock" in the respects in which the shares of such series may vary from shares of other series of the Series Preferred Stock shall be as follows: (1) The dividend rate shall be 6.05% per share per annum and dividends on each share of such Series shall be cumulative from the date or dates of the initial issue of shares of such Series; (2) The Corporation, after full dividends on all outstanding shares of the 4-1/2% Preferred Stock and the Series Preferred Stock, including this Series, for all past dividend periods shall have been paid or set aside, -6- shall redeem as and for a Sinking Fund for the retirement of this Series (the "6.05% Sinking Fund"), out of funds legally available therefor, on April 1, 2002, all of the outstanding shares of this Series. If on April 1, 2002, the required number of shares shall not be redeemed because of the lack of legally available funds, or for any other reason, the amount required to be redeemed shall be carried forward until such obligation is fully discharged. The price at which shares of this Series shall be called for redemption through the 6.05% Sinking Fund shall be $100 per share, plus an amount equal to accumulated and unpaid dividends to the date of such redemption computed as provided in Section 5 of Division C of Article VI of these Amended and Restated Articles of Incorporation. If the Corporation shall for any reason fail to discharge in full its 6.05% Sinking Fund obligation on April 1, 2002, the Corporation shall not thereafter, unless and until such 6.05% Sinking Fund obligation shall have been discharged in full, declare or pay any dividend on, or make any other distribution of property with respect to, or purchase or otherwise acquire, any of its Common Stock. Any shares of this Series which are redeemed, repurchased or otherwise reacquired by the Corporation shall, until further action by the Board of Directors or the Executive Committee of the Board of Directors, have the status of authorized and unissued shares of Series Preferred Stock, without designation as to series. (3) The amount per share for this Series payable to the holders thereof upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation shall be $100. The shares of this Series shall not be convertible into shares of any other class or classes or into any other securities of the Corporation. The number of shares of this Series authorized is 250,000 shares. (I) 6.15% Series Preferred Stock. The terms of the "6.15% Preferred Stock" in the respects in which the shares of such series may vary from shares of other series of the Series Preferred Stock shall be as follows: (1) The dividend rate shall be 6.15% per share per annum and dividends on each share of such Series shall be cumulative from the date or dates of the initial issue of shares of such Series; (2) The Corporation, after full dividends on all outstanding shares of the 4-1/2% Preferred Stock and the Series Preferred Stock, including this Series, for all past dividend periods shall have been paid or set aside, shall redeem as and for a sinking fund for the retirement of this Series (the "6.15% Sinking Fund"), out of funds legally available therefor, on April 1, 2003, all of the outstanding shares of this Series. If on April 1, 2003, the required number of shares shall not be redeemed because of the lack of legally available funds, or for any other reason, the amount required to be redeemed shall be carried forward until such obligation is fully discharged. The price at which shares of this Series shall be called for redemption through the 6.15% Sinking Fund shall be $100 per share, plus an amount equal to accumulated and unpaid dividends to the date of such redemption computed as provided in Section 5 of Division C of Article VI of these Amended and Restated Articles of Incorporation. If the Corporation shall for any reason fail to discharge in full its 6.15% Sinking Fund obligation on April 1, 2003, the Corporation shall not thereafter, unless and until such 6.15% Sinking Fund obligation shall have been discharged in full, declare or pay any dividend on, or make any other distribution of property with respect to, or purchase or otherwise acquire, any of its Common Stock. Any shares of this Series which are redeemed, repurchased or otherwise reacquired by the Corporation shall, until further action by the Board of Directors or the Executive Committee of the Board of Directors, have the status of authorized and unissued shares of Series Preferred Stock, without designation as to series. (3) The amount per share for this Series payable to the holders thereof upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation shall be $100. The shares of this Series shall not be convertible into shares of any other class or classes or into any other securities of the Corporation. The number of shares of this Series authorized is 250,000 shares. (J) For the purposes of the foregoing paragraphs (A) through (I), the terms "involuntary liquidation, dissolution or winding up" shall include, without being limited to, a liquidation, dissolution or winding up of the Corporation resulting in the distribution of all of the net proceeds of a sale, lease or conveyance of all or substantially all of the property or business of the Corporation to any governmental body including, without limitation, any municipal corporation or political subdivision or authority. -7- DIVISION C -- PROVISIONS APPLICABLE TO BOTH THE 4-1/2% PREFERRED STOCK AND THE SERIES PREFERRED STOCK Section 1. General. The term "Preferred Stock" whenever used in this Article VI, shall be deemed to include the 4-1/2% Preferred Stock, the Series Preferred Stock and any other class of stock entitled to dividends on a parity with the 4-1/2% Preferred Stock and Series Preferred Stock. Section 2. Dividends. (A) The shares of Preferred Stock shall be entitled to the payment of dividends on a parity with each other at the rate or rates established by or pursuant to the provisions of this Article VI and in preference to the Preference Stock and the Common Stock, but only when and as declared by the Board of Directors, out of funds legally available for the payment of dividends. (B) Said dividends shall be payable quarterly on January 1, April 1, July 1 and October 1 of each year or otherwise as the Board of Directors may determine, to shareholders of record as of a date not exceeding forty (40) days and not less than ten (10) days preceding such dividend payment dates, to be fixed by the Board of Directors. The holders of the Preferred Stock shall not be entitled to receive any dividends thereon out of net profits or surplus earnings other than dividends established by or pursuant to this Article VI. Section 3. Preferences In Distribution. The shares of the 4-1/2% Preferred Stock and the Series Preferred Stock shall be entitled to share on a parity with each other, and shall have a preference over the Preference Stock and the Common Stock, upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, or upon any distribution of assets, other than net profits or surplus earnings until there shall have been paid in respect of the shares of: (a) 4-1/2% Preferred Stock -- the full par value thereof, or (b) Series Preferred Stock -- the liquidation price fixed as provided in Division B; plus, in either case, an amount, if any, by which an amount equivalent to the annual dividend upon such shares from the date after which dividends thereon became cumulative to the date of liquidation exceeds the dividends actually paid thereon or declared and set apart for payment thereon from such date to the date of liquidation. The 4-1/2% Preferred Stock and the Series Preferred Stock shall not receive any share in any voluntary or involuntary liquidation, dissolution or winding up of the Corporation or in any distribution of assets in excess of the aggregate amount specified in this section. Section 4. Voting Rights. (A) Except as otherwise provided in these Amended and Restated Articles of Incorporation, each share of the 4-1/2% Preferred Stock, the Series Preferred Stock, the Common Stock and (if, and to the extent, stated in the resolution or resolutions providing for the issue of a series of Preference Stock) the Preference Stock shall be equal in voting power and shall entitle the holder thereof to one vote upon any question presented to any shareholders meeting, it being hereby agreed and declared that a majority in number of shares regardless of the class to which such shares may belong is a majority in value or in interest within the meaning of any statute or law requiring the consent of stockholders holding a majority in interest or a greater amount in value of stock of the Corporation. (B) If and when dividends payable on any shares of Preferred Stock shall be in default in an amount equivalent to the annual dividend, or more, per share, and thereafter until all dividends on the Preferred Stock (of all classes and series) in default shall have been paid, the holders of the Preferred Stock voting as a single class, separate from the holders of the Preference Stock and the Common Stock, shall be entitled to elect the smallest number of directors necessary to constitute a majority of the full Board of Directors, and the holders of the Common Stock and the Preference Stock (if, and to the extent, stated in the resolution or resolutions providing for the issue of a series of Preference Stock), voting separately as a class, shall have the right to elect the remaining directors of the Corporation. The terms of office, as directors, of all persons who may be directors of the Corporation at the time shall terminate upon the election of a majority of the Board of Directors by the holders of the Preferred Stock, except that, if the holders of the Preference Stock and/or the Common Stock shall not have exercised their right to -8- elect directors of the Corporation (either by voting together as a single class or by voting separately as two distinct classes, as the case may be) because of the lack of a quorum consisting of a majority of the required class, then such remaining directors shall be elected by the directors whose term of office is thus terminated and who have not been elected by the holders of the Preferred Stock as a class; and in that event, such elected directors shall hold office for the interim period, pending such time s a quorum of the requisite class shall be present at a meeting held for the election of directors. (C) If and when all dividends then in default on the Preferred Stock, then outstanding, shall be paid (and such dividends shall be declared and paid out of any funds legally available therefor as soon as reasonably practicable), the holders of the Preferred Stock shall be divested of any special right with respect to the election of directors and the voting power of the holders of the Preferred Stock and the holders of the Common Stock and the Preference Stock (to the extent stated in the resolution or resolutions providing for the issue of a series of Preference Stock) shall revert to the status existing before the first dividend payment date on which dividends on any shares of the Preferred Stock were not paid in full; but always subject to the same provisions for vesting such special rights in the holders of the Preferred Stock in case of further like default or defaults on dividends thereon. Upon the termination of any such special voting right, the terms of office of all persons who may have been elected directors of the Corporation by vote of the holders of the Preferred Stock, as a class, pursuant to such special voting right shall forthwith terminate, and the resulting vacancies shall be filled by the vote of a majority of the remaining directors. (D) In case of any vacancy in the office of a director occurring among the directors elected by the holders of the Preferred Stock, voting as a single class separate from the holders of the Common Stock and the holders of any series of Preference Stock with voting rights, the remaining directors elected by the holders of the Preferred Stock, by affirmative vote of a majority thereof, or the remaining director so elected if there be but one, may elect a successor or successors to hold office for the unexpired terms of the director or directors whose place or places shall be vacant. (E) In case of any vacancy in the office of a director occurring among the directors not elected by the holders of the Preferred Stock, the remaining directors not elected by the holders of the Preferred Stock, by affirmative vote of a majority thereof, or the remaining such director if there be but one, may elect a successor or successors to hold office for the unexpired term of the director or directors whose place or places shall be vacant. (F) Whenever the right shall have accrued to the holders of the Preferred Stock to elect directors, voting as a single class separate from the holders of the Common Stock and the holders of any series of Preference Stock with voting rights, then upon request in writing signed by any holder of the Preferred Stock entitled to vote, delivered by registered mail or in person to the president, a vice president or secretary of the Corporation, it shall be the duty of such officer forthwith to cause notice to be given to the shareholders entitled to vote of a meeting to be held at such time as such officer may fix, not less than ten (10) nor more than sixty (60) days after the receipt of such request, for the purpose of electing directors. At all meetings of shareholders held for the purpose of electing directors during such time as the holders of a class or classes of stock shall have the special right, voting as a single class, separate from the holders of the other class or classes of stock (not entitled to such special right), to elect directors, the presence in person or by proxy of the holders of a majority of such other class or classes of stock (counted either separately as single classes or together as a single class, as the case may be) shall be required to constitute a quorum of such class or classes for the election of directors, and the presence in person or by proxy of the holders of a majority of the outstanding shares of the class or classes of stock entitled to such special right shall be required to constitute a quorum of such class or classes for the election of directors; provided, however, that the absence of a quorum of the holders of any such class or classes of stock shall not prevent the election at any such meeting or any adjournment thereof of directors by any other class or classes if the necessary quorum of the holders of stock of such other class or classes is present in person or by proxy at such meeting or adjournment thereof; and provided further that in the event a quorum of the holders of the Preferred Stock is not present, then the election of the directors elected by the holders of any other class or classes of stock shall not become effective and the directors so elected by such other class or classes of stock shall not assume their offices and duties until the holders of the Preferred Stock shall have elected the directors they shall be entitled to elect; and provided further, however, that in the absence of a quorum of the holders of stock of any class, a majority of the holders of the stock of such class who are present in person or by proxy shall have the power to adjourn the election of the directors to be elected by such class from day -9- to day or for such longer periods, not exceeding 15 days, each, as such majority shall direct without notice other than announcement at the meeting until the requisite number of holders of such class shall be present in person or by proxy. Section 5. Redemption. (A) By a majority vote of the Board of Directors of the Corporation: (1) the 4-1/2% Preferred Stock may be redeemed in whole or in part at any time at One Hundred Ten Dollars ($110.00) per share, or (2) any series of Series Preferred Stock may be redeemed in whole or in part at any time at the redemption price fixed and determined as specified in Division B; plus, in either case, an amount, if any, by which an amount equivalent to the annual dividend upon such shares from the date after which dividends thereon became cumulative to the date of redemption exceeds the dividends actually paid thereon or declared and set apart for payment thereon from such date to the date of redemption. If, pursuant to such vote, less than all of the shares of any class or series thereof of the Preferred Stock are to be redeemed, the shares to be redeemed shall be selected by lot, in such manner as the Board of Directors of the Corporation shall determine, by a bank or trust company chosen for that purpose by the Board of Directors of the Corporation. (B) Nothing herein contained shall limit any right of the Corporation to purchase or otherwise acquire any shares of the Preferred Stock. (C) Notice of the intention of the Corporation to redeem shares of the Preferred Stock or any thereof shall be mailed thirty (30) days before the date of redemption to each holder of record of the shares to be redeemed, at his last known post office address as shown by the records of the Corporation. At any time after such notice has been mailed as aforesaid, the Corporation may deposit the aggregate redemption price (or the portion thereof not already paid in the redemption of shares so to be redeemed) with any bank or trust company in the City of Philadelphia, Pennsylvania; City of Allentown, Pennsylvania; or in the City of New York, New York, named in such notice, payable in amounts aforesaid to the respective orders of the record holders of the shares so to be redeemed, on endorsement and surrender of their certificates, and thereupon said holders shall cease to be shareholders with respect to said shares and from and after the making of such deposit, said holders shall have no interest in or claim against the Corporation with respect to said shares, but shall be entitled only to receive said moneys from said bank or trust company with interest, if any, allowed by such bank or trust company on such moneys deposited as provided in this subsection (C), on endorsement and surrender of their certificates as aforesaid. (D) Any moneys so deposited, plus interest thereon, if any, and remaining unclaimed at the end of six years from the date fixed for redemption, if thereafter requested by resolution of the Board of Directors of the Corporation, shall be repaid to the Corporation and in the event of such repayment to the Corporation, such holders of record of the shares so redeemed as shall not have made claim against such moneys prior to such repayment to the Corporation shall be deemed to be unsecured creditors of the Corporation for an amount without interest equivalent to the amount deposited, plus interest thereon, if any, allowed by such bank or trust company, as above stated, for the redemption of such shares and so paid to the Corporation. DIVISION D -- PREFERENCE STOCK Section 1. General. To the extent permitted by these Amended and Restated Articles of Incorporation, the Board of Directors, by majority vote of a quorum, shall have the authority to issue shares of Preference Stock from time to time in one or more series, and to fix by resolution, at the time of issuance of each of such series, the distinctive designations, terms, relative rights, privileges, qualifications, limitations, options, conversion rights, preferences, and voting powers, and such prohibitions, restrictions and qualifications of voting or other rights and powers thereof except as they are fixed and determined in this Article VI. The dividend rate or rates, dividend payment dates or other terms of a series of Preference Stock may vary from time to time dependent upon facts ascertainable outside of these Amended and Restated Articles of Incorporation if the manner in which the facts will operate to fix or change such terms is set forth in the express terms of the series or upon terms incorporated by -10- reference to an existing agreement between the Corporation and one or more other parties or to another document of independent significance or otherwise to the extent permitted by the Business Corporation Law of 1988. Section 2. Dividends. Subject to the provisions of Section 2(A) of Division C, the holders of shares of each series of Preference Stock shall be entitled to receive, when and as declared by the Board of Directors, out of any funds legally available for the purpose under 15 Pa.C.S. (S) 1551 (relating to distributions to shareholders) or any superseding provision of law subject to any additional limitations in the express terms of the series, cash dividends at the rate or rates and on the terms which shall have been fixed by or pursuant to the authority of the Board of Directors with respect to such series and no more, payable at such time or times as may be fixed by or pursuant to the authority of the Board of Directors. If and to the extent provided by the express terms of any series of Preference Stock, the holders of the series shall be entitled to receive such other dividends as may be declared by the Board of Directors. Section 3. Liquidation of the Corporation. Subject to the provisions of Section 3 of Division C, in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of shares of Preference Stock shall be entitled to receive from the assets of the Corporation (whether capital or surplus), prior to any payment to the holders of shares of Common Stock or of any other class of stock of the Corporation ranking as to assets subordinate to the Preference Stock, the amount per share (which, in the case of an involuntary liquidation, dissolution or winding up, shall not be in excess of the original offering price per share (not including accrued dividends, if any) or $100 per share, whichever is less) which shall have been fixed and determined by the Board of Directors with respect thereto, plus the accrued and unpaid dividends thereon computed to the date on which payment thereof is made available, whether or not earned or declared. For the purposes of this section, the terms "involuntary liquidation, dissolution or winding up" shall include, without being limited to, a liquidation, dissolution or winding up of the Corporation resulting in the distribution of all of the net proceeds of a sale, lease or conveyance of all or substantially all of the property or business of the Corporation to any governmental body including, without limitation, any municipal corporation or political subdivision or authority. Section 4. Conversion Privileges. In the event any series of the Preference Stock is issued with the privilege of conversion, such stock may be converted, at the option of the record holder thereof, at any time or from time to time, as determined by the Board of Directors, in the manner and upon the terms and conditions stated in the resolution establishing and designating the series and fixing and determining the relative rights and preferences thereof. Section 5. Redemption. The Corporation, at its option to be exercised by its Board of Directors, may redeem the whole or any part of the Preference Stock or of any series thereof at such time or times as may be fixed by the Board, at the applicable price for each share, and upon the terms and conditions which shall have been fixed and determined by the Board with respect thereto. Section 6. Voting Rights. Each holder of record of shares of a series of Preference Stock shall have full voting rights of one vote per share or such other limited, multiple, fractional or conditional or no voting rights as shall be stated in the resolution or resolutions of the Board of Directors providing for the issue of the shares of such series. Unless provided in such resolution or resolutions, no holder of shares of Preference Stock shall have cumulative voting rights. DIVISION E -- COMMON STOCK Section 1. Dividends And Shares In Distribution On Common Stock. (A) Subject to the rights of the holders of the Senior Stock, and the Preference Stock and subordinate thereto, the Common Stock alone shall receive all further dividends and shares upon liquidation, dissolution, winding up or distribution. (B) A consolidation or merger of the Corporation with or into any other corporation or corporations shall not be deemed a distribution of assets of the Corporation within the meaning of any provision of this Article VI. -11- Section 2. Voting Rights. Except as otherwise provided in these Amended and Restated Articles of Incorporation, each share of the 4-1/2% Preferred Stock, the Series Preferred Stock and the Common Stock shall be equal in voting power and shall entitle the holder thereof to one vote upon any question presented to any shareholders' meeting, it being hereby agreed and declared that a majority in number of shares (including, if and to the extent provided pursuant to Division D, shares of Preference Stock) regardless of the class to which such shares may belong is a majority in value or in interest within the meaning of any statute or law requiring the consent of stockholders holding a majority in interest or a greater amount in value of stock of the Corporation. DIVISION F -- GENERAL PRE-EMPTIVE RIGHTS. The Corporation may issue or sell shares, option rights, or securities having conversion or option rights for money or otherwise without first offering them to shareholders of any class or classes. REDEMPTION. Any shares of the 4-1/2% Preferred Stock, the Series Preferred Stock, the Preference Stock and the Common Stock which are redeemed, repurchased or otherwise reacquired by the Corporation shall, until further action by the Board of Directors or the Executive Committee of the Board of Directors, have the status of authorized and unissued shares, without, in the case of the Series Preferred Stock, designation as to series. CONVERTIBILITY. Unless otherwise provided in the terms of a series of Series Preferred Stock or Preference Stock or otherwise in these Amended and Restated Articles of Incorporation, the shares of each of the 4-1/2% Preferred Stock, the Series Preferred Stock, the Preference Stock and the Common Stock, respectively, shall not be convertible into shares of any other class or classes or into any other securities of the Corporation. ARTICLE VII. A majority of the directors may amend, alter or repeal the Bylaws, subject to the power of the shareholders to change such action; provided, however, that any amendment, alteration or repeal of, or the adoption of any provision inconsistent with, Sections 3.01, 3.01.1, 3.04, 3.05, or 3.13 of the Bylaws, if by action of the shareholders, shall be only upon the affirmative vote of the shareholders entitled to cast at least two-thirds of the votes which all shareholders are entitled to cast, and if by action of the directors, shall be only upon the approval of two-thirds of the directors. ARTICLE VIII. These Amended and Restated Articles of Incorporation may be amended in the manner from time to time prescribed by statute and all rights conferred upon shareholders herein are granted subject to this reservation; provided, however, that, notwithstanding the foregoing (and in addition to any vote that may be required by law, these Amended and Restated Articles of Incorporation or the Bylaws), the affirmative vote of the shareholders entitled to cast at least two-thirds of the votes which all shareholders are entitled to cast shall be required to amend, alter or repeal, or to adopt any provision inconsistent with, Articles VII or VIII of these Amended and Restated Articles of Incorporation. ARTICLE IX. The following provisions of the Business Corporation Law of 1988 shall not be applicable to the Corporation: 15 Pa.C.S. (S) 2538 (relating to approval of transactions with interested shareholders) and 15 Pa.C.S. Subchapter E (relating to control transactions). -12- EX-27.1 3 FINANCIAL DATA SCHEDULE
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, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000317187 PP&L, INC 3-MOS DEC-31-1998 MAR-31-1999 PER-BOOK 4,301 695 890 3,111 0 8,997 1,476 44 241 1,761 295 171 2,819 0 0 91 0 0 104 61 3,695 8,997 968 76 731 807 161 7 168 48 120 12 108 0 0 147 0 0
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