-----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, WNjcUJ1zxiD8FZ08mVRNA6KDsKuRt84veBj0rfoCet5E21A5iZGP7GtsuUL84Mht XJg67yuYw6GbWx3iDuovTw== 0001036050-99-002348.txt : 19991115 0001036050-99-002348.hdr.sgml : 19991115 ACCESSION NUMBER: 0001036050-99-002348 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99748346 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 FOR PP&L, INC. 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 SEPTEMBER 30, 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, 143,694,305 shares outstanding at October 31, 1999, excluding 30,995,957 shares held as treasury stock PP&L, Inc. Common stock, no par value, 102,230,382 shares outstanding and all held by PP&L Resources, Inc. at October 31, 1999, excluding 55,070,000 shares held as treasury stock PP&L RESOURCES, INC. AND PP&L, INC. ---------- FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 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 Consolidated Statement of Shareowners' Common Equity 6 PP&L, Inc. Consolidated Statement of Income 8 Consolidated Statement of Cash Flows 9 Consolidated Balance Sheet 10 Consolidated Statement of Shareowner's Common Equity 12 Notes to Consolidated Financial Statements PP&L Resources, Inc. and PP&L, Inc. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PP&L Resources, Inc. and PP&L, Inc. 28 Item 3. Quantitative and Qualitative Disclosures About Market Risk 43 PART II. OTHER INFORMATION Item 1. Legal Proceedings 44 Item 6. Exhibits and Reports on Form 8-K 44 GLOSSARY OF TERMS AND ABBREVIATIONS 45 SIGNATURES 47 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 48
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 September 30, 1999 and December 31, 1998, and the Consolidated Statement of Income, Consolidated Statement of Cash Flows, and the Consolidated Statement of Shareowners' Common Equity for the periods ended September 30, 1999 and 1998. 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 Nine Months Ended Ended September 30, September 30, -------------------------- ------------------------ 1999 1998 1999 1998 --------------- --------- -------------- -------- Operating Revenues Electric........................................................... $ 811 $ 647 $2,062 $1,822 Gas and propane.................................................... 13 6 81 6 Wholesale energy marketing and trading............................. 497 483 1,131 987 Energy related businesses.......................................... 65 30 183 69 ----------------- --------- -------------- -------- Total.............................................................. 1,386 1,166 3,457 2,884 ----------------- --------- -------------- -------- Operating Expenses Operation Electric fuel.................................................... 131 150 351 385 Natural gas and propane.......................................... 3 2 36 2 Energy purchases................................................. 557 415 1,163 846 Other............................................................ 210 168 512 418 Amortization of recoverable transition costs..................... 27 113 Maintenance........................................................ 53 39 150 130 Depreciation and amortization...................................... 73 71 193 266 Taxes, other than income........................................... 40 34 135 136 Energy related businesses.......................................... 54 25 139 54 ----------------- --------- -------------- -------- Total.............................................................. 1,148 904 2,792 2,237 ----------------- --------- -------------- -------- Operating Income..................................................... 238 262 665 647 ----------------- --------- -------------- -------- Other Income......................................................... 16 7 26 ----------------- --------- -------------- -------- Income Before Interest, Income Taxes and Minority Interest............................................................. 238 278 672 673 Interest Expense..................................................... 80 58 203 164 ----------------- --------- -------------- -------- Income Before Income Taxes, Minority Interest and Extraordinary Items................................................ 158 220 469 509 Income Taxes......................................................... (22) 78 92 200 Minority Interest.................................................... 13 13 ----------------- --------- -------------- -------- Income Before Extraordinary Items.................................... 167 142 364 309 Extraordinary Items (net of income taxes) (Note 5)........................................................... (59) (59) (948) ----------------- --------- -------------- -------- Income(Loss) Before Dividends on Preferred Stock..................... 108 142 305 (639) Preferred Stock Dividend Requirements................................ 6 6 19 19 ----------------- --------- -------------- -------- Net Income(Loss)..................................................... $ 102 $ 136 $ 286 ($658) ================= ========= ============== ======== Earnings Per Share of Common Stock Basic and Diluted (Note 3): Income Before Extraordinary Items................................ $1.07 $0.81 $2.22 $1.74 Extraordinary Items (net of tax)................................. (0.39) (0.37) (5.68) ----------------- --------- -------------- -------- Net Income(Loss)..................................................... $0.68 $0.81 $1.85 $(3.94) ================= ========= ============== ======== Dividends Declared per Share of Common Stock......................... $0.25 $0.25 $0.75 $1.085
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)
Nine Months Ended September 30, ------------------------------ 1999 1998 ------------ ------------ Net Cash Provided by Operating Activities.......................... $ 530 $ 435 Cash Flows From Investing Activities Expenditures for property, plant and equipment.................... (291) (204) Investment in electric energy projects............................ (189) (279) Sale of nuclear fuel to trust..................................... 14 16 Purchases of available-for-sale securities........................ (14) Sales and maturities of available-for-sale securities............. 16 Funding of security account for debt issuance..................... (12) Other investing activities - net.................................. 8 (15) ------------ ------------ Net cash used in investing activities....................... (470) (480) ------------ ------------ Cash Flows From Financing Activities Issuance of long-term debt........................................ 2,420 320 Issuance of common stock.......................................... 8 48 Retirement of long-term debt...................................... (1,469) (268) Purchase of treasury stock........................................ (417) (419) Payment of common and preferred dividends......................... (137) (228) Net increase (decrease) in short-term debt........................ (200) 629 Payments on capital lease obligations............................. (42) (42) Other financing activities - net.................................. (78) (2) ------------ ------------ Net cash provided by financing activities................... 85 38 ------------ ------------ Net Increase (Decrease) In Cash and Cash Equivalents............... 145 (7) Cash and Cash Equivalents at Beginning of Period................... 195 50 ------------ ------------ Cash and Cash Equivalents at End of Period......................... $ 340 $ 43 ============ ============ Supplemental Disclosures of Cash Flow Information Cash paid during the period for: Interest (net of amount capitalized)............................. $ 179 $ 169 Income taxes..................................................... $ 141 $ 185
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)
September 30, December 31, 1999 1998 (Unaudited) (Audited) ------------------ --------------------- ASSETS Property, Plant and Equipment Electric utility plant in service - net Transmission and distribution........................................... $ 2,463 $2,179 Generation.............................................................. 1,691 1,601 General and intangible.................................................. 247 223 ------------------ --------------------- 4,401 4,003 Construction work in progress - at cost................................... 123 117 Nuclear fuel owned and leased - net....................................... 129 162 ------------------ --------------------- Electric utility plant - net............................................ 4,653 4,282 Gas and oil utility plant - net........................................... 170 175 Other property - net...................................................... 58 23 ------------------ --------------------- 4,881 4,480 ------------------ --------------------- Investments Investment in unconsolidated affiliates - at equity....................... 524 688 Nuclear plant decommissioning trust fund.................................. 227 206 Other..................................................................... 24 12 ------------------ --------------------- 775 906 ------------------ --------------------- Current Assets Cash and cash equivalents................................................. 340 195 Accounts receivable (less reserve: 1999, $21; 1998, $17) Utility customers....................................................... 199 173 Other................................................................... 252 125 Unbilled revenues Utility customers....................................................... 140 106 Other................................................................... 156 64 Fuel, materials and supplies - at average cost............................ 206 207 Prepayments............................................................... 67 15 Unrealized mark-to-market energy trading gains............................ 22 2 Other..................................................................... 97 61 ------------------ --------------------- 1,479 948 ------------------ --------------------- Regulatory Assets and Other Noncurrent Assets Recoverable transition costs.............................................. 2,706 2,819 Other..................................................................... 768 454 ------------------ --------------------- 3,474 3,273 ------------------ --------------------- $10,609 $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)
September 30, December 31, 1999 1998 (Unaudited) (Audited) -------------- ------------- LIABILITIES Capitalization Common equity Common stock............................................................ $ 2 $ 2 Capital in excess of par value.......................................... 1,860 1,866 Treasury stock.......................................................... (836) (419) Earnings reinvested..................................................... 543 372 Accumulated other comprehensive income.................................. (47) (4) Capital stock expense and other......................................... (12) (27) -------------- ------------- 1,510 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 Minority interest......................................................... 85 Long-term debt............................................................ 3,650 2,983 -------------- ------------- 5,592 5,120 -------------- ------------- Current Liabilities Short-term debt........................................................... 436 636 Long-term debt due within one year........................................ 481 1 Capital lease obligations due within one year............................. 59 59 Above market NUG purchases due within one year............................ 100 105 Accounts payable.......................................................... 438 197 Taxes and interest accrued................................................ 123 95 Dividends payable......................................................... 43 46 Unrealized mark-to-market energy trading losses........................... 23 9 Other..................................................................... 197 128 -------------- ------------- 1,900 1,276 -------------- ------------- Deferred Credits and Other Noncurrent Liabilities Deferred income taxes and investment tax credits.......................... 1,514 1,574 Above market NUG purchases................................................ 699 775 Capital lease obligations................................................. 83 109 Other..................................................................... 821 753 -------------- ------------- 3,117 3,211 -------------- ------------- Commitments and Contingent Liabilities (Note 10)............................ -------------- ------------- $10,609 $9,607 ============== =============
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. 5 PP&L RESOURCES, INC. AND SUBSIDIARIES - ------------------------------------- CONSOLIDATED STATEMENT OF SHAREOWNERS' COMMON EQUITY (Unaudited) (Millions of Dollars)
Accumulated Capital Capital Other Stock Common in Excess Treasury Earnings Comprehensive Expense Stock of Par Stock Reinvested Income and Other Total ------ ----------- -------- ----------- ------------- --------- -------- For the Three Months Ended September 30, - ---------------------------------------- 1999 Beginning Balance.................... $2 $1,874 ($419) $ 477 ($20) ($28) $1,886 Comprehensive income Net income......................... 102 Other comprehensive income: Foreign currency translation adjustment, net of taxes of $1. (27) Total comprehensive income......... 75 Issuance of common stock............. Purchase of treasury stock........... (417) (417) Common dividends declared............ (37) (37) Other................................ (14) 1 16 3 ------ ----------- -------- ----------- ------------- --------- ------- Ending Balance....................... $2 $1,860 ($836) $ 543 ($47) ($12) $1,510 ====== =========== ======== =========== ============= ========= ======= 1998 Beginning Balance.................... $2 $1,702 $ 0 $ 231 ($1) ($27) $1,907 Comprehensive income Net income......................... 136 Other comprehensive income: Foreign currency translation adjustment, net of tax credits of $2.......................... 6 Unrealized gain on available-for-sale securities.. 1 Total comprehensive income......... 143 Issuance of common stock............. 150 150 Purchase of treasury stock........... (419) (419) Common dividends declared............ (43) (43) Other................................ (1) (1) ------ ----------- -------- ----------- ------------- --------- ------- Ending Balance....................... $2 $1,852 ($419) $ 323 $6 ($27) $1,737 ====== =========== ======== =========== ============= ========= ======= For the Nine Months Ended September 30, - --------------------------------------- 1999 Beginning Balance.................... $2 $1,866 ($419) $ 372 ($4) ($27) $1,790 Comprehensive income Net income......................... 286 Other comprehensive income: Foreign currency translation adjustment, net of tax credits of $2.......................... (43) Total comprehensive income......... 243 Issuance of common stock............. 8 8 Purchase of treasury stock........... (417) (417) Common dividends declared............ (115) (115) Other................................ (14) 15 1 ------ ----------- -------- ----------- ------------- --------- ------- Ending Balance....................... $2 $1,860 ($836) $ 543 ($47) ($12) $1,510 ====== =========== ======== =========== ============= ========= ======= 1998 Beginning Balance.................... $2 $1,669 $0 $1,164 $ 0 ($26) $2,809 Comprehensive income Net loss........................... (658) Other comprehensive income: Foreign currency translation adjustment, net of tax credits of $3................ 5 Unrealized gain on available- for-sale securities.......... 1 Total comprehensive income....... (652) Issuance of common stock............. 183 183 Purchase of treasury stock........... (419) (419) Common dividends declared............ (183) (183) Other................................ (1) (1) ------ ----------- -------- ----------- ------------- --------- ------- Ending Balance....................... $2 $1,852 ($419) $ 323 $6 ($27) $1,737 ====== =========== ======== =========== ============= ========= =======
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements 6 (THIS PAGE LEFT BLANK INTENTIONALLY.) 7 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 September 30, 1999 and December 31, 1998, and the Consolidated Statement of Income, Consolidated Statement of Cash Flows, and the Consolidated Statement of Shareowner's Common Equity for the periods ended September 30, 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 Nine Months Ended September 30, Ended September 30, ---------------------- ---------------------- 1999 1998 1999 1998 ---------- -------- ---------- -------- Operating Revenues Electric........................................................... $ 635 $ 647 $1,886 $1,822 Wholesale energy marketing and trading............................. 489 483 1,122 987 Energy related businesses.......................................... 4 1 11 2 ---------- -------- ---------- -------- Total.............................................................. 1,128 1,131 3,019 2,811 ---------- -------- ---------- -------- Operating Expenses Operation Electric fuel.................................................... 131 150 351 385 Energy purchases................................................. 449 415 1,053 846 Other............................................................ 184 164 470 415 Amortization of recoverable transition costs 27 113 Maintenance........................................................ 45 39 140 130 Depreciation and amortization...................................... 59 70 176 265 Taxes, other than income........................................... 39 33 130 135 Energy related businesses.......................................... 4 1 10 2 ---------- -------- ---------- -------- Total.............................................................. 938 872 2,443 2,178 ---------- -------- ---------- -------- Operating Income..................................................... 190 259 576 633 Other Income......................................................... 7 11 29 32 ---------- -------- ---------- -------- Income Before Interest and Income Taxes.............................. 197 270 605 665 Interest Expense..................................................... 59 49 155 147 ---------- -------- ---------- -------- Income Before Income Taxes and Extraordinary Items................... 138 221 450 518 Income Taxes......................................................... (28) 84 91 208 ---------- -------- ---------- -------- Income Before Extraordinary Items.................................... 166 137 359 310 Extraordinary Items (net of income taxes) (Note 5)................... (59) (59) (948) ---------- -------- ---------- -------- Net Income(Loss) Before Dividends on Preferred Stock................. 107 137 300 (638) Dividends on Preferred Stock......................................... 6 12 30 36 ---------- -------- ---------- -------- Earnings Available to PP&L Resources, Inc............................ $ 101 $ 125 $ 270 $ (674) ========== ======== ========== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. 8 PP&L, INC. AND SUBSIDIARIES - --------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Millions of Dollars)
Nine Months Ended September 30, ------------------------------------ 1999 1998 ---------------- --------------- Net Cash Provided by Operating Activities............................................... $ 459 $ 483 Cash Flows From Investing Activities Expenditures for property, plant and equipment........................................ (201) (202) Loan to parent........................................................................ 136 Sale of nuclear fuel to trust......................................................... 14 16 Purchases of available-for-sale securities............................................ (14) Sales and maturities of available-for-sale securities................................. 15 Funding of security account for debt issuance......................................... (12) Other investing activities - net...................................................... 2 6 ---------------- --------------- Net cash used in investing activities........................................... (61) (179) ---------------- --------------- Cash Flows From Financing Activities Issuance of long-term debt............................................................ 2,420 200 Retirement of long-term debt.......................................................... (1,467) (266) Purchase of treasury stock............................................................ (632) Retirement of preferred stock......................................................... (369) Payment of common and preferred dividends............................................. (188) (245) Net increase in short-term debt....................................................... 130 69 Payments on capital lease obligations................................................. (42) (42) Other financing activities - net...................................................... (89) (1) ---------------- --------------- Net cash used in financing activities........................................... (237) (285) ---------------- --------------- Net Increase in Cash and Cash Equivalents............................................... 161 19 Cash and Cash Equivalents at Beginning of Period........................................ 31 15 ---------------- --------------- Cash and Cash Equivalents at End of Period.............................................. $ 192 $ 34 ================ =============== Supplemental Disclosures of Cash Flow Information Cash paid during the period for: Interest (net of amount capitalized)................................................ $ 130 $ 152 Income taxes........................................................................ $ 143 $ 189
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. 9 PP&L, INC. AND SUBSIDIARIES - --------------------------- CONSOLIDATED BALANCE SHEET (Millions of Dollars)
September 30, December 31, 1999 1998 (Unaudited) (Audited) -------------- ------------- ASSETS Property, Plant and Equipment Electric utility plant in service - net Transmission and distribution..................................................... $2,185 $2,179 Generation........................................................................ 1,643 1,601 General and intangible............................................................ 217 223 -------------- ------------- 4,045 4,003 Construction work in progress - at cost............................................. 106 117 Nuclear fuel owned and leased - net................................................. 129 162 -------------- ------------- Electric utility plant - net...................................................... 4,280 4,282 Gas and oil utility plant - net..................................................... 26 28 Other property - net................................................................ 21 21 -------------- ------------- 4,327 4,331 -------------- ------------- Investments Loan to parent...................................................................... 293 429 Nuclear plant decommissioning trust fund............................................ 227 206 Investment in unconsolidated affiliate - at equity.................................. 17 17 Other............................................................................... 24 13 -------------- ------------- 561 665 -------------- ------------- Current Assets Cash and cash equivalents........................................................... 192 31 Accounts receivable (less reserve: 1999, $20; 1998, $16) Utility customers................................................................. 161 163 Other............................................................................. 120 67 Unbilled revenues Utility customers................................................................. 122 104 Other............................................................................. 151 59 Fuel, material and supplies - at average cost....................................... 186 196 Prepayments......................................................................... 60 14 Unrealized mark-to-market energy trading gains...................................... 22 2 Other............................................................................... 86 58 -------------- ------------- 1,100 694 -------------- ------------- Regulatory Assets and Other Noncurrent Assets Recoverable transition costs........................................................ 2,706 2,819 Other............................................................................... 334 329 -------------- ------------- 3,040 3,148 -------------- ------------- $9,028 $8,838 ============== =============
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. 10 PP&L, INC. AND SUBSIDIARIES - --------------------------- CONSOLIDATED BALANCE SHEET (Millions of Dollars)
September 30, December 31, 1999 1998 (Unaudited) (Audited) ---------------- ------------------ LIABILITIES Capitalization Common equity Common stock................................................................. $1,476 $1,476 Additional paid-in capital................................................... 55 70 Treasury stock............................................................... (632) Earnings reinvested.......................................................... 327 210 Accumulated other comprehensive income....................................... (6) (6) Capital stock expense and other.............................................. (16) (20) ---------------- ------------------ 1,204 1,730 Preferred stock With sinking fund requirements............................................... 47 295 Without sinking fund requirements............................................ 50 171 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely company debentures.......................... 250 250 Long-term debt................................................................. 3,205 2,569 ---------------- ------------------ 4,756 5,015 ---------------- ------------------ Current Liabilities Short-term debt................................................................ 221 91 Long-term debt due within one year............................................. 329 Capital lease obligations due within one year.................................. 59 59 Above market NUG purchases due within one year................................. 100 105 Accounts payable............................................................... 232 178 Taxes and interest accrued..................................................... 116 86 Dividends payable.............................................................. 6 12 Unrealized mark-to-market energy trading losses................................ 23 9 Other.......................................................................... 173 114 ---------------- ------------------ 1,259 654 ---------------- ------------------ Deferred Credits and Other Noncurrent Liabilities Deferred income taxes and investment tax credits............................... 1,472 1,561 Above market NUG purchases..................................................... 699 775 Capital lease obligations...................................................... 83 109 Other.......................................................................... 759 724 ---------------- ------------------ 3,013 3,169 ---------------- ------------------ Commitments and Contingent Liabilities (Note 10)................................. ---------------- ------------------ $9,028 $8,838 ================ ==================
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. 11 PP&L, INC. AND SUBSIDIARIES - --------------------------- CONSOLIDATED STATEMENT OF SHAREOWNER'S COMMON EQUITY (Unaudited) (Millions of Dollars)
Accumulated Capital Capital in Other Stock Common Excess of Treasury Earnings Comprehensive Expense Stock Par Stock Reinvested Income and Other Total -------- ----------- --------- ----------- -------------- ---------- ------- For the Three Months Ended September 30, - ---------------------------------------- 1999 Beginning Balance.............................. $1,476 $ 70 $ 0 $ 262 ($6) ($20) $1,782 Comprehensive income Net income................................... 101 Other comprehensive income: Total comprehensive income................... 101 Issuance of common stock....................... Purchase of treasury stock..................... (632) (632) Common dividends declared...................... (36) (36) Other.......................................... (15) 4 (11) -------- ----------- --------- ----------- -------------- ---------- ------- Ending Balance................................. $1,476 $ 55 ($632) $ 327 ($6) ($16) $1,204 ======== =========== ========= =========== ============== ========== ======= 1998 Beginning Balance.............................. $1,476 $ 64 $ 0 $ 153 $ 0 ($20) $1,673 Comprehensive income Net loss..................................... 125 Other comprehensive income: Total comprehensive income................... 125 Issuance of common stock....................... Common dividends declared...................... (47) (47) Other.......................................... -------- ----------- --------- ----------- -------------- ---------- ------- Ending Balance................................. $1,476 $ 64 $ 0 $ 231 $ 0 ($20) $1,751 ======== =========== ========= =========== ============== ========== ======= For the Nine Months Ended September 30, - --------------------------------------- 1999 Beginning Balance.............................. $1,476 $ 70 $ 0 $ 210 ($6) ($20) $1,730 Comprehensive income Net income................................... 270 Other comprehensive income: Total comprehensive income................... 270 Issuance of common stock....................... Purchase of treasury stock..................... (632) (632) Common dividends declared...................... (153) (153) Other.......................................... (15) 4 (11) -------- ----------- --------- ----------- -------------- ---------- ------- Ending Balance................................. $1,476 $ 55 ($632) $ 327 ($6) ($16) $1,204 ======== =========== ========= =========== ============== ========== ======= 1998 Beginning Balance.............................. $1,476 $ 64 $ 0 $1,092 $ 0 ($20) $2,612 Comprehensive income Net loss..................................... (674) Other comprehensive income Total comprehensive income................... (674) Issuance of common stock....................... Common dividends declared...................... (187) (187) Other.......................................... -------- ----------- --------- ----------- -------------- ---------- ------- Ending Balance................................. $1,476 $ 64 $ 0 $ 231 $ 0 ($20) $1,751 ======== =========== ========= =========== ============== ========== =======
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statement. 12 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 September 30, 1998 and December 31, 1998 financial statements have been reclassified to conform to the presentation in the September 30, 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. The following are updates to the accounting policies described in the 10-K. Business and Consolidation PP&L Global consolidates the financial statements of its affiliates when it has majority ownership and control, in accordance with SFAS 94, "Consolidation of All Majority-Owned Subsidiaries." The minority parties' share of operating results and equity ownership are reflected as "Minority Interest" in the PP&L Resources Consolidated Statement of Income and Consolidated Balance Sheet, respectively. When PP&L Global increases its ownership interest in an affiliate through a series of acquisitions and subsequently achieves control, it ceases the equity method of accounting. In accordance with Accounting Research Bulletin 51, "Consolidated Financial Statements," PP&L Global consolidates the affiliate's results as though it were acquired at the beginning of the fiscal year. The portion of affiliate earnings owned by outside shareowners prior to PP&L Global majority ownership is included in "Minority Interest" on the Consolidated Statement of Income. The consolidated financial statements of PP&L Resources and PP&L include the accounts of PP&L Transition Bond Company. PP&L Transition Bond Company, a special purpose Delaware limited liability company, was formed for the purpose of purchasing and owning ITP, and pledging its interest in 13 ITP to a trustee to collateralize transition bonds. The assets of PP&L Transition Bond Company, including the ITP, are not available to creditors of PP&L Resources or PP&L. The transition bonds are obligations of PP&L Transition Bond Company, and are non-recourse to PP&L Resources and PP&L. Recoverable Transition Costs Based on the PUC Final Order, PP&L began amortizing its competitive transition (or stranded) costs over an eleven-year transition period on January 1, 1999. 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. Competitive transition costs of $2.402 billion were converted to intangible transition costs when securitized by the issuance of transition bonds. The intangible transition costs are being amortized over the life of the transition bonds, based on ITC revenues, interest accruals and other fees. The assets of PP&L Transition Bond Company are not available to creditors of PP&L or PP&L Resources, and the intangible transition property is not an asset of PP&L or PP&L Resources. Liability for Above Market NUG Purchases At June 30, 1998, PP&L recorded an estimated liability for above-market purchases under existing NUG contracts. This liability was recorded as part of the PUC restructuring adjustments. Effective January 1, 1999, PP&L began reducing this liability as an offset to "Energy Purchases" on the Consolidated Statement of Income. This reduction is based on the estimated timing of the purchases from the NUGs and projected market prices for this generation. This accounting will continue through 2014, when the last of the existing NUG contracts expires. This liability is subject to future revision if the underlying estimates change. Accounting for Price Risk Management PP&L Resources and PP&L entered into forward starting swaps and treasury locks to hedge the interest rate risk associated with debt issuances. The gains or losses on these swaps have been deferred and are being recognized over the life of the debt. Comprehensive Income Comprehensive income consists of net income and other comprehensive income, defined as changes in common equity from transactions not related to shareowners. For PP&L, other comprehensive income consists of unrealized gains or losses on available-for-sale securities and the excess of additional pension liability over unamortized prior service costs. The other comprehensive income of PP&L Resources consists of the foregoing as well as foreign currency translation adjustments recorded by PP&L Global. 14 In accordance with SFAS 130, "Reporting Comprehensive Income," comprehensive income is reflected on the Consolidated Statement of Shareowners' Common Equity, and accumulated other comprehensive income is presented in the capitalization section of the Consolidated Balance Sheet. 3. Earnings Per Share SFAS 128, "Earnings Per Share," requires the disclosure of basic and diluted EPS. Basic EPS is calculated by dividing earnings available to common shareowners ("Net Income" on the PP&L Resources' Consolidated Statement of Income) by the weighted average number of common shares outstanding during the period. In the calculation of diluted EPS, weighted average shares outstanding are increased for additional shares that would be outstanding if potentially dilutive securities were converted to common stock. In April 1999, PP&L Resources made its initial award of stock options under its Incentive Compensation Plan. Stock options are the only potentially dilutive securities outstanding. For the three months ended September 30, 1999, the weighted average shares outstanding and the dilutive shares (in thousands) were 150,694 and 41, respectively. For the nine months ended September 30, 1999, the weighted average shares outstanding and the dilutive shares (in thousands) were 154,865 and 29, respectively. Dilutive shares had no impact on EPS in either period. There were no dilutive shares outstanding in 1998. The weighted average shares outstanding (in thousands) for the three and nine months ended September 30, 1998 were 166,652 and 166,871, respectively. 4. Securitization In August 1999, PP&L Transition Bond Company issued $2.42 billion of transition bonds to securitize a portion of PP&L's stranded costs. The bonds were issued in eight different classes, with expected average lives of 1 to 8.7 years. PP&L used a portion of the securitization proceeds to acquire equity held by PP&L Resources, including $380 million of preferred stock and $481 million of common stock. In addition, PP&L used a portion of the proceeds to repurchase $1.467 billion of its first mortgage bonds through tender offers and open market purchases. In August 1999, PP&L recorded an extraordinary charge of $59 million for the premiums and related expenses to extinguish this first mortgage debt. See Note 5 for additional information. PP&L Resources used $417 million of the proceeds it received from PP&L to purchase 14 million shares of its common stock. This repurchase is included as "Treasury Stock" on the Consolidated Balance Sheet of PP&L Resources at September 30, 1999. 15 In August 1999, PP&L released approximately $78 million of deferred income taxes associated with the CTC that were no longer required because of securitization. PP&L customers will benefit from securitization through an expected average rate reduction of approximately one percent for the period the transition bonds are outstanding. With securitization, a substantial portion of the CTC has been replaced with an ITC, which results in lower charges due to the flow through of 75% of the net financing savings. The actual reduction will vary by year, by customer class and by level of use. 5. Extraordinary Items PUC Restructuring and FERC Settlement In June 1998, PP&L recorded extraordinary items of $948 million, net of income tax benefits of $666 million. Reference is made 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. Extinguishment of Debt SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt," requires that a material aggregate gain or loss from the extinguishment of debt be classified as an extraordinary item, net of the related income tax effect. As explained in Note 4, PP&L repurchased $1.467 billion of first mortgage bonds in August 1999, using the proceeds from the issuance of transition bonds. PP&L recorded an extraordinary charge of $59 million for the premiums and related expenses to reacquire these first mortgage bonds. Details of this extraordinary charge are as follows (millions of dollars): Reacquisition cost of debt $1,554 Net carrying amount of debt 1,454 ------ Extraordinary charge pre-tax 100 Tax effects 41 ------ Extraordinary charge $ 59 ======
6. 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 the United 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., 16 Chile, and El Salvador. PP&L Global also owns and operates generating facilities in the United States. PP&L Global's revenue represents equity earnings in unconsolidated investments, revenues from the sale of generation to wholesale customers, and revenue from the delivery of electricity to retail customers. Other operating revenues of PP&L Resources 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 Nine Months Ended September 30, Ended September 30, -------------------- ---------------------- 1999 1998 1999 1998 --------- --------- ------------ -------- Income Statement data Operating revenues PP&L $1,128 $1,131 $3,019 $2,811 PP&L Global 198 9 240 25 Other and Eliminations 60 26 198 48 ------ ------ ------ ------ 1,386 1,166 3,457 2,884 Depreciation and amortization PP&L 59 70 176 265 PP&L Global 13 13 Other and Eliminations 1 1 4 1 ------ ------ ------ ------ 73 71 193 266 Interest expense PP&L 59 49 155 147 PP&L Global 18 7 33 15 Other and Eliminations 3 2 15 2 ------ ------ ------ ------ 80 58 203 164 Income taxes PP&L (28) 84 91 208 PP&L Global 8 (3) 9 (1) Other and Eliminations (2) (3) (8) (7) ------ ------ ------ ------ (22) 78 92 200 Extraordinary items, net of taxes PP&L (59) (59) (948) PP&L Global Other and Eliminations ------ ------ ------ ------ (59) (59) (948) Net income PP&L 101 125 270 (674) PP&L Global 5 11 19 12 Other and Eliminations (4) (3) 4 ------ ------ ------ ------ $ 102 $ 136 $ 286 $ (658) ====== ====== ====== ======
17
Nine Months Ended September 30, ----------------- 1999 1998 -------- ------ Cash Flow data Property, plant & equipment expenditures PP&L $ 201 $ 202 PP&L Global 80 Other and Eliminations 10 2 ------- ------ 291 204 Investment in electric energy projects PP&L PP&L Global 189 279 Other and Eliminations ------- ------ $ 189 $ 279 ======= ====== Sept. 30 Dec. 31 1999 1998 -------- ------ Balance Sheet data Cumulative net investment in equity method affiliates PP&L $ 17 $ 17 PP&L Global 507 671 Other and Eliminations ------- ------ 524 688 Total assets PP&L 9,028 8,838 PP&L Global 1,332 757 Other and Eliminations 249 12 ------- ------ $10,609 $9,607 ======= ======
7. Sales to Other Electric Utilities PP&L is providing JCP&L with 189,000 kilowatts of capacity and related energy from all of its generating units during 1999. This agreement terminates 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 200,000 kilowatts to 300,000 kilowatts in June 1999 and continues at this level through May 2004. Prices for this capacity and energy are market-based. In August 1999, the FERC approved new interconnection and power supply agreements between PP&L and UGI. Under the new power supply agreement, effective August 1999, UGI 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 agreement terminates in February 2001. 18 8. Financial Instruments During the first nine months of 1999, PP&L Resources and PP&L entered into forward starting interest rate swaps and treasury locks with various counterparties to hedge the interest rate risk associated with anticipated debt issuances, including the issuance of transition bonds in August 1999. All financial instruments associated with hedging the interest rate risk of the transition bonds were settled at the end of July. The proceeds were received and deferred on the balance sheet in August 1999. As a result of these hedging activities, interest expense on the transition bonds, applied under the effective interest method, will be reduced by $24.8 million. Seventy-five percent of these savings are being passed back to customers. On the same day that PP&L priced its transition bonds, PP&L entered into short-dated treasury lock transactions with a notional amount of $1.07 billion to lock in the treasury rate related to PP&L's offer to purchase any or all of $1.66 billion of selected series of its first mortgage bonds. These contracts were settled one week later for an amount that was not significant. See Note 4 for additional information about transition bonds. PP&L Resources has also entered into forward currency agreements with various counterparties to hedge a portion of its currency risk associated with its net investment in a foreign subsidiary. At September 30, 1999, the estimated fair value of these forward currency agreements, which represents the amount PP&L Resources would pay if it terminated these agreements on that date, was $939,000. At September 30, 1999, PP&L Resources had also entered into forward-starting interest rate swap agreements with various counterparties to hedge the interest rate risk associated with debt issuances expected in the fourth quarter of 1999. These interest rate swap agreements involve the exchange of floating rate interest payments for fixed rate interest payments over the life of the agreements. PP&L Resources agreed to pay fixed rates between 5.805% - 7.03% on notional amounts of $1.17 billion, with maturity dates between October 29, 2004 and November 15, 2029. PP&L Resources will receive a variable rate interest payment based on either a 3-month or 6-month LIBOR rate through the maturity dates of these agreements. The estimated fair value of the forward interest rate swaps, which represents the estimated amount PP&L Resources would receive if it had terminated these agreements at September 30, 1999, was $22.5 million. In October 1999, $170 million of these swaps were settled in connection with the issuance of medium-term notes (as described in Note 9). PP&L Resources received net proceeds from these settlements of about $9 million. This amount will be deferred on the balance sheet and will subsequently be amortized over the life of the medium-term notes using the effective interest rate method. 19 9. Credit Arrangements and Financing Activities PP&L issues commercial paper and, from time to time, borrows from banks to provide short-term funds for general corporate purposes. Bank borrowings generally bear interest at rates negotiated at the time of the borrowing. At September 30, 1999, PP&L had $225 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 September 30, 1999, PP&L Capital Funding had $202 million of commercial paper outstanding. In July 1999, PP&L, PP&L Capital Funding and PP&L Resources (as guarantor for PP&L Capital Funding) entered into a new 364-day $750 million credit facility with a group of banks. This facility replaced a $350 million 364-day revolving credit facility shared by PP&L and PP&L Capital Funding and five separate $80 million 364-day credit facilities maintained by PP&L Capital Funding. No borrowings are outstanding under this new facility. In June 1999, PP&L instituted a short-term bond program in order to meet short-term working capital requirements and to increase financing flexibility. Under this program, a total of $600 million of short-term bonds were issued with no more than $200 million of such bonds outstanding at any one time. This program was completed in August 1999. PP&L Resources, PP&L Capital Funding and PP&L Capital Funding Trust I filed a $1.2 billion shelf registration with the SEC in September 1999 for the registration of debt and equity securities. It is expected that such securities will be issued from time to time to provide funding for general corporate purposes, including making loans to the unregulated subsidiaries of PP&L Resources and reducing commercial paper balances. In October 1999, PP&L Capital Funding issued $200 million of medium-term notes in the form of 7.70% Reset Put Securities Series due 2007. In connection with this issuance, PP&L Capital Funding assigned to a third party the option to call the notes from the holders on November 15, 2002. These notes will mature on November 15, 2007, but will be required to be surrendered by the existing holders on November 15, 2002 either through the exercise of the call option by the callholder or, if such option is not exercised, through the automatic exercise of a mandatory put. If the call option is exercised, the notes will be remarketed and the interest rate will be reset for the remainder of their term to the maturity date, not to exceed 8-1/2%. If the call option is not exercised, the mandatory put will be exercised and PP&L Capital Funding will be required to repurchase the notes at 100% of their principal amount on November 15, 2002. 20 In August 1999, PP&L Resources purchased 14 million shares of common stock for $417 million, under a forward purchase agreement with a third party. Also in August 1999, PP&L repurchased and subsequently retired $1.467 billion of first mortgage bonds through tender offers and open market purchases. See Note 4 for additional information on the issuance of $2.42 billion of transition bonds to securitize stranded costs, some of the proceeds of which were used to fund this purchase of common stock and tendered debt. 10. Commitments and Contingent Liabilities Nuclear Insurance PP&L is a member of certain insurance programs which provide coverage for property damage to members' nuclear generating stations. Under these programs, facilities at the Susquehanna station are insured against property damage losses up to $2.75 billion. 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 September 30, 1999, the maximum amount PP&L could be assessed under these programs was about $24 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 $20 million per year, plus 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. 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 its rate of 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 21 Pennsylvania DEP has finalized regulations which require PP&L to reduce its ozone seasonal NOx by 57% from 1999 levels beginning in May 1999. PP&L is complying with this reduction with operational initiatives that rely primarily on the existing low NOx burners. In 1997, the EPA finalized new national standards for ambient levels of ground-level ozone and fine particulates. Those standards were challenged by industry groups and have been held invalid by the D.C. Circuit Court of Appeals. Based in part on the new ozone standard, the EPA has called for 22 states (including PA) to revise their regulations capping their NOx emissions to specified levels in 2003. PA's NOx emissions cap in effect requires approximately an 80% reduction in NOx emissions from the 1990 level. The EPA required states to make these revisions to their regulations by September 1999. However, these EPA requirements have also been challenged in the D.C. Circuit Court of Appeals and the Court has stayed the September 1999 deadline. 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 found significant contribution by most sources named in the petitions and proposed to require emissions reductions at those sources if the states fail to develop plans by September 1999 to implement the proposed 2003 limits. The EPA's finding of significant contribution has been challenged in the D.C. Circuit Court of Appeals. The EPA has recently issued an interim stay of its action on these 126 petitions in light of the D. C. Circuit Court of Appeals' decisions. PP&L estimates that compliance with the 2003 emissions regulations requirements could require installation of NOx removal systems at PP&L's three largest coal-fired units, at a total capital cost of approximately $120 million. The first system is expected to be installed at the Montour Plant by May 2000. A new particulates standard, if ultimately upheld, may require further reductions in SO2 and may expand the planned seasonal NOx reductions to year round in the 2010-2012 time frame. Under the Clean Air Act, the EPA has been studying the health effects of hazardous air emissions from power plants and other sources, 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 if 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 an 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 significant. 22 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 significant. Water and Residual Waste ------------------------ Water discharges at PP&L facilities and any groundwater contamination caused by PP&L's ash basins must be addressed under DEP's regulations under the Clean Streams Law and DEP's residual waste regulations, respectively. 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 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 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 increase operating costs. These amounts are not now determinable but 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 September 30, 1999, PP&L has completed work on more than half of the sites included in the consent order. 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 23 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 September 30, 1999, PP&L and Penn Fuel Gas had accrued $6 million and $14 million, respectively, representing the amounts they 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. 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 and Other Guarantees of Affiliated Companies PP&L Resources provides certain guarantees for its subsidiaries. PP&L Resources guarantees all of the debt of PP&L Capital Funding, which consisted of $397 million of medium-term notes and $202 million of commercial paper at September 30, 1999 (as shown on the Consolidated Balance Sheet). As noted in Note 9, an additional $200 million of medium-term notes were issued in October 1999 by PP&L Capital Funding. PP&L Resources also guaranteed $17 million of notes of a subsidiary of Penn Fuel Gas. In addition, PP&L Resources has provided $113 million of guarantees to PP&L Global subsidiaries. With respect to the development of the Griffith Energy Project, PP&L Resources has received a guaranty from Duke Capital Corporation to backstop a portion of PP&L Resources' guaranty (up to $25 million of PP&L Resources' $50 million guaranty). See Note 11 for additional information on the Griffith Energy Project. Lastly, PP&L Resources has guaranteed certain obligations of PP&L EnergyPlus for up to $263 million under certain power purchase and sales agreements. 24 As of September 30, 1999, PP&L had provided a $12 million guarantee in support of one of its subsidiaries. 11. Acquisitions and Divestitures In February 1999, PP&L Resources acquired McCarl's; in April 1999, PP&L Spectrum acquired Burns Mechanical; and in September 1999, PP&L Resources acquired Western Mass. Holdings. In October 1999, Burns Mechanical finalized its merger with DVY. The purchase prices for these mechanical contractor and engineering firms were not individually significant. In November 1999, PP&L sold its Sunbury plant and the principal assets of its wholly-owned coal processing subsidiary, Lady Jane Collieries, to Sunbury Holdings, LLC. PP&L received cash proceeds of $107 million for these assets, including coal inventory, which will result in a one-time contribution of about 27 cents per share to PP&L Resources' 1999 earnings. This sale will be recorded in the fourth quarter of 1999. In May 1999, PP&L Global acquired most of Bangor Hydro's generating assets and certain transmission rights, as well as its interest in an oil-fired generation facility, for $79 million. In August 1999, PP&L Global purchased Bangor Hydro's 50% interest in the 13-megawatt West Enfield hydroelectric station for $10 million. In July 1999, PP&L Global acquired an additional 29.4% interest in Emel for $95 million, resulting in majority ownership and control of the company. In August 1999, PP&L Global acquired an additional 18.5% interest in Emel for $44 million. The most recent acquisition brought PP&L Global's ownership of Emel to 85.4%. The additional ownership in Emel also gave PP&L Global a majority interest in EC, an entity that is jointly owned by PP&L Global and Emel. As a result, in the third quarter PP&L Global consolidated the financial statements of Emel and EC, including DelSur from January 1, 1999 through August 31, 1999, thereby establishing a one-month reporting lag. In October 1999, PP&L Global offered to purchase additional shares of Emel between October 13 and November 26. If these additional shares are purchased, PP&L Global would own about 95% of Emel's shares. PP&L Global has also signed definitive agreements with the Montana Power Company, Portland General Electric Company and Puget Sound Energy, Inc. to acquire interests in 13 Montana power plants, with 2,372 megawatts of generating capacity, for a purchase price of $1.546 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, FERC has approved the sale of the assets to PP&L Global. Upon completion of this acquisition, PP&L Global will have 100% ownership interest in these power plants, except for Colstrip Units 3 and 4, in which PP&L Global's ownership interest will be 75% and 45%, respectively. PP&L Global expects to complete this acquisition by the first quarter of 2000. About 65% of the acquisition cost is expected to be financed on a 25 project credit basis, non-recourse to 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 Resources' acquisition of related transmission assets for an additional $126 million, subject to certain conditions, including federal regulatory approval. PP&L Resources is in the process of acquiring the energy marketing operation of the Montana Power Company for an amount that is not significant. The Montana marketing and trading operation will become part of PP&L EnergyPlus, and will sell electricity in wholesale and retail markets in Montana and the Northwest. In September 1999, PP&L Global's U.K. subsidiary, SWEB, sold its electricity supply business to London Electricity for about $264 million. PP&L Global expects to record an after tax gain from the sale of about $40 million in the fourth quarter of 1999. The supply business provided about 15% of SWEB's annual earnings. PP&L Global and Southern Energy will continue joint ownership of the electric delivery business, which has been renamed Western Power Distribution (WPD). WPD will continue to own and operate an extensive power network in southwest Britain, transporting and delivering electricity to 1.4 million customers. In August 1999, the U.K.'s Office of Gas and Electricity Markets, the regulatory authority for electricity and natural gas distribution, issued proposed base rate reductions for the country's 14 electricity distribution businesses, including WPD. The proposed rate reduction for WPD is between 20% and 25%. Under the proposal, the final rates would be issued in November 1999 and would be effective for five years beginning in April 2000. In anticipation of this action, PP&L Global is evaluating the carrying value of its investment in WPD. The amount of any possible write-down cannot be determined until the final rate reductions for WPD are known, but such a write-down could be material. In July 1999, PP&L Global reached an agreement with Duke Energy North America to jointly complete the Griffith Energy Project, a gas-fired, combined- cycle power plant near Kingman, Arizona. As part of the agreement, PP&L Global transferred a 50% interest in the project to Duke. PP&L Global will fund 50% of the capital cost of the project. The facility, expected to be in service in 2001, would have a nominal base-load capacity of 500 megawatts and a peak capacity of 600 megawatts. The project cost is anticipated to be about $300 million. 12. New Accounting Standards In June 1999, the FASB issued SFAS 137 which defers the effective date of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," to fiscal years beginning after June 15, 2000. SFAS 137 also changed the look-back period for bifurcating embedded derivatives in host contracts from December 31, 1997, to December 31, 1998. PP&L Resources 26 and PP&L intend to adopt SFAS 133 as of January 1, 2001. The impact of adopting this statement on the net income and financial position of PP&L Resources and PP&L is not yet determinable but may be significant. 13. Subsequent Event On November 1, 1999 the Pennsylvania Department of Revenue (DOR) issued Public Utility Realty Tax Act (PURTA) tax notices to Pennsylvania Utilities for calendar year 1998 in accordance with amendments to PURTA enacted earlier in 1999. Based on the DOR notice, PP&L's PURTA tax expense for 1998 and 1999 will be reduced by about $19 million. This reduction in expense will be recorded in the fourth quarter of 1999. 27 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 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. 28 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 significant changes in principal items on the Consolidated Statement of Income comparing the three months and nine months ended September 30, 1999, to the comparable periods in 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
Comparison of Earnings - September 30 ------------------------------------- Three Months Ended Nine Months Ended ------------------ ----------------- 1999 1998 1999 1998 ------ ------ ------ ------ Earnings per share - excluding one-time adjustments and restructuring impacts $0.55 $0.54 $1.72 $ 1.47 One-time adjustments: Securitization 0.13 0.13 PUC Restructuring Charge (5.49) FERC Municipalities Settlement (0.19) U.K. Income Tax Rate Reduction 0.06 0.06 Penn Fuel Gas Acquisition Costs 0.03 0.03 Restructuring impacts 0.18 0.18 ----- ----- ------- ------ Earnings per share - actual $0.68 $0.81 $1.85 ($3.94) ===== ===== ======= ======
PP&L recorded two extraordinary items in June 1998 related to the PUC restructuring proceeding and a settlement with municipalities under FERC jurisdiction. 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. PP&L also recorded an extraordinary item in August 1999 for the extinguishment of debt using the proceeds of transition bonds. Refer to Note 5 to the Financial Statements for further information. Also, certain 29 deferred income taxes were no longer required because of securitization. This $78 million credit to income, when offset by the extinguishment charge, increased 1999 earnings by 13 cents per share. Earnings per share, excluding these and other one-time adjustments and restructuring impacts, were $0.01 higher for the three months ended September 30, 1999, and $0.25 higher for the first nine months of 1999, when compared with the same periods in 1998. The earnings improvement during the nine-month period reflects higher sales of electricity to retail customers, higher margins on wholesale energy marketing and trading activities and higher earnings of PP&L Global. Depreciation and effective income tax rates were lower than in 1998, a direct result of the restructuring adjustments recorded by PP&L in June 1998. PP&L Resources' common stock repurchases in September 1998 and August 1999 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 supply and higher operating and maintenance costs. In addition, PP&L lost the benefit of certain regulatory treatments that improved earnings during the first nine months of 1998. Electric Energy Sales PP&L's electricity sales for 1999 and 1998 were as follows:
September 30, 1999 vs. September 30, 1998 ----------------------------------------- Three Months Ended Nine Months Ended ------------------ ----------------- 1999 1998 1999 1998 ----- ------ ------ ------ (Millions of kWh) Electricity delivered to retail customers by PP&L (a) 8,221 8,368 25,086 24,201 Less: Electricity supplied by others 2,770 520 6,950 1,493 ----- ------ ------ ------ Electricity supplied to retail customers by PP&L 5,451 7,848 18,136 22,708 Electricity supplied to retail customers by PP&L EnergyPlus 3,029 469 7,096 1,139 ----- ------ ------ ------ Total electricity supplied to retail customers (a) 8,480 8,317 25,232 23,847 Wholesale Energy Sales 7,805 12,258 24,034 29,303
(a) kWh for customers residing in PP&L's service territory who received energy from PP&L or PP&L EnergyPlus are reflected in both of these categories. Under Pennsylvania's Electric Choice program, beginning on January 1, 1999 customers were allowed to choose the supplier of their electricity. 30 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 in the three months ended September 30, 1999, decreased by 147 million kWh, or 1.8%, from the comparable period in 1998. The decline reflects lower usage by industrial customers. Electricity supplied to retail customers increased by 163 million kWh, or 2.0%, when comparing the three months ended September 30, 1999, to the same period in 1998. Total electricity supplied increased more than electricity delivered because PP&L EnergyPlus' gains in the competitive electricity supply market were greater than the losses to other utilities. In the third quarter, PP&L's supply of electricity to retail customers was 3% higher than its delivery of electricity. Electricity delivered to retail customers in the nine months ended September 30, 1999, increased by 885 million kWh, or 3.7%, from the comparable period in 1998. If normal weather had been experienced in the first nine months of 1999 and 1998, deliveries would have increased by 0.8%. Electricity supplied to retail customers increased by 1,385 million kWh, or 5.8%, when comparing the nine months ended September 30, 1999, to the same period in 1998. This increase is due to the increased sales by PP&L EnergyPlus in the competitive market and the impact of mild weather on sales in the first quarter of 1998. Wholesale energy sales, which includes sales to other utilities and energy marketers through contracts, spot market transactions or power pool arrangements, decreased by 4,453 million kWh and 5,269 million kWh in the three and nine month periods ending September 30, 1999, when compared to the same periods in 1998. These decreases were primarily the result of decreased activity of the Energy Marketing Center in the wholesale market because of retail market needs and the decrease or expiration of contracts. 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. In July 1999, PP&L entered into an insurance contract to mitigate risk associated with a potential forced outage during periods of high market prices. PP&L has entered into an agreement to provide wholesale energy marketing, trading and energy portfolio management services for an energy 31 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 See Note 8 to the Financial Statements for a discussion of forward starting interest rate swaps and treasury locks to hedge debt issuances and retirements during the first nine months of 1999. Note 8 also describes hedge positions at September 30, 1999 to manage exposures to foreign currency risk and interest rate risk for anticipated debt issuance in the fourth quarter of 1999. PP&L Resources remains exposed to changes in the fair value of the forward starting interest rate swaps. At September 30, 1999, PP&L Resources, based on historical trends, estimated its potential maximum exposure to a change in the fair value of these instruments through a downward movement in interest rates over a one-day period at $11.1 million, based on a confidence level of 97.5%. Operating Revenues Electric - -------- The increase (decrease) in revenues from electric operations was attributable to the following:
September 30, 1999 vs. September 30, 1998 ------------------------------------------- Three Months Ended Nine Months Ended ----------------------- ------------------ (Millions of Dollars) Retail Electric Revenue PP&L - electric delivery and generation provider of last resort $(131) $(247) PP&L EnergyPlus - electric generation supply 117 294 PP&L Global - Emel/EC - electric delivery 176 176 Other 2 17 ----- ----- $ 164 $ 240 ===== =====
PP&L and PP&L EnergyPlus revenues for the third quarter of 1999 were $14 million, or 2.2%, below the third quarter of 1998. This reflects lower deliveries to industrial and commercial customers and the 4% reduction in PP&L's retail rates effective January 1, 1999 in connection with the PUC Final Order in PP&L's restructuring proceeding. While PP&L delivery sales were down, PP&L EnergyPlus and PP&L supplied more generation than they did in the third quarter of 1998. PP&L and PP&L EnergyPlus revenues for the nine months ended September 30, 1999 were $47 million, or 2.6%, higher compared with the same period in 1998. This increase, in part, reflects the unfavorable impact of mild 32 winter weather on 1998 sales. Also, PP&L EnergyPlus and PP&L provided 5.8% more electricity to retail customers during the first nine months of 1999. These revenue gains were partially offset by the 4% reduction in PP&L's regulated rates, as noted above. PP&L Global consolidated the financial results of Emel and EC in the third quarter of 1999, effective from January 1, 1999. Accordingly, "Electric Operating Revenues" includes Emel and EC revenues from transmission and distribution of electricity to their customers in Central America. See Note 11 for additional information. Gas and Propane - --------------- 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 marketing and trading activities was attributable to the following:
September 30, 1999 vs. September 30, 1998 ------------------------------------------- Three Months Ended Nine Months Ended --------------------- -------------------- (Millions of Dollars) Electric Bilaterial Sales $(54) $ 16 PJM 9 13 Cost-based contracts (20) (52) Oil & gas sales 79 167 ---- ---- $ 14 $144 ==== ====
Revenues in both periods increased despite the phase-down of the capacity and energy agreement with JCP&L and the end of the capacity and energy agreement with Atlantic. The revenue decreases associated with the phase-downs are reflected in cost-based contracts. The overall revenue increase reflects PP&L's continued emphasis in competing in wholesale markets and support of PP&L EnergyPlus requirements. Energy purchases have also increased to meet these increased sales. Refer to "Energy Purchases" for more information. Energy-Related Businesses Energy-related businesses contributed $11 million and $5 million to the operating income of PP&L Resources for the three months ended September 30, 1999 and 1998, respectively. For the nine months ended September 30, 1999 and 1998, these businesses contributed a total of $44 million and $15 million, respectively, to operating income. The improvement in 1999 over 1998 primarily reflects PP&L Global's higher equity earnings due to its additional investment in SWEB, and additional operating income provided by PP&L Spectrum and the mechanical contractor and engineering subsidiaries. Energy-related businesses, including PP&L 33 Global equity investments, PP&L Spectrum, H.T. Lyons, McClure, McCarl's and Burns Mechanical, are expected to provide an increasing share of PP&L Resources' future earnings. Electric Fuel Costs Electric fuel costs decreased $19 million and $34 million for the three and nine months ended September 30, 1999, respectively, from the comparable periods in 1998. The decrease for the three months was attributed to an unplanned outage coupled with lower generation for fossil fuel units. Less generation was required in the third quarter of 1999 due to reduced Energy Marketing Center activity and lower summer demand. The decrease for the nine months was attributed to lower fossil plant availability and lower fuel prices for coal- fired units. These decreases were partially offset by a one-time charge of $5 million in 1999 for the increase in estimated costs of dry cask canisters for on-site spent fuel storage at the Susquehanna plant. Energy Purchases After eliminating the purchases made by Emel and EC, which were consolidated by PP&L Global in the third quarter of 1999, energy purchases increased by $33 million and $209 million for the three and nine months ended September 30, 1999, respectively, compared with the same periods in 1998. These increases were primarily due to increased gas purchases by the Energy Marketing Center, additional wholesale purchases to support PP&L EnergyPlus, and higher wholesale prices for electricity. These costs were partially offset by a decrease in the volume of electricity purchased by the Energy Marketing Center for trading purposes and the amortization of the liability for above market NUG purchases. Other Operation Expenses Other operation expenses increased by $42 million and $94 million for the three and nine months ended September 30, 1999, respectively, compared with the same periods in 1998. Certain regulatory impacts and operating expenses of acquired companies caused a substantial portion of these increases. These included: . About $13 million and $43 million of regulatory credits were recorded in the three months and nine months ended September 30, 1998, respectively. These credits were for the loss of revenue as a result of the customer choice pilot program and the deferral of undercollected energy costs. No similar accounting was recorded in 1999, as the pilot program was completed and energy costs are no longer recoverable through the ECR. . About $3 million and $21 million of additional operation expenses of Penn Fuel Gas were recorded in the three and nine months ended September 30, 1999, respectively, over the comparable periods in 1998. Penn Fuel Gas was acquired in August of 1998. 34 . PP&L Global consolidated the results of Emel and EC in the third quarter of 1999, which added about $16 million in operation expenses. Eliminating these items, the other operation expenses of PP&L Resources increased by $10 million and $14 million for the three and nine months ended September 30, 1999, respectively, compared with the same periods in 1998. These increases were primarily due to additional expenses associated with customer choice, including expenses to educate customers and additional marketing expenses by PP&L EnergyPlus. Higher wages and employee benefits also contributed to the increase. Power Plant Operations In April 1999, PP&L closed its Holtwood coal-fired generating station. The closing is part of an effort to reduce operating costs and position PP&L for the competitive marketplace. The adjacent hydroelectric plant continues to operate. In November 1999, PP&L sold its Sunbury plant and the principal assets of its wholly-owned coal processing subsidiary, Lady Jane Collieries, to Sunbury Holdings, LLC. PP&L received cash proceeds of $107 million for the assets, including coal inventory, which will result in a one-time contribution of about 27 cents per share to PP&L Resources' 1999 earnings. This sale will be recorded in the fourth quarter of 1999. Maintenance Expenses Maintenance expenses increased by $14 million and $20 million for the three and nine months ended September 30, 1999, respectively, from the comparable periods in 1998. About one-half of these increases were due to higher cost of outage-related and other maintenance at PP&L's fossil power plants, and additional expenses to maintain transmission and distribution facilities. The balance of the increase in maintenance expenses is due to the consolidation of Emel's accounts in the third quarter of 1999 and the acquisition of Penn Fuel Gas in August 1998. Depreciation and Amortization Expenses Depreciation and amortization expenses decreased by $73 million for the nine months ended September 30, 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. The decrease was partially offset by the additional depreciation associated with the acquisition of Penn Fuel Gas in August 1998 and PP&L Global's consolidation of Emel's accounts in the third quarter of 1999. 35 Other Income Other income decreased $16 million and $19 million for the three and nine months ended September 30, 1999, respectively, from the comparable periods in 1998. PP&L Global's earnings for 1998 reflected a $9 million U.K. income tax rate reduction. In addition, PP&L Resources recorded the Penn Fuel Gas acquisition in August 1998. Third quarter 1998 earnings were credited by $6 million for estimated transaction costs originally contemplated as a pooling of interests but ultimately recorded under purchase accounting. These decreases were partially offset by PP&L Global's consolidation of Emel and EC financial results in the third quarter of 1999, which resulted in deductions of about $5 million. Income Taxes Income taxes decreased by $100 million and $108 million for the three and nine months ended September 30, 1999, respectively, when compared to the same periods in 1998. The decreases were primarily due to changes in PP&L Resources' pre-tax book income, deferred income taxes no longer required due to securitization and tax changes relating to the second quarter 1998 restructuring write-off. Financial Condition ------------------- Financing Activities The following financing activities have occurred to date in 1999: . In January and February, PP&L Resources issued $8 million of new common stock through the DRIP. Effective March 1, the DRIP was changed from a new issue to an open market purchase program. . In June, PP&L instituted a short-term bond program in order to meet short-term working capital requirements and to increase financing flexibility. Under this program, a total of $600 million of short-term bonds were issued with no more than $200 million of such bonds outstanding at any one time. This program was completed in August 1999. . In August, PP&L Transition Bond Company issued $2.42 billion of transition bonds to securitize stranded costs. PP&L used these proceeds to repurchase $1.467 billion of first mortgage bonds. PP&L Resources purchased 14 million shares of its common stock for $417 million. Refer to Note 4 to the Financial Statements for additional information. . In September, PP&L Resources, PP&L Capital Funding, and PP&L Capital Funding Trust I filed a $1.2 billion shelf registration with the SEC to issue various debt and equity securities. It is expected that these various securities will be issued from time to time to provide long- term funding for PP&L Resources and its subsidiaries other than PP&L. 36 . PP&L Capital Funding issued $200 million of medium-term notes in October 1999, in the form of 7.70% Reset Put Securities Series due 2007. Refer to Note 9 to the Financial Statements for additional information on credit arrangements and financing activities. Financing and Liquidity Cash and cash equivalents increased by $152 million more during the nine months ended September 30, 1999, compared with the same period in 1998. The reasons for this change were: . A $95 million increase in cash provided by operating activities, primarily due to higher operating cash flow from PP&L Global, an increase in trade payables to support operations, and the adjustment for certain non-cash components of earnings, including the amortization of recoverable transition costs. These sources of funds were partially offset by an increase in accounts receivable and unbilled revenues. . $10 million decrease in cash used in investing activities. . A $47 million increase in cash provided by financing activities. This increase was due to additional issuance of long-term debt and a decrease in payments of common dividends. These financing inflows were partially offset by lower funds from issuing common stock, greater retirement of long-term debt, and a net reduction in short-term debt balances in 1999. Financial Indicators Earnings for the twelve months ended September 30, 1999 and 1998 were impacted by one-time adjustments and restructuring impacts, which are listed in the "Earnings" discussion in the Results of Operations of this Form 10-Q, and the Form 10-K for the year ended December 31, 1998. The following financial indicators for PP&L Resources reflect the elimination of these impacts from earnings, and provide an additional measure of the underlying earnings performance of PP&L Resources and its subsidiaries.
12 Months Ended September 30, ------------------------------- 1999 1998 --------------- -------------- Earnings per share, as adjusted $ 2.13 $ 1.90 Return on average common equity 13.90% 11.04% Ratio of pre-tax income to interest charges 3.06 3.47 Dividends declared per share $ 1.00 $ 1.50
37 Acquisitions and Divestitures Refer to Note 11 to the Financial Statements for information regarding Acquisitions and Divestitures. As of September 30, 1999, PP&L Global had investments of $864 million in foreign and domestic facilities, including consolidated investments, Emel, DelSur, and Penobscot Hydro. PP&L Global continues to pursue opportunities to develop and acquire electric generation, transmission and distribution facilities in the United States and abroad. Commitments and Contingent Liabilities Refer to Note 10 to the Financial Statements for a discussion of commitments and contingent liabilities. Increasing Competition The electric utility industry has experienced and will continue to experience a significant increase in the level of competition in the energy supply market at both the state and federal level. State 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 PP&L EnergyPlus, a separate affiliated corporation. 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 Pennsylvania. PP&L EnergyPlus is also approved to market electricity in New Jersey, Maine, Delaware, and Montana. Federal Activities ------------------ In June 1999, PP&L filed with the FERC an application requesting authority to sell specified ancillary services at market-based rates in the following markets: the New England power pool, the New York power pool, the market administered by the California ISO, and PJM. The FERC granted the application in July 1999. 38 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. In July 1999, PP&L EnergyPlus filed an application with the FERC requesting authority to sell specified ancillary services at market-based rates in the following markets: the New England power pool, the New York power pool, the market administered by the California ISO, and PJM. The FERC granted the application in August 1999. Proposed Corporate Realignment In September 1999, the Boards of Directors of PP&L Resources and PP&L approved the initiation of a corporate realignment, in order to better position PP&L Resources and its subsidiaries in the new competitive marketplace. This realignment includes the following key features: . The transfer of all of PP&L's electric generating facilities and related assets to a new generating company subsidiary of PP&L Resources. . The transfer of PP&L's wholesale energy marketing business, along with the energy marketing business of PP&L EnergyPlus, to a new marketing company subsidiary of PP&L Resources. . The transfer of the U.S. electric generating business of PP&L Global to the new generating company. As a result of this corporate realignment, PP&L's principal business would be the transmission and distribution of electricity to serve retail customers in its franchised territory in eastern and central Pennsylvania. PP&L Global's principal business would be the acquisition or development of both U.S. and international energy projects and the ownership of international energy projects. With respect to other existing subsidiaries of PP&L Resources and PP&L, they generally will be aligned in the new corporate structure according to their principal business functions. The proposed corporate realignment is subject to approval from the PUC, the FERC and the NRC, as well as certain third-party consents. PP&L Resources expects to complete the corporate realignment in mid-2000. Year 2000 PP&L Resources is faced with the task of addressing the Year 2000 issue. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year and other programming techniques which limit date calculations or assign special meanings to some dates. Any of PP&L's computer systems that have date-sensitive software or microprocessors may recognize a date using "00" 39 as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to measure usage, read meters, process transactions, send bills or operate electric generation stations. In addition, the Year 2000 issue could affect the ability of customers to receive bills sent by PP&L or to make payments on these bills. A Company-wide Year 2000 coordination committee was formed to raise the awareness of the Year 2000 issue, share information and review 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. Delivery of electricity is dependent on the overall reliability of the electric grid. PP&L is cooperating and coordinating with the NERC and the PJM Interconnection regarding Year 2000 remediation efforts. PP&L's power plant and electricity delivery systems are ready for the Year 2000. PP&L has completed testing all electricity generation and delivery systems. This testing has determined that the equipment necessary for the delivery of safe and reliable electricity to customers is ready for the turnover to the Year 2000. . The inventory and assessment steps have addressed computer system; embedded systems at power plants; equipment involved in the transmission and distribution of electricity on various grids, including substations; security systems; environmental monitoring equipment; elevators; and other areas. (Embedded systems are one or more integral computer chips containing a calendar/clock function.) . In addition, PP&L has a team of employees from departments throughout the company that is reviewing the equipment and systems within their departments to ensure that they are either "compliant" or "ready" for the Year 2000. . The company has also contacted appropriate vendors to ensure they are aware of the Year 2000 issues, and that they are taking appropriate steps to deal with those issues. . PP&L also has tested appropriate systems to make sure they can continue operating on January 1, 2000, and beyond. The testing on the major systems, those involved in the production of power and its delivery, has been completed. It is anticipated that all systems will be Year 2000 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- 40 sensitive chips can be used on January 1, 2000 and beyond, but are not fully Year 2000 compliant. For many years, PP&L has had 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 recognized that additional contingency plans were necessary and, as part of the seven-step remediation process, developed additional contingency plans. 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. PP&L has completed the development of these contingency plans. 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 had until July 1, 1999 to inform the NRC that their computers are Year 2000 ready or to submit a status report summarizing the ongoing work. On July 1, 1999, PP&L filed its written response with the NRC, stating that PP&L's nuclear power plant is Year 2000 ready. In February 1999, an independent assessment of the Year 2000 Program Readiness Plan for PP&L's nuclear department was performed with no significant adverse findings identified. The results of that assessment were incorporated into the overall Year 2000 Program Readiness Plan for PP&L's nuclear department. In May 1999, the NRC conducted an audit of PP&L's nuclear-related Year 2000 compliance activities. This audit was observed by the PUC. There were no adverse findings identified as a result of the audit. 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, 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. On July 1, 1999, PP&L informed the PUC that all of the systems that support the generation and delivery of electricity are Year 2000 ready. PP&L also filed its updated Year 2000 contingency plans with the PUC. 41 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, PP&L filed its Year 2000 testing schedule with the PUC; meanwhile, 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 a result of Year 2000 computer problems. The results of this 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 that some improvements were 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 were incorporated into the respective business entities' Year 2000 remediation efforts. As of October 1, 1999, PP&L is more than 98% complete in addressing the Year 2000 issue. PP&L has achieved the following completion percentages on the seven steps referenced above for Year 2000 compliance: awareness, 98%; inventory, 100%; assessment, 99%; remediation, 98%; testing, 99%; implementation, 97%; and additional contingency plans, beyond the basic plans referenced above, 85%. The preceding percentages are for all of PP&L's computer systems, including components of the computer systems that are mission-critical. Third-party relationships are very important to the continued operations of PP&L. These third-party relationships are the means to acquire equipment, services, consumables and fuel that are needed to keep the generating and transmission and distribution facilities running smoothly. PP&L began addressing third-party relationships with respect to the Year 2000 issue during the fourth quarter of 1998 by identifying the suppliers that are important to PP&L's day- to-day operations. PP&L identified approximately 400 of these suppliers. An introductory letter, as well as two follow-up letters, were mailed to the suppliers asking for their Year 2000 compliance status. Approximately 96% of all vendors have responded to date, with 99% of their responses being favorable. All of the mission-critical vendors have provided favorable responses. PP&L is responding to those suppliers whose Year 2000 compliance status does not meet PP&L's expectations. PP&L has participated in several Year 2000 tests with the PJM. The first test with the PJM focused on basic data communications. The second test with the PJM was done in conjunction with NERC on April 9, 1999, and focused on redundant communications. The third test focused on system interfaces. PP&L also participated with the PJM in a NERC-sponsored Year 2000 test on September 8, 1999, which was a full simulation of generation, 42 transmission and distribution operational plans. The results indicated that these systems were Year 2000 ready. In October 1999, Penn Fuel Gas also announced that its systems used in the distribution of natural gas and propane to its customers are ready for the year 2000. Penn Fuel Gas's Year 2000 Project included its subsidiaries PFG Gas Inc. and North Penn Gas Company. Based upon present assessments, PP&L estimates that it will incur approximately $13.5 million in Year 2000 remediation costs. Through September 30, 1999, PP&L had spent approximately $12.3 million in remediation costs, which included assistance from outside consultants. These costs are being expensed as incurred. With respect to PP&L Global's Emel-related investments, an assessment has been made of the Chilean and Bolivian companies, and they are taking appropriate steps to ensure Year 2000 Readiness by year-end. An assessment of Year 2000 Readiness is ongoing in El Salvador. Item 3. Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------- Reference is made to "Quantitative and Qualitative Disclosures About Market Risk," in Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 8 to the Financial Statements. 43 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 12 - Computation of Ratio of Earnings to Fixed Charges 27 - Financial Data Schedule (b) Reports on Form 8-K Report dated July 27, 1999 -------------------------- Item 5. Other Events Information regarding PP&L's cash tender offers for any and all of approximately $1.66 billion of 11 different series of its first mortgage bonds. Report dated August 10, 1999 ---------------------------- Item 5. Other Events Information regarding the expiration of PP&L's cash tender offers for any and all of approximately $1.66 billion of 11 different series of its first mortgage bonds. Report dated August 31, 1999 ---------------------------- Item 5. Other Events Information regarding PP&L Global's acquisition of approximately 2.7 million additional shares of the Chilean electricity distribution company Empresas Emel S.A. The transaction brings PP&L Global's ownership of Emel to 85.4 percent. Report dated September 24, 1999 ------------------------------- Item 5. Other Events Information regarding the approval by the Board of Directors of PP&L Resources, Inc. and PP&L, Inc. to initiate a corporate realignment. Report dated September 30, 1999 ------------------------------- Item 5. Other Events Information regarding SWEB's settlement on the sale of its electricity supply business to London Electricity for 160 million pounds (about $264 million). 44 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 on customer bills to recover allowable transition costs under the Customer Choice Act. 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 - Distribuidora Electricidad del Sur S.A., an electric distribution company in El Salvador, a majority of which is owned by EC. 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. DVY - DVY, Incorporated, a mechanical contractor and engineering firm acquired by Burns Mechanical in October 1999. EC - Electricidad de Centroamerica, S.A. de C.V, an ElSalvadoran holding company and the majority owner of Del Sur. EC is jointly owned by PP&L Global and Emel. ECR - (Energy Cost Rate) a tariff applied to PUC-jurisdictional customers to recover fuel and other energy costs. Effective January 1997, energy costs were rolled into base rates. EGS - electric generation supplier. EITF - (Emerging Issues Task Force) an organization that aids the FASB in identifying emerging issues that may require FASB action. 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. EPS - Earnings per share. FASB - (Financial Accounting Standards Board) a rulemaking organization that establishes financial accounting and reporting standards. FGD - flue gas desulfurization equipment installed at coal-fired power plants to reduce sulfur dioxide emissions. FERC - (Federal Energy Regulatory Commission) federal agency that regulates interstate transmission and sale of electricity and related matters. 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 on customer bills to recover intangible transition costs associated with securitizing stranded costs under the Customer Choice Act. ITP - intangible transition property created under the Customer Choice Act, which represents the right to recover intangible transition costs, through the ITC. 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. McClure - McClure Company, a PP&L Resources unregulated subsidiary specializing in mechanical contracting and engineering. NERC - North American Electric Reliability Council. 45 NOx - 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. 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 Trust I - a Delaware statutory business trust created to issue Preferred Securities and Common Trust Securities. 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., LLC, 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. PP&L Transition Bond Company - PP&L Transition Bond Company LLC, a wholly-owned subsidiary of PP&L, Inc. which was formed to issue transition bonds under the Customer Choice Act. 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. PURPA - (Public Utility Regulatory Policies Act of 1978) legislation passed by Congress to encourage energy conservation, efficient use of resources, and equitable rates. SEC - Securities and Exchange Commission. SO2 - Sulfur dioxide. SFAS - (Statement of Financial Accounting Standards) accounting and financial reporting rules issued by the FASB. Superfund - federal and state legislation that addresses remediation of contaminated sites. SWEB - South Western Electricity plc, a British regional electric utility company. UGI - UGI Corporation. U.K. - United Kingdom. Western Mass. Holdings - Western Massachusetts Holdings, Inc., a PP&L Resources unregulated subsidiary specializing in mechanical contracting and engineering. WPD - Western Power Distribution, the new name for SWEB's remaining power distribution business. Year 2000 - A set of date-related problems that may be experienced by software systems or applications. 46 SIGNATURES ---------- 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 subsidiaries. PP&L Resources, Inc. -------------------- (Registrant) PP&L, Inc. ---------- (Registrant) Date: November 12, 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.) 47 EX-12 2 COMPUTATION OF RATIO OF EARNINGS 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 September 30, December 31, --------------- ------------------------------------------------------- 1999(a) 1998(a) 1997 1996 1995 1994 --------------- -------------- --------- ------- ----------- ------ Fixed charges, as defined: Interest on long-term debt............................. $ 220 $ 203 $ 196 $ 207 $ 213 $ 214 Interest on short-term debt and other interest.................................. 51 33 26 17 18 18 Amortization of debt discount, expense and premium - net.................................... 3 2 2 2 2 2 Interest on capital lease obligations Charged to expense................................. 8 8 9 13 15 12 Capitalized........................................ 1 2 2 2 2 1 Estimated interest component of operating rentals.................................... 20 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............................ $ 304 $ 267 $ 251 $ 250 $ 259 $ 254 =============== ============== ========= ======= =========== ====== Earnings, as defined: Net income............................................. $ 433 $ 379 $ 296 $ 329 $ 323 $ 216 Preferred and Preference Stock Dividend Requirements (b)............................ 25 25 24 28 28 28 Less undistributed income of less than 50-percent-owned persons........................ - - - - - - --------------- -------------- --------- ------- ----------- ------ 458 404 320 357 351 244 Add (Deduct): Income taxes........................................... 150 259 238 253 286 180 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)........................ 303 265 248 248 257 253 --------------- -------------- --------- ------- ----------- ------ Total earnings................................. $ 913 $ 930 $ 808 $ 862 $ 899 $ 686 =============== ============== ========= ======= =========== ====== Ratio of earnings to fixed charges................................................ 3.00 3.48 3.22 3.45 3.47 2.70 =============== ============== ========= ======= =========== ======
(a) Excluding extraordinary items and deferred tax adjustments related to securitization. (b) Includes distributions on company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely company debentures. 48 EX-27 3 FINANCIAL DATA SCHEDULE
UT 0000317187 PP&L, INC. 1,000,000 9-MOS DEC-31-1998 SEP-30-1999 PER-BOOK 4,306 582 1,100 3,040 0 9,028 1,476 (599) 327 1,204 47 50 3,455 60 0 161 329 0 83 59 3,580 9,028 3,019 91 2,443 2,534 485 29 514 155 300 30 270 0 0 459 0 0 Net of $632 million of treasury stock Net income includes an extraordinary item of ($59) million ($100 million net of $41 million of income taxes) reflecting the effects of the early extinguishment of debt. It also includes minority interest of $13 million.
-----END PRIVACY-ENHANCED MESSAGE-----