-----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, PFewi2WPbVvzjCzhGYyWWFx+Lg4ce9+556CpM8PrM/wEfeTADcK8WM9ZdUqPuguX E5Z3YJNjdOmuMlk42rMTcw== 0000317187-95-000031.txt : 19951119 0000317187-95-000031.hdr.sgml : 19951119 ACCESSION NUMBER: 0000317187-95-000031 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PP&L RESOURCES INC CENTRAL INDEX KEY: 0000922224 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 232758192 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11459 FILM NUMBER: 95591351 BUSINESS ADDRESS: STREET 1: TWO NORTH NINTH STREET CITY: ALLENTOWN STATE: PA ZIP: 18101 BUSINESS PHONE: 6107745151 MAIL ADDRESS: STREET 1: TWO NORTH NINTH STREET STREET 2: TWO NORTH NINTH STREET CITY: ALLENTOWN STATE: PA ZIP: 181011179 10-Q 1 United States Securities and Exchange Commission Washington, DC 20549 Form 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Registrant; State of Incorporation; IRS Employer Number Address; and Telephone No. Identification No. 1-11459 PP&L Resources, Inc. 23-2758192 (Pennsylvania) Two North Ninth Street Allentown, PA 18101 (610) 774-5151 1-905 Pennsylvania Power & Light Company 23-0959590 (Pennsylvania) Two North Ninth Street Allentown, PA 18101 (610) 774-5151 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. PP&L Resources, Inc. Yes X No PP&L Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: PP&L Resources, Inc. Common stock, $.01 par value, 159,060,605 shares outstanding at October 31, 1995 Pennsylvania Power & Light Co. Common stock, no par value, 157,300,382, shares outstanding and all held by PP&L Resources, Inc. at October 31, 1995 PP&L RESOURCES, INC. AND PENNSYLVANIA POWER & LIGHT COMPANY FORM 10-Q FOR THE QUARTER ENDED September 30, 1995 INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements PP&L Resources, Inc. Consolidated Statement of Income Consolidated Balance Sheet Consolidated Statement of Cash Flows Pennsylvania Power & Light Company Consolidated Statement of Income Consolidated Balance Sheet Consolidated Statement of Cash Flows Notes to Financial Statements PP&L Resources, Inc. and Pennsylvania Power & Light Company Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PP&L Resources, Inc. and Pennsylvania Power & Light Company PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 6. Exhibits and Reports on Form 8-K SIGNATURES PP&L RESOURCES, INC. Part 1. FINANCIAL INFORMATION Item 1. Financial Statements In the opinion of PP&L Resources, Inc. (Resources), the unaudited financial statements included herein reflect all adjustments necessary to present fairly the Consolidated Balance Sheets as of September 30, 1995 and December 31, 1994, and the Consolidated Statement of Income and Consolidated Statement of Cash Flows for the periods ended September 30, 1995 and 1994. Resources is the parent holding company of Pennsylvania Power & Light Company (PP&L), Power Markets Development Company (PMDC), and the newly formed Spectrum Energy Services Corporation (Spectrum). PP&L comprises 99 percent of Resources' assets, revenues and earnings. All nonutility operating transactions are included in "Other Income and (Deductions)--Other-net" in Resources' Consolidated Statement of Income. CONSOLIDATED STATEMENT OF INCOME (Unaudited) (Thousands of Dollars, except per share data)
Three Months Ended September 30, 1995 1994 Operating Revenues ............................... $682,249 $661,142 Operating Expenses Operation Fuel......................................... 125,974 117,798 Power purchases.............................. 66,142 66,067 Other........................................ 110,362 118,500 Maintenance..................................... 38,488 43,207 Depreciation.................................... 77,437 72,129 Amortized depreciation.......................... 9,939 6,564 Income taxes.................................... 92,229 57,952 Taxes, other than income........................ 48,217 46,992 Voluntary early retirement program.............. (65,661) 503,127 529,209 Operating Income .................................. 179,122 131,933 Other Income and (Deductions) Allowance for equity funds used during construction................................. 68 Income tax credits (expense).................... (8,229) 1,916 Other - net..................................... (20,238) 212 (28,399) 2,128 Income Before Interest Charges & Dividends on Preferred Stock ........................................... 150,723 134,061 Interest Charges Long-term debt.................................. 52,851 52,445 Short-term debt and other....................... 6,020 6,605 Allowance for borrowed funds used during construction and interest capitalized........ (2,270) (1,943) 56,601 57,107 Preferred Stock Dividend Requirements.............. 6,942 6,942 Net Income......................................... $87,180 $70,012 Earnings Per Share of Common Stock (a) ............ $0.55 $0.46 Average Number of Shares Outstanding (thousands)....................................... 158,131 153,789 Dividends Declared Per Share of Common Stock............................................. $0.4175 $0.4175 (a) Based on average number of shares outstanding. See accompanying Financial Notes.
PP&L RESOURCES, INC. CONSOLIDATED STATEMENT OF INCOME (Unaudited) (Thousands of Dollars, except per share data)
Nine Months Ended September 30, 1995 1994 Operating Revenues ...............................$2,018,947 $2,070,813 Operating Expenses Operation Fuel......................................... 326,563 365,154 Power purchases.............................. 214,040 221,916 Other........................................ 353,712 365,114 Maintenance..................................... 123,615 133,630 Depreciation.................................... 232,324 216,346 Amortized depreciation.......................... 29,816 19,693 Income taxes.................................... 210,171 186,059 Taxes, other than income........................ 149,547 153,284 Voluntary early retirement program.............. (65,661) 1,574,127 1,661,196 Operating Income .................................. 444,820 409,617 Other Income and (Deductions) Allowance for equity funds used during construction................................. 4,072 2,552 Income tax credits (expense).................... (7,998) 4,461 Other - net..................................... (17,376) (2,258) (21,302) 4,755 Income Before Interest Charges & Dividends on Preferred Stock ........................................... 423,518 414,372 Interest Charges Long-term debt.................................. 161,064 159,823 Short-term debt and other....................... 15,404 15,773 Allowance for borrowed funds used during construction and interest capitalized........ (6,995) (5,843) 169,473 169,753 Preferred Stock Dividend Requirements.............. 20,826 21,463 Net Income......................................... $233,219 $223,156 Earnings Per Share of Common Stock (a) ............ $1.48 $1.46 Average Number of Shares Outstanding (thousands)....................................... 157,187 152,951 Dividends Declared Per Share of Common Stock............................................. $1.2525 $1.2525 (a) Based on average number of shares outstanding. See accompanying Financial Notes.
PP&L RESOURCES,INC. CONSOLIDATED BALANCE SHEET (Thousands of Dollars)
Sept. 30, December 31, 1995 1994 (Unaudited) (Audited) ASSETS Property, Plant and Equipment Electric utility plant in service.................. $9,551,516 $9,306,519 Accumulated depreciation......................... (3,051,562) (2,871,129) Deferred depreciation............................ 226,401 256,021 6,726,355 6,691,411 Construction work in progress...................... 186,929 211,288 Nuclear fuel owned and leased - net of amortization.................................. 144,856 143,591 Other leased property - net of amortization ....... 84,064 80,385 Electric utility plant - net..................... 7,142,204 7,126,675 Other property - net of depreciation, amortization and depletion....................... 64,060 67,850 7,206,264 7,194,525 Investments Associated company - at equity..................... 17,185 17,088 Nuclear plant decommissioning trust fund .......... 102,918 87,490 Financial investments.............................. 136,733 119,632 Other - at cost or less............................ 23,781 8,654 280,617 232,864 Current Assets Cash and cash equivalents.......................... 9,159 10,079 Marketable securities.............................. 94,363 100,537 Accounts receivable, less reserve Customers........................................ 181,581 189,771 Interconnection.................................. 1,888 1,610 Other............................................ 11,368 12,861 Unbilled revenues.................................. 59,912 88,668 Fuel (coal and oil) - at average cost.............. 90,661 125,545 Materials and supplies - at average cost........... 124,073 123,630 Prepayments........................................ 33,799 11,015 Deferred income taxes.............................. 38,780 27,572 Other.............................................. 21,401 26,916 666,985 718,204 Deferred Debits Utility plant carrying charges - net of amortization.................................. 22,353 23,142 Reacquired debt costs.............................. 117,899 113,466 Assessment for decommissioning uranium enrichment facilities............................ 31,522 33,492 Retired miners' health care benefits............... 13,783 14,536 Taxes recoverable through future rates............. 989,289 986,292 Postretirement benefits other than pensions........ 31,925 Voluntary early retirement program................. 65,661 Other.............................................. 43,873 55,160 1,316,305 1,226,088 $9,470,171 $9,371,681 See accompanying Financial Notes.
PP&L RESOURCES, INC. CONSOLIDATED BALANCE SHEET (Thousands of Dollars)
Sept. 30, December 31, 1995 1994 (Unaudited) (Audited) LIABILITIES Capitalization Common equity Common stock...................................... $1,584 $1,555 Capital in excess of par value ................... 1,495,941 1,432,946 Earnings reinvested .............................. 1,060,137 1,024,127 Capital stock expense and other .................. (7,249) (4,160) 2,550,413 2,454,468 Preferred stock With sinking fund requirements.................... 295,000 295,000 Without sinking fund requirements................. 171,375 171,375 Long-term debt...................................... 2,827,356 2,940,750 5,844,144 5,861,593 Current Liabilities Commercial paper.................................... 120,000 64,000 Bank loans.......................................... 14,887 10,168 Long-term debt due within one year.................. 30,000 39 Capital lease obligations due within one year....... 79,396 73,682 Accounts payable.................................... 107,729 146,073 Taxes accrued....................................... 30,427 46,741 Interest accrued.................................... 66,543 63,958 Dividends payable................................... 73,077 71,710 Other............................................... 112,904 101,924 634,963 578,295 Deferred Credits and Other Noncurrent Liabilities Deferred investment tax credits..................... 221,954 230,064 Deferred income taxes............................... 2,089,263 2,046,861 Capital lease obligations........................... 150,734 151,083 Unamortized cost of power plant spare parts......... 7,719 26,406 Accrued nuclear plant decommissioning costs......... 105,267 89,713 Accrued mine closing costs.......................... 55,928 56,427 Contract settlement proceeds to be credited to customers..................................... 24,521 32,931 Accrued pension costs............................... 180,763 163,487 Accrued assessment for decommissioning uranium enrichment facilities.................... 28,895 28,895 Accrued retired miners' health care benefits........ 30,975 29,568 Accrued postretirement benefits other than pensions and postemployment benefits.............. 34,275 21,784 Other............................................... 60,770 54,574 2,991,064 2,931,793 Commitments and Contingent Liabilities (See Note 11).............................................. $9,470,171 $9,371,681 See accompanying Financial Notes.
PP&L RESOURCES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Nine Months Ended Sept. 30, 1995 1994 Cash Flows From Operating Activities Net income......................................................... $233,219 $223,156 Adjustments to reconcile net income to net cash provided by operating activities Depreciation.................................................... 263,774 237,732 Amortization of property under capital leases................... 61,022 61,419 Preferred stock dividend requirements .......................... 20,826 21,463 Amortization of contract settlement proceeds and deferred cost of power plant spare parts....................... (28,721) (28,527) Deferred income taxes and investment tax credits................ 18,187 (22,831) Equity component of AFUDC....................................... (4,072) (2,552) Voluntary early retirement program.............................. (65,661) Change in current assets and current liabilities Accounts receivable....................................... 9,405 2,522 Unbilled and refundable electric revenues................. 39,432 34,237 Fuel inventories.......................................... 34,884 (10,274) Materials and supplies.................................... (443) 3,243 Prepayments .............................................. (22,784) (19,477) Accounts payable.......................................... (38,344) (47,755) Accrued interest and taxes................................ (13,729) (28,379) Other..................................................... 5,623 17,780 Other operating activities - net................................ 26,279 49,610 Net cash provided by operating activities.................... 538,897 491,367 Cash Flows From Investing Activities Property, plant and equipment expenditures......................... (318,326) (363,983) Proceeds from sales of nuclear fuel to trust....................... 43,756 13,551 Purchases of available-for-sale securities......................... (247,614) (124,164) Sales and maturities of available-for-sale securities.............. 242,900 66,842 Net purchases and sales of other financial investments ............ (8,704) 6,531 Other investing activities - net................................... 3,685 19,641 Net cash used in investing activities........................ (284,303) (381,582) Cash Flows From Financing Activities Issuance of long-term debt......................................... 55,000 718,750 Issuance of common stock........................................... 56,997 43,073 Issuance of preferred stock.................................................... 80,000 Reduction of long-term debt........................................ (140,250) (637,350) Retirement of preferred stock.................................................. (120,000) Payments on capital lease obligations.............................. (61,022) (61,419) Dividends paid..................................................... (216,667) (212,354) Net increase in short-term debt.................................... 60,719 101,102 Costs associated with issuance and retirement of securities........ (10,252) (23,551) Other financing activities - net................................... (39) (39) Net cash used in financing activities........................ (255,514) (111,788) Net Decrease In Cash and Cash Equivalents .......................... (920) (2,003) Cash and Cash Equivalents at Beginning of Period ................... 10,079 8,271 Cash and Cash Equivalents at End of Period ......................... $9,159 $6,268 Supplemental Disclosures of Cash Flow Information Cash paid during the period for Interest (net of amount capitalized).............................. $162,039 $151,887 Income taxes...................................................... $195,509 $212,145 See accompanying Financial Notes.
PENNSYLVANIA POWER & LIGHT COMPANY In the opinion of Pennsylvania Power & Light Company (PP&L), the unaudited financial statements included herein reflect all adjustments necessary to present fairly the Consolidated Balance Sheets as of September 30, 1995 and December 31, 1994, and the Consolidated Statement of Income and Consolidated Statement of Cash Flows for the periods ended September 30, 1995 and 1994. All nonutility operating transactions are included in "Other Income and (Deductions)--Other-net" in PP&L's Consolidated Statement of Income. CONSOLIDATED STATEMENT OF INCOME (Unaudited) (Thousands of Dollars, except per share data)
Three Months Ended September 30, 1995 1994(a) Operating Revenues ............................... $682,249 $661,142 Operating Expenses Operation Fuel......................................... 125,974 117,798 Power purchases.............................. 66,142 66,067 Other........................................ 110,362 118,500 Maintenance..................................... 38,488 43,207 Depreciation.................................... 77,437 72,129 Amortized depreciation.......................... 9,939 6,564 Income taxes.................................... 92,229 57,952 Taxes, other than income........................ 48,217 46,992 Voluntary early retirement program.............. (65,661) 503,127 529,209 Operating Income .................................. 179,122 131,933 Other Income and (Deductions) Allowance for equity funds used during construction................................. 68 Income tax credits (expense) ................... (8,620) 1,887 Other - net..................................... (19,207) (115) (27,759) 1,772 Income Before Interest Charges..................... 151,363 133,705 Interest Charges Long-term debt.................................. 52,851 52,445 Short-term debt and other....................... 6,020 6,605 Allowance for borrowed funds used during construction and interest capitalized........ (2,270) (1,943) 56,601 57,107 Net Income......................................... 94,762 76,598 Dividends on Preferred Stock....................... 6,942 6,942 Earnings Available to PP&L Resources, Inc. ....... $87,820 $69,656 (a) Restated to reflect the retroactive dividend of Power Markets Development Company (PMDC) to Resources, as described in Financial Note 2 to the financial statements. See accompanying Financial Notes.
PENNSYLVANIA POWER & LIGHT COMPANY CONSOLIDATED STATEMENT OF INCOME (Unaudited) (Thousands of Dollars, except per share data)
Nine Months Ended September 30, 1995 1994(a) Operating Revenues ...............................$2,018,947 $2,070,813 Operating Expenses Operation Fuel......................................... 326,563 365,154 Power purchases.............................. 214,040 221,916 Other........................................ 353,712 365,114 Maintenance..................................... 123,615 133,630 Depreciation.................................... 232,324 216,346 Amortized depreciation.......................... 29,816 19,693 Income taxes.................................... 210,171 186,059 Taxes, other than income........................ 149,547 153,284 Voluntary early retirement program.............. (65,661) 1,574,127 1,661,196 Operating Income .................................. 444,820 409,617 Other Income and (Deductions) Allowance for equity funds used during construction................................. 4,072 2,552 Income tax credits (expense).................... (9,029) 4,418 Other - net..................................... (15,534) (2,959) (20,491) 4,011 Income Before Interest Charges..................... 424,329 413,628 Interest Charges Long-term debt.................................. 161,064 159,823 Short-term debt and other....................... 15,404 15,773 Allowance for borrowed funds used during construction and interest capitalized........ (6,995) (5,843) 169,473 169,753 Net Income......................................... 254,856 243,875 Dividends on Preferred Stock....................... 20,826 21,463 Earnings Available to PP&L Resources, Inc. ........ $234,030 $222,412 (a) Restated to reflect the retroactive dividend of Power Markets Development Company (PMDC) to Resources, as described in Financial Note 2 to the financial statements. See accompanying Financial Notes.
PENNSYLVANIA POWER & LIGHT COMPANY CONSOLIDATED BALANCE SHEET (Thousands of Dollars)
Sept. 30, December 31, 1995 1994(a) ASSETS Property, Plant and Equipment Electric utility plant in service.................. $9,551,516 $9,306,519 Accumulated depreciation......................... (3,051,562) (2,871,129) Deferred depreciation............................ 226,401 256,021 6,726,355 6,691,411 Construction work in progress...................... 186,929 211,288 Nuclear fuel owned and leased - net of amortization.................................. 144,856 143,591 Other leased property - net of amortization ....... 84,064 80,385 Electric utility plant - net..................... 7,142,204 7,126,675 Other property - net of depreciation, amortization and depletion....................... 64,060 67,850 7,206,264 7,194,525 Investments Associated company - at equity..................... 17,185 17,088 Nuclear plant decommissioning trust fund .......... 102,918 87,490 Financial investments.............................. 127,699 118,115 Other - at cost or less............................ 13,670 8,654 261,472 231,347 Current Assets Cash and cash equivalents.......................... 3,978 9,109 Marketable securities.............................. 50,607 52,544 Accounts receivable, less reserve Customers........................................ 181,581 189,771 Interconnection.................................. 1,888 1,610 Other............................................ 11,165 12,390 Unbilled revenues.................................. 59,912 88,668 Fuel (coal and oil) - at average cost.............. 90,661 125,545 Materials and supplies - at average cost........... 124,073 123,630 Prepayments........................................ 33,666 11,015 Deferred income taxes.............................. 38,773 27,524 Other.............................................. 21,518 26,916 617,822 668,722 Deferred Debits Utility plant carrying charges - net of amortization.................................. 22,353 23,142 Reacquired debt costs.............................. 117,899 113,466 Assessment for decommissioning uranium enrichment facilities............................ 31,522 33,492 Retired miners' health care benefits............... 13,783 14,536 Taxes recoverable through future rates............. 989,289 986,292 Postretirement benefits other than pensions ....... 31,925 Voluntary early retirement program ................ 65,661 Other.............................................. 43,873 55,160 1,316,305 1,226,088 $9,401,863 $9,320,682 (a) Restated to reflect the retroactive dividend of Power Markets Development Company (PMDC) to Resources, as described in Financial Note 2 to the financial statements. See accompanying Financial Notes.
PENNSYLVANIA POWER & LIGHT COMPANY CONSOLIDATED BALANCE SHEET (Thousands of Dollars)
Sept. 30, December 31, 1995 1994(a) LIABILITIES Capitalization Common equity Common stock...................................... $1,476,048 $1,440,527 Additional paid-in capital ....................... 3,176 Earnings reinvested............................... 1,010,051 973,230 Capital stock expense and other .................. (7,238) (10,112) 2,482,037 2,403,645 Preferred stock With sinking fund requirements.................... 295,000 295,000 Without sinking fund requirements................. 171,375 171,375 Long-term debt...................................... 2,827,356 2,940,750 5,775,768 5,810,770 Current Liabilities Commercial paper.................................... 120,000 64,000 Bank loans.......................................... 14,887 10,168 Long-term debt due within one year.................. 30,000 39 Capital lease obligations due within one year....... 79,396 73,682 Accounts payable.................................... 107,597 145,723 Taxes accrued....................................... 30,676 46,907 Interest accrued.................................... 66,543 63,958 Dividends payable................................... 73,077 71,710 Other............................................... 112,855 101,924 635,031 578,111 Deferred Credits and Other Noncurrent Liabilities Deferred investment tax credits..................... 221,954 230,064 Deferred income taxes............................... 2,089,263 2,046,869 Capital lease obligations........................... 150,734 151,083 Unamortized cost of power plant spare parts......... 7,719 26,406 Accrued nuclear plant decommissioning costs......... 105,267 89,713 Accrued mine closing costs.......................... 55,928 56,427 Contract settlement proceeds to be credited to customers..................................... 24,521 32,931 Accrued pension costs............................... 180,763 163,487 Accrued assessment for decommissioning uranium enrichment facilities.................... 28,895 28,895 Accrued retired miners' health care benefits........ 30,975 29,568 Accrued postretirement benefits other than pensions and postemployment benefits.............. 34,275 21,784 Other............................................... 60,770 54,574 2,991,064 2,931,801 Commitments and Contingent Liabilities (See Note 11).............................................. $9,401,863 $9,320,682 (a) Restated to reflect the retroactive dividend of Power Markets Development Company (PMDC) to Resources, as described in Financial Note 2 to the financial statements. See accompanying Financial Notes.
PENNSYLVANIA POWER & LIGHT COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Nine Months Ended Sept. 30, 1995 1994(a) Cash Flows From Operating Activities Net income......................................................... $254,856 $243,875 Adjustments to reconcile net income to net cash provided by operating activities Depreciation.................................................... 263,774 237,732 Amortization of property under capital leases................... 61,022 61,419 Amortization of contract settlement proceeds and deferred cost of power plant spare parts....................... (28,721) (28,527) Deferred income taxes and investment tax credits................ 18,187 (22,831) Equity component of AFUDC....................................... (4,072) (2,552) Voluntary early retirement program.............................. (65,661) Change in current assets and current liabilities Accounts receivable....................................... 9,137 2,794 Unbilled and refundable electric revenues................. 39,432 34,237 Fuel inventories.......................................... 34,884 (10,274) Materials and supplies.................................... (443) 3,243 Prepayments .............................................. (22,651) (19,477) Accounts payable.......................................... (38,126) (47,755) Accrued interest and taxes................................ (13,646) (28,371) Other..................................................... 5,457 17,780 Other operating activities - net................................ 26,093 49,452 Net cash provided by operating activities.................... 539,522 490,745 Cash Flows From Investing Activities Property, plant and equipment expenditures......................... (318,326) (363,983) Proceeds from sales of nuclear fuel to trust....................... 43,756 13,551 Purchases of available-for-sale securities......................... (66,337) (38,323) Sales and maturities of available-for-sale securities.............. 64,976 31,172 Net purchases and sales of other financial investments ............ 1,407 6,531 Other investing activities - net................................... 3,685 19,641 Net cash used in investing activities........................ (270,839) (331,411) Cash Flows From Financing Activities Issuance of long-term debt......................................... 55,000 718,750 Issuance of common stock and capital contribution from parent ..... 38,697 43,073 Issuance of preferred stock.................................................... 80,000 Reduction of long-term debt........................................ (140,250) (637,350) Retirement of preferred stock.................................................. (120,000) Payments on capital lease obligations.............................. (61,022) (61,419) Dividends paid..................................................... (216,667) (212,354) Dividends for capitalization of PMDC .......................................... (50,000) Net increase in short-term debt.................................... 60,719 101,102 Costs associated with issuance and retirement of securities........ (10,252) (23,551) Other financing activities - net................................... (39) (39) Net cash used in financing activities........................ (273,814) (161,788) Net Decrease In Cash and Cash Equivalents .......................... (5,131) (2,454) Cash and Cash Equivalents at Beginning of Period ................... 9,109 8,271 Cash and Cash Equivalents at End of Period ......................... $3,978 $5,817 Supplemental Disclosures of Cash Flow Information Cash paid during the period for Interest (net of amount capitalized).............................. $162,039 $151,887 Income taxes...................................................... $196,501 $212,145 (a) Restated to reflect the retroactive dividend of Power Markets Development Company (PMDC) to Resources, as described in Financial Note 2 to the financial statements. See accompanying Financial Notes.
PP&L Resources, Inc. and Pennsylvania Power & Light Company Notes to Financial Statements 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 Securities and Exchange Commission (SEC). These financial statements should be read in conjunction with the financial statements and notes thereto included in Pennsylvania Power & Light Company's Annual Report to the SEC on Form 10-K for the year ended December 31, 1994. Certain amounts in the September 30, 1994 financial statements have been reclassified to conform to the presentation in the September 30, 1995 financial statements. 2. Holding Company Formed Effective April 27, 1995, PP&L Resources, Inc. (Resources), which had been a wholly owned subsidiary of Pennsylvania Power & Light Company (PP&L), became the parent holding company of PP&L. As of the effective date, the holders of PP&L common stock became holders of Resources common stock and the stock certificates representing PP&L common stock now represent Resources common stock. Also effective April 27, 1995, Power Markets Development Company (PMDC), a subsidiary of PP&L, was transferred as a dividend in the amount of $50.9 million from PP&L to become a direct subsidiary of Resources. In the accompanying financial statements, for comparability purposes, the dividend of PMDC was reported retroactive to March 1994 when PMDC was formed as a subsidiary. In July 1995, Resources incorporated a new subsidiary, Spectrum Energy Services Corporation (Spectrum), to pursue unregulated business opportunities that are allied to the energy business. PP&L's financial condition and results of operation are currently the principal factors affecting Resources' financial condition and results of operations. All nonutility operating transactions are included in "Other Income and (Deductions)--Other-net" in Resources' and PP&L's Consolidated Statements of Income. 3. Rate Matters - PP&L Base Rate Filing with the PUC On September 27, 1995, the Pennsylvania Public Utility Commission (PUC) issued a final order with respect to the base rate case filed by PP&L on December 30, 1994 (PUC decision). PP&L's request to increase base rates, which was its first in ten years, sought to increase annual PUC-jurisdictional revenues by $261.6 million, or about 11.7%. The PUC's decision granted PP&L a $107 million increase based on test year conditions. An allocation of a $22 million credit to base rates from the Energy Cost Rate (ECR) resulted in an $85 million, or about 3.8%, net increase in PUC-jurisdictional revenues effective September 28, 1995. The following table provides a comparison of PP&L's filing and the PUC decision: Original Filing Allowed Rate Base ($ - Millions) $5,017.7 $5,017.7 Return ($ - Millions) $508.9 $478.7 Rate of Return 10.14% 9.54% Return on Common Equity 13.00% 11.50% The PUC decision allows PP&L to levelize the annual amount of depreciation on pre-1989 property for its Susquehanna station at $173 million for the period October 1, 1995 through December 31, 1998. This levelization eliminates the previously scheduled annual increase in depreciation expense resulting from the modified sinking fund method of depreciation. As part of its proposal to levelize depreciation, PP&L agreed to automatically reduce annual Susquehanna station depreciation on January 1, 1999 to reflect the return to straight line depreciation. This change in depreciation will result in a $90 million annual reduction in base rates effective January 1, 1999. The PUC determined that all of PP&L's generating capacity is necessary to meet customer needs, rejecting the arguments of some intervenors that an excess capacity adjustment should be imposed on PP&L. As a result of the PUC's action in this regard, PP&L's base rates include a full return on all of its generating facilities used to serve retail customers, as well as all operating expenses associated with those facilities. In its previous base rate case in 1985, the PUC had found that PP&L had excess generating capacity and disallowed a return on the common equity PP&L invested in Susquehanna Unit No. 2. Also, the PUC decision permits recovery of the PUC-jurisdictional amount of retiree health care costs applicable to operations, the amount incurred under the prior "pay-as-you-go" method, about $7 million annually, and the amount resulting from the adoption of Statement of Financial Accounting Standards (SFAS) 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", about $11 million annually. In addition, the PUC decision permits PP&L to recover, over a period of about 17 years, the amount of SFAS 106 costs that would have been deferred from January 1, 1993 through September 30, 1995 pursuant to a PUC order but for a Pennsylvania Commonwealth Court (Commonwealth Court) decision (now awaiting possible Pennsylvania Supreme Court review) that PP&L could not recover these deferred costs. As a result of the PUC decision, which provides for recovery of $27 million of previously expensed SFAS 106 costs, PP&L recorded a $15.7 million after-tax credit to income, or 10 cents per share of Resources' common stock, in September 1995. In addition, the PUC decision permits PP&L to recover through customer rates the PUC-jurisdictional amount, $65.7 million, of the cost of its 1994 voluntary early retirement program over a period of five years. As a result, PP&L recorded a $37.8 million after-tax credit to income, or 24 cents per share of Resources' common stock, in September 1995 to reverse the charge for this program that was recorded in the fourth quarter of 1994. The estimated annual savings of $35 million from the program also are reflected in the allowed rates. The PUC decision also permits recovery over a 10-year period of certain deferred operating and capital costs, net of energy savings, incurred from the time Susquehanna Unit No. 2 was placed in commercial operation until the effective date of base rate recognition for that Unit, but denies recovery of those costs for Susquehanna Unit No. 1. As a result of the PUC decision with respect to Susquehanna Unit No. 1, PP&L recorded a one-time charge in September 1995 which, after taxes, reduced PP&L's net income by $20.4 million, or 13 cents per share of Resources' common stock. The PUC decision makes several adjustments to the amount requested by PP&L for the currently estimated cost of decommissioning the Susquehanna station. These adjustments include the elimination of the $106.6 million contingency amount included in the decommissioning cost estimate, an increase in the earnings assumption on the decommissioning fund from 5.5% to 7.5% and a reflection of post-shutdown earnings on the fund in calculating the total amount necessary to decommission the Susquehanna station. After giving effect to these adjustments, the total amount of the Susquehanna station decommissioning costs included in PUC-jurisdictional rates is $9.5 million annually. The PUC decision reduces the return on common equity from the 13.0% requested by PP&L to 11.5%. In addition to the reduction in the return on common equity, the PUC makes several other adjustments and disallowances in its final decision. Except for the reduction in the return on common equity and the one-time charge relating to the denial of the claim for deferred operating and capital costs for Susquehanna Unit No. 1, the adjustments and disallowances included in the PUC decision do not have a significant adverse impact on PP&L's and Resources' earnings. In its decision, the PUC ruled that PP&L cannot include in its ECR the cost of capacity currently being billed to other utilities pursuant to contractual arrangements as it returns to PP&L. At the same time, however, the PUC also ruled that PP&L was not required to flow back to PUC- jurisdictional customers through the ECR the revenues received for off- system sales of capacity and energy attributable to such returning capacity. Accordingly, the PUC decision permits the benefits that can be achieved from sales of the returning capacity to accrue to shareowners. The Pennsylvania Office of Consumer Advocate has appealed the PUC decision to the Commonwealth Court. PP&L cannot predict the final outcome of this matter. Energy Cost Rate Issues As a result of the PUC decision, PP&L filed a new ECR rate with the PUC for the period September 28, 1995 through March 31, 1996. The new rate reflects the roll-in of all energy costs into base rates. In addition, PP&L is no longer required to include as a credit to the ECR one-third of the revenues from its capacity credit sales to other electric utilities. On October 26, 1995, the PUC approved the revised ECR rate. In April 1994, the PUC reduced PP&L's 1994-95 ECR claim by approximately $15.7 million to reflect costs associated with replacement power during a portion of the period that Susquehanna Unit 1 was out of service for refueling and repairs. As a result of the PUC's action, PP&L recorded a charge against income in the first quarter of 1994 for the $15.7 million of unrecovered replacement power costs which reduced earnings by 6 cents per share of PP&L's common stock. PP&L filed a complaint with the PUC objecting to the decision to exclude these replacement power costs from the 1994-95 ECR, and subsequently reached a settlement with the complainants and the PUC's Office of Trial Staff on this matter. The PUC approved the settlement agreement on February 24, 1995. As a result of this PUC action, PP&L in the first quarter of 1995 recorded a credit to income of $9.7 million which increased earnings by 4 cents per share of PP&L's common stock. In March 1995, the PUC approved PP&L's 1995-96 ECR. That ECR, which is about $2.8 million lower than the previous ECR, reflected the recovery of the $9.7 million of previously disallowed replacement power costs. Special Base Rate Credit Adjustment The Special Base Rate Credit Adjustment (SBRCA) has been in effect since April 1, 1991 and reduced PUC-jurisdictional customers' bills for the effects of three nonrecurring items. As a result of the PUC decision, PP&L's SBRCA was changed to exclude that portion of the credit associated with a capacity and energy contract with Atlantic City Electric Company (Atlantic), since the costs recovered from Atlantic were excluded from PUC- jurisdictional base rates. See Note 4 for more details on this contract. Refund of State Tax Decrease In June 1994, legislation was enacted that decreased the Pennsylvania corporate net income tax rate (Pa. CNI) from 12.25% to 11.99% retroactive to January 1, 1994, with further reductions to 10.99%, 10.75% and 9.99% in 1995, 1996 and 1997, respectively. In accordance with the terms of its tariffs, PP&L filed with the PUC a recomputation of its State Tax Adjustment Surcharge (STAS) to reflect the decreases in state income taxes for 1994 and the first quarter of 1995. The STAS began in July 1994 and reduced customer bills through March 1995 by about $2.7 million. A revised STAS for the April 1995 through March 1996 period went into effect in April 1995 and was expected to reduce customer bills through March 1996 by about $9.2 million. However, in June 1995, legislation was enacted that decreased the Pa. CNI from 10.99% to 9.99% retroactive to January 1, 1995. In July 1995, PP&L filed with the PUC a recomputation of its STAS to reflect the decrease in the Pa. CNI from 10.99% to 9.99%. This was expected to reduce customer rates by about $16.6 million rather than the $9.2 previously filed. As a result of the PUC decision, the Pa. CNI reflected in base rates was changed from 12.25% to 10.99%. PP&L filed a recomputation of its STAS to reflect the new Pa. CNI reflected in base rates as well as revised revenues and taxable income resulting from the base rate filing. The revised STAS, which was approved on October 26, 1995, is expected to reduce customer rates by about $12.9 million. This change will have no effect on PP&L's net income. FERC-Jurisdictional Rates On October 26, 1995, the Federal Energy Regulatory Commission (FERC) approved PP&L's request to recover postretirement benefits other than pensions through its contractual agreements with other major electric utilities, subject to refund after FERC review. Beginning November 1, 1995, PP&L will bill these utilities on an accrual basis for their share of ongoing postretirement costs other than pensions. In addition, each utility will be billed a levelized amount of previously deferred postretirement benefit costs. PP&L expects to recover the previously deferred costs during the contract periods. See Note 4 for more details on these contracts. In the October 26, 1995 order, FERC also ordered hearings to evaluate the justness and reasonableness of PP&L's rates in its contractual agreements with Jersey Central Power & Light Company (JCP&L), Atlantic, Baltimore Gas & Electric Company and UGI Corporation. PP&L cannot predict the outcome of these hearings. See "Part II. Other Information - Legal Proceedings" for a discussion of litigation by JCP&L against PP&L. 4. Sales to Other Major Electric Utilities - PP&L PP&L provides Atlantic with 125,000 kilowatts of capacity (summer rating) and related energy from its wholly owned coal-fired stations. The agreement with Atlantic originally provided for sales to continue through September 2000. On March 20, 1995, Atlantic notified PP&L that it will terminate the agreement on March 20, 1998, pursuant to termination provisions in the agreement. PP&L expects to be able to resell the capacity and energy at prices approximately equal to that received from Atlantic. The agreement's termination is not expected to have a material impact on PP&L's revenues or net income. In 1994, PP&L received about $23.1 million in revenues from this agreement. PP&L provides JCP&L with 945,000 kilowatts of capacity and related energy from all of its generating units. Sales to JCP&L will continue at the 945,000 kilowatt level through 1995, with the amount then declining uniformly each year (189,000 kilowatts per year) until the end of the agreement on December 31, 1999. PP&L estimates that annual revenues associated with 189,000 kilowatts of returning capacity from JCP&L are about $40 million and that economy energy sales for 189,000 kilowatts of capacity on the Pennsylvania-New Jersey-Maryland Interconnection Association (PJM) would produce about $25 million of annual revenues. On April 6, 1995, PP&L entered into a new agreement with JCP&L whereby PP&L will provide JCP&L increasing amounts of installed capacity credits and energy from all of its generating units. Sales to JCP&L under this agreement will begin in June 1997 and will continue through May 2004. Under this agreement, PP&L will provide JCP&L 150,000 kilowatts of capacity credits and energy from June 1997 through May 1998, 200,000 kilowatts from June 1998 through May 1999 and 300,000 kilowatts from June 1999 through May 2004. Sales under the new agreement will be priced based on a predetermined demand factor that escalates over time, plus an energy component based on PP&L's actual fuel-related costs. This agreement with JCP&L must be approved by the FERC and the New Jersey Board of Public Utilities. PP&L provides Baltimore Gas & Electric (BG&E) with 129,000 kilowatts or 6.6 percent of its share of capacity and related energy from the Susquehanna station. Sales to BG&E will continue through May 2001. PP&L will continue to seek additional opportunities to market its capacity and energy in the bulk power markets which would produce revenues in excess of the amount that would be realized through economy energy sales on the PJM. 5. Financing Activity - Resources/PP&L As a result of a corporate restructuring, as of April 27, 1995, PP&L's 157,300,382 shares of outstanding common stock became Resources' common stock. During the third quarter of 1995, 937,165 shares of Resources' common stock ($18.3 million) were issued through the Dividend Reinvestment Plan (DRIP). At September 30, 1995, Resources had 390,000,000 shares of authorized common stock, $.01 par value, of which 158,407,582 shares were outstanding. In October 1995, Resources issued an additional 653,023 shares of common stock ($15.2 million) through the DRIP. In the second quarter of 1995, PP&L acquired in the open market $35.0 million of its First Mortgage Bonds, 9-1/4% Series due 2019, and $50.25 million of its First Mortgage Bonds, 9-3/8% Series due 2021. PP&L intends to retire these bonds within the coming year. The acquisition of these bonds reduced long-term debt outstanding on the Consolidated Balance Sheets of Resources and PP&L. In August, PP&L issued $55 million principal amount of First Mortgage Bonds, 6.15% Pollution Control Bonds Series K due 2029, that provided for the refunding of $55 million principal amount of First Mortgage Bonds, 9.375% Pollution Control Bonds Series G, on September 1, 1995. 6. Credit Arrangements - PP&L PP&L issues commercial paper and, from time to time, borrows from banks to provide short-term funds required for general corporate purposes. In addition, certain subsidiaries also borrow from banks to obtain short- term funds. Bank borrowings generally bear interest at rates negotiated at the time of the borrowing. PP&L's weighted average interest rate on short- term borrowings was 5.9% at September 30, 1995. PP&L has credit arrangements with banks that produce a total of $295 million of lines of credit to provide back-up for PP&L's commercial paper and short-term borrowings of certain subsidiaries. No borrowings were outstanding at September 30, 1995 under these credit arrangements. PP&L leases its nuclear fuel from a trust. The maximum financing capacity of the trust under existing credit arrangements is $200 million. 7. New Regulatory Assets - PP&L PP&L established new regulatory assets as a result of the recent PUC and FERC decisions. These regulatory assets as of September 30, 1995 are as follows (millions of dollars): Voluntary early retirement program $65.7 Postretirement benefits other than pensions 31.9 Rate case expenses 1.5 $99.1 The PUC-jurisdictional portion of PP&L's 1994 voluntary early retirement program costs will be recovered through rates over a five-year period beginning September 28, 1995. Postretirement benefits other than pensions includes $27.0 million applicable to PUC-jurisdictional customers, which will be recovered through rates over approximately 17 years beginning September 28, 1995. The balance represents postretirement benefits other than pensions applicable to PP&L's contractual agreements with other major electric utilities. PP&L will recover these costs during the contract periods. Rate case expenses represent non-payroll costs incurred for the preparation of the recent base rate case applicable to PUC-jurisdictional customers. These costs will be recovered through rates over a four-year period beginning September 28, 1995. See Note 3 for more details on "Rate Matters". 8. Workforce Reductions - PP&L As part of its continuing efforts to reduce costs, PP&L offered a voluntary severance program to employees who are members of the bargaining unit. Under the program, bargaining unit employees had until July 7, 1995 to request voluntary severance. Seventy-five employees requested and were granted severance under this program. Additionally, re-engineering efforts led to the displacement and termination of 100 management employees. The cost of severance benefits provided to these management and bargaining unit employees reduced net income for the three and nine months ended September 30, 1995 by $8.3 million, or 5 cents per share of Resources' common stock, and $10.4 million, or 7 cents per share of Resources' common stock, respectively. Annual savings in operating expenses associated with this reduction in employees are estimated to be approximately $12 million. PP&L continues its ongoing re-engineering and cost reduction efforts, which are expected to impact the size of PP&L's workforce. As a result of these efforts, PP&L on November 13, 1995, announced that about 300 bargaining unit positions will be eliminated throughout its service territory. Although no specific targets have been set, PP&L currently expects that the present level of 6,730 full time employees will decline to 6,000 or fewer employees over the next few years. As the workforce declines, additional costs may be incurred due to the reductions, in amounts that are not currently determinable. 9. New Accounting Standard - Resources In March 1995, the Financial Accounting Standards Board adopted SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement requires a company to review certain assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If an asset is determined to be impaired, an impairment loss is recognized. SFAS 121 is effective for financial statements for fiscal years beginning after December 15, 1995. Resources does not expect the adoption of SFAS 121 to have a material effect on its net income. 10. Fourth Quarter 1995 Events - PP&L In October 1995, a PP&L subsidiary entered into an agreement to sell one of its subsidiaries that owns coal mining assets. PP&L has determined these assets will not be required for future operations. PP&L estimates that after-tax income of approximately $24 million will be recorded in the fourth quarter upon closing this transaction. PP&L is reviewing the level of spare parts at its power plants and the capitalized costs of a new information system. The potential write-off from the above items is not yet determinable, but may eliminate a substantial portion of the gain associated with the sale of the coal assets. 11. Commitments and Contingent Liabilities - PP&L There have been no material changes related to PP&L's commitments and contingent liabilities since PP&L filed its 1994 Form 10-K, except for the discussions below regarding the denial of plaintiff's motion for class certification in the Fuel Oil Dealers' Litigation and environmental matters. For discussion pertaining to PP&L's financing matters, see Management's Discussion and Analysis of Financial Condition and Results of Operations under the caption "Financial Condition - Financing Programs." Nuclear Operations PP&L is a member of certain insurance programs which provide coverage for property damage to members' nuclear generating stations. Facilities at the Susquehanna station are insured against property damage losses up to $3.6 billion under these programs. PP&L is also a member of an insurance program which provides insurance coverage for the cost of replacement power during prolonged outages of nuclear units caused by certain specified conditions. Under the property and replacement power insurance programs, PP&L could be assessed retrospective premiums in the event of the insurers' adverse loss experience. The maximum amount PP&L could be assessed under these programs at September 30, 1995 was about $41.7 million. Nuclear Regulatory Commission regulations require that in the event of an accident, where the estimated cost of stabilization and decontamination exceeds $100 million, proceeds of property damage insurance be segregated and used, first, to place and maintain the reactor in a safe and stable condition and, second, to complete required decontamination operations before any insurance proceeds would be made available to PP&L or the trustee under the Mortgage. PP&L's on-site property damage insurance policies for the Susquehanna station conform to these regulations. PP&L's public liability for claims resulting from a nuclear incident at the Susquehanna station is limited to about $8.9 billion under provisions of The Price Anderson Amendments Act of 1988 (the Act). PP&L is protected against this liability by a combination of commercial insurance and an industry assessment program. A utility's liability under the assessment program will be indexed not less than once during each five-year period for inflation and will be subject to an additional surcharge of 5% in the event the total amount of public claims and costs exceeds the basic assessment. In the event of a nuclear incident at any of the reactors covered by the Act, PP&L could be assessed up to $151 million per incident, payable at a rate of $20 million per year, plus the additional 5% surcharge, if applicable. Fuel Oil Dealers' Litigation In August 1991, a group of fuel oil dealers in PP&L's service area filed a complaint against PP&L in United States District Court for the Eastern District of Pennsylvania (District Court) alleging that certain of PP&L's marketing activities had violated and continue to violate the federal antitrust laws. The complaint requested judgment against PP&L for a sum in excess of $10 million for the alleged antitrust violations, treble the damages alleged to have been sustained by the plaintiffs. In addition, the complaint requested a permanent injunction against all activities found to be illegal. In April 1992, another fuel oil dealer in PP&L's service area filed a class action complaint against PP&L in the District Court alleging, as did the August 1991 complaint, that certain of PP&L's marketing activities had violated and continue to violate the federal antitrust laws. The complaint also alleged that PP&L engaged in a civil conspiracy and unfair competition in violation of Pennsylvania law. The plaintiff sought to represent as a class all fuel oil dealers in PP&L's service area. The complaint requested a permanent injunction against all activities found to be illegal and treble the damages alleged to have been sustained by the class. No specific damage amount was set forth in the complaint. This second antitrust complaint was consolidated with the August 1991 complaint for pre-trial purposes. In April 1995, the District Court denied plaintiff's motion for class certification. PP&L has been granted summary judgment on many of these claims. Still pending before the District Court are the plaintiffs' claims regarding PP&L's alleged agreements with developers that their developments consist of only electrically heated units (all-electric agreements) and the state law claims related to such agreements. In addition, in June 1994 plaintiffs filed an amended complaint in District Court alleging that PP&L's former residential conversion program, under which cash grants were offered to contractors and homeowners to convert from fossil fuel heating systems to electric systems, also violated the federal antitrust laws. PP&L cannot predict the outcome of this litigation. Environmental Matters The Federal Clean Air Act Amendments of 1990 (Clean Air Act) deal, in part, with acid rain under Title IV, attainment of federal ambient ozone standards under Title I, and toxic air emissions under Title III. PP&L has complied with the Phase I acid rain provisions under Title IV. More stringent Phase II limits for sulfur dioxide reductions are required by January 2000. To meet the Phase II limits, PP&L plans to purchase lower sulfur coal, consume banked emission allowances and purchase additional emission allowances instead of relying on flue gas desulfurization equipment (FGD). PP&L's decision to not install FGD, with an estimated capital cost of $413 million, on the two 750,000 kilowatt coal-fired generating units at the Montour station represents a significant reduction in capital expenditures. PP&L has met the requirements under Title I to install reasonably available control technology to reduce nitrogen oxide emissions. A further two-phase nitrogen oxides reduction from pre-Clean Air Act levels has been proposed for the area where PP&L's plants are located, a 55% reduction by May 1999 and a 75% reduction by 2003, unless scientific studies expected to be completed by 1997 indicate a different reduction is appropriate. The reductions would be required during a five-month ozone season from May through September. Expenditures to meet the 1999 requirements are disclosed in the table of projected construction expenditures and discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations under the caption "Financial Condition - Capital Expenditure Requirements". In addition to acid rain and ambient ozone attainment provisions, the legislation requires the Environmental Protection Agency (EPA) to conduct a study of hazardous air emissions from power plants. EPA is also studying the health effects of fine particulates which are emitted from power plants and other sources. Adverse findings from either study could cause the EPA to mandate additional ultra high efficiency particulate removal baghouses or specialized flue gas scrubbing to remove certain vaporous trace metals and certain gaseous emissions. PP&L currently estimates that additional capital expenditures and operating costs for environmental compliance will be incurred beyond 2000 in amounts which are not now determinable but could be material. The Pennsylvania Air Pollution Control Act implements the Clean Air Act. The state legislation essentially requires that new state air emission standards be no more stringent than federal standards. This legislation is not expected to significantly affect PP&L's plans for compliance with the Clean Air Act. The PUC's policy regarding the trading and usage of, and the ratemaking treatment for, emission allowances by Pennsylvania electric utilities provides, among other things, that the PUC will not require approval of specific transactions and the cost of allowances will be recognized as energy-related power production expenses and recoverable through the ECR. The Pennsylvania Department of Environmental Protection (DEP), formerly Department of Environmental Resources, regulations governing the handling and disposal of industrial (or residual) solid waste require PP&L to submit detailed information on waste generation, minimization and disposal practices. They also require PP&L to upgrade and repermit existing ash basins at all of its coal-fired generating stations by applying updated standards for waste disposal. Ash basins that cannot be repermitted are required to close by July 1997. Any groundwater contamination caused by the basins must also be addressed. Any new ash disposal facility must meet the rigid site and design standards set forth in the regulations. In addition, the siting of future facilities at PP&L facilities could be affected. To address the DEP regulations, PP&L is moving forward with its plan to install dry fly ash handling systems at the Brunner Island, Sunbury and Holtwood stations. PP&L, with siting assistance from a public advisory group, has chosen mine sites at which to use the dry fly ash from the Sunbury and Holtwood stations for reclamation. In addition, PP&L is pursuing opportunities to beneficially use coal ash from the Brunner Island station in various roadway construction projects in the vicinity of the plant that may delay or preclude the need for a new disposal facility. Groundwater degradation related to fuel oil leakage from underground facilities and seepage from coal refuse disposal areas and coal storage piles has been identified at several PP&L generating stations. Many requirements of the DEP regulations address these groundwater degradation issues. PP&L has reviewed its remedial action plans with the DEP. Remedial work is substantially completed at two generating stations. There is nothing to indicate remedial work will be required at other PP&L generating stations. The DEP regulations to implement the toxic control provisions of the Federal Water Quality Act of 1987 and to advance Pennsylvania's toxic control program authorize the DEP to use both biomonitoring and a water quality based chemical-specific approach in the National Pollutant Discharge Elimination System (NPDES) permits to control toxics. The current Montour station NPDES permit contains very stringent limits for certain toxic metals and increased monitoring requirements. Toxic reduction studies are being conducted at the Montour station before the permit limits become effective. Depending on the results of the studies, additional water treatment facilities may be needed at the Montour station. Improvements and upgrades are being planned for the Sunbury, Brunner Island and Holtwood stations' waste water treatment systems to meet the anticipated NPDES permit requirements. In June 1995, the DEP ordered a PP&L subsidiary to abate seepage allegedly discharged from a mine formerly operated by that subsidiary. The subsidiary currently does not believe that it is responsible for this seepage and is contesting the DEP order. A consultant was hired to perform additional testing to determine the source of the seepage. If no direct connection exists between the mine water and the seepage, no abatement is required. Capital expenditures through 2000, to comply with the residual waste regulations, correct groundwater degradation at fossil-fueled generating stations and address waste water control at PP&L facilities, are discussed in the table of construction expenditures in the Management's Discussion and Analysis of Financial Condition and Results of Operations under the caption "Financial Condition - Capital Expenditure Requirements". PP&L currently estimates that about $30 million of additional capital expenditures could be required beyond 2000. Actions taken to correct groundwater degradation, to comply with the DEP's regulations and to address waste water control are also expected to result in increased operating costs in amounts which are not now determinable but could be material. PP&L has signed a Consent Order with the DEP to address a number of sites where PP&L may be liable for remediation of contamination. This may include potential polychlorinated biphenyl contamination at certain of PP&L's 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 a current or past owner or operator of these sites, PP&L may be liable under the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (Superfund), or other laws for the costs associated with addressing any hazardous substances at these sites. These sites have been prioritized based upon a number of factors, including any potential human health or environmental risk posed by the site, the public's interest in the site, and PP&L's plans for the site. Under the Consent Order, PP&L will not be required by DEP to spend more than $5 million per year on investigation and remediation at those sites covered by the Consent Order. At September 30, 1995, PP&L had accrued $11.7 million, representing the amount PP&L can reasonably estimate it will have to spend to remediate sites involving the removal of hazardous or toxic substances including those covered by the Consent Order mentioned above. PP&L is involved in several other sites where it may be required, along with other parties, to contribute to such remediation. Some of these sites have been listed by the EPA under Superfund, and others may be candidates for listing at a future date. Future cleanup or remediation work at sites currently under review, or at sites currently unknown, may result in material additional operating costs which PP&L cannot estimate at this time. In addition, certain federal and state statutes, including Superfund and the Pennsylvania Hazardous Sites Cleanup Act, empower certain governmental agencies, such as the EPA and the DEP, to seek compensation from the responsible parties for the lost value of damaged natural resources. The EPA and the DEP may file such compensation claims against the parties, including PP&L, held responsible for cleanup of such sites. Such natural resource damage claims against PP&L could result in material additional liabilities. Concerns have been expressed by some members of the scientific community and others regarding the potential health effects of electric and magnetic fields (EMF). These fields are emitted by all devices carrying electricity, including electric transmission and distribution lines and substation equipment. Federal, state and local officials are focusing increased attention on this issue. PP&L is actively participating in the current research effort to determine whether or not EMF causes any human health problems and is taking steps to reduce EMF, where practical, in the design of new transmission and distribution facilities. PP&L is unable to predict what effect the EMF issue might have on PP&L operations and facilities and the associated cost. In complying with statutes, regulations and actions by regulatory bodies involving environmental matters, including the areas of water and air quality, hazardous and solid waste handling and disposal and toxic substances, PP&L may be required to modify, replace or cease operating certain of its facilities. PP&L may also incur material capital expenditures and operating expenses in amounts which are not now determinable. PP&L Resources, Inc. and Pennsylvania Power & Light Company Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Effective April 27, 1995, PP&L Resources, Inc. (Resources), which had been a wholly owned subsidiary of Pennsylvania Power & Light Company (PP&L), became the parent holding company of PP&L. As of the effective date, the holders of PP&L common stock became holders of Resources common stock and the stock certificates representing PP&L common stock now represent Resources common stock. Also effective April 27, 1995, Power Markets Development Company (PMDC), a subsidiary of PP&L, became a direct subsidiary of Resources. In July 1995, Resources incorporated a new subsidiary, Spectrum Energy Services Corporation (Spectrum), to pursue unregulated business opportunities that are allied to the energy business. PP&L is the principal subsidiary of Resources and, as such, this discussion explains material changes in results of operations as reflected in both Resources' and PP&L's Consolidated Statements of Income and also focuses on recent trends and events affecting Resources' and PP&L's financial conditions. This discussion should be read in conjunction with the section entitled "Review of the Company's Financial Condition and Results of Operations" in PP&L's Annual Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1994. Results of Operations The following explains material changes in principal items on the Consolidated Statements of Income comparing the three months and nine months ended September 30, 1995 to the comparable periods ended September 30, 1994. The Consolidated Statements of Income reflect the results of past operations and are not intended as any representation of the results of future operations. Future results of operations will necessarily be affected by various and diverse factors and developments. Because results for interim periods can be disproportionately influenced by various factors and developments and by seasonal variations, the results of operations for interim periods are not necessarily indicative of results or trends for the year. Earnings - Resources Comparison of Earnings September 30, 3 Months Ended 9 Months Ended 1995 1994 1995 1994 Earnings per share - actual $0.55 $0.46 $1.48 $1.46 Weather variance (0.05) (0.02) 0.01 (0.10) Earnings per share, weather-normalized 0.50 0.44 1.49 1.36 Employee reduction programs: Voluntary early retirement program-PUC (0.24) (0.24) Other employee reductions 0.07 0.07 One-time adjustments: Recovery of postretirement benefits other than pensions-PUC (0.10) (0.10) Disallowance of Susquehanna Unit No. 1 deferred operating and capital costs 0.13 0.13 Recovery of purchased power costs (0.04) Recognition of deferred tax liabilities relating to undeveloped coal reserves 0.03 0.03 Expensing deferred PUC-jurisdictional postretirement benefits - applicable to 1993 0.04 Unrecovered purchased power costs _____ _____ _____ 0.06 Earnings Per Share-Normalized $0.39 $0.44 $1.34 $1.46 The reductions in earnings excluding weather, employee reduction programs and one-time adjustments for the three and nine months ended September 30, 1995 and 1994 were primarily due to the annual increase in depreciation for the Susquehanna station and the depreciation of PP&L's other new property placed in service. Several key initiatives have been put in place to improve financial performance. These initiatives include: o A $671 million reduction in capital expenditures over the five-year period 1996-2000, including reductions of $93 million and $220 million for 1996 and 1997, respectively; these reductions reflect, among other things, a decision to not install flue gas desulfurization equipment (FGD) at PP&L's Montour station; o Except for common equity capital to be provided through sales of common stock under the Dividend Reinvestment Plan (DRIP) by Resources, PP&L expects to meet all of its construction expenditures and debt maturities through internally generated funds during the five-year period 1996-2000; o A planned 8% ($56 million) reduction in operation and maintenance costs by the year 2000; and o Marketing and economic development activities to achieve an average compound growth rate of about 2% annually in sales to service area customers through the year 2000. Resources and PP&L believe that the PUC's September 27, 1995 rate decision (PUC decision) and these initiatives should result in financial performance that will permit Resources to increase shareowner value, including growth in earnings per share and in the dividend on common stock over the long term. Actual sales growth and improvement in earnings and financial performance will depend upon economic conditions, the levels of consumption, the impact of increasing competition in the electric utility industry, the effects of regulation and other factors. Additionally, PP&L remains committed to a corporate objective of keeping its prices as stable as possible and maintaining customer rates that compare favorably with those of neighboring utilities. See Financial Note 3 for detailed information about PP&L's recent Pennsylvania Public Utility Commission (PUC) decision. Electric Energy Sales - PP&L System Sales System, or service area, sales for the three months ended September 30, 1995 were approximately 8.1 billion kwh, an increase of 368 million kwh, or 4.7%, over the three months ended September 30, 1994. Sales for the third quarter of 1995 to residential, commercial, and industrial customers increased 6.9%, 5.3%, and 2.7%, respectively, over the comparable period in 1994. System sales were approximately 24.7 billion kwh for the nine months ended September 30, 1995, essentially unchanged from the nine months ended September 30, 1994. Sales in the residential customer category were lower for the nine months ended September 30, 1995 than for the comparable period in 1994, primarily due to the extreme cold weather in the first quarter of 1994 compared to milder weather in the first quarter of 1995. However, sales in the commercial and industrial customer categories were higher in the first nine months of 1995 than in the comparable period in 1994. Industrial sales, which are not affected by weather conditions, increased in each of the first three quarters of 1995 and each quarter of 1994. Industrial sales are an important indicator of the economic health of PP&L's service area. Weather-normalized system sales totaled 24.7 billion kwh for the nine months ended September 30, 1995. This represents an increase of 559 million kwh, or 2.3%, over the same period in 1994. Weather-normalized sales to residential, commercial, and industrial customers were higher in the first nine months of 1995 than in the first nine months of 1994. Sales to Other Major Electric Utilities For the three months ended September 30, 1995, contractual sales to other major utilities were 2.3 billion kwh, 31.1% higher than the comparable period in 1994, while sales to Pennsylvania-New Jersey-Maryland Interconnection Association (PJM) were 915 million kwh, or 40.4% lower than the comparable period in 1994. These fluctuations were primarily due to an increase in direct two-party sales to other utilities versus sales to the PJM. Contractual sales to other major utilities for the nine months ended September 30, 1995 were 5.8 billion kwh, 23.7% higher than the comparable period in 1994, while sales to the PJM for the nine months ended September 30, 1995, were 1.9 billion kwh, 23.3% lower than the comparable period in 1994. These changes were primarily due to an increase in direct two-party sales to other utilities versus sales to PJM. See Financial Note 4 for a discussion on PP&L's long-term contracts with other major utilities. Rate Matters - PP&L On September 27, 1995, the PUC issued a final order with respect to the base rate case filed by PP&L on December 30, 1994. PP&L's request to increase base rates, which was its first in ten years, sought to increase PUC-jurisdictional revenues by $261.6 million, or about 11.7%. The PUC decision in the rate case grants PP&L a $107 million increase based on test year conditions. An allocation of a $22 million credit to base rates from the Energy Cost Rate (ECR) will produce an $85 million, or about 3.8%, increase in PUC-jurisdictional revenues effective September 28, 1995. See Financial Note 3 for detailed information about PP&L's base rate filing with the PUC as well as information about other rate matters. Operating Revenues - PP&L Changes in total operating revenues were attributable to the following: September 30, 1995 vs. September 30, 1994 (Millions of Dollars) Three Months Nine Months Ended Ended Sales volume & sales mix effect $16.3 $ 28.7 Weather effect 8.8 (37.1) Energy revenues 3.7 (43.0) Replacement power costs - 25.4 Reduction in PA corporate income tax (2.9) (10.9) Sales to other major utilities 14.3 12.6 PJM energy sales (13.0) (21.0) Capacity-related and transmission entitlement transactions (7.1) (9.0) Other 1.0 2.4 $21.1 $(51.9) Lower energy revenues of $43.0 million for the nine months ended September 30, 1995, were partially offset by a $25.4 million increase in revenues due to replacement power costs, which was the result of a $15.7 million decrease in revenues in the first quarter of 1994 for the unrecovered replacement power costs and a $9.7 million increase in revenues in the first quarter of 1995 for the partial recovery of these replacement power costs. The net effect on energy costs is a $17.6 million decrease in 1995 from the comparable period in 1994. Revenues from capacity-related sales and transmission entitlements for the three and nine months ended September 30, 1995, were lower than the comparable periods in 1994 due to the end of one of PP&L's long-term contracts for capacity credit sales. Fuel Expense - PP&L Fuel expense for the three months ended September 30, 1995 increased $8.2 million, 6.9% from the comparable period in 1994 due to: Components of Steam Stations Combustion Fuel Cost - Coal- Oil- Nuclear- Turbines & Thousands of Dollars Fired Fired Fired Diesels Total Higher (Lower) Output $ 8,917 $ 7,004 $(1,611) $1,052 $15,362 Higher (Lower) Price of Fuel (2,457) (1,551) (3,183) 5 (7,186) $ 6,460 $ 5,453 $(4,794) $1,057 $ 8,176 Fuel expense for the nine months ended September 30, 1995 decreased $38.6 million, 10.6% from the comparable period in 1994 due to: Components of Steam Stations Combustion Fuel Cost - Coal- Oil- Nuclear- Turbines & Thousands of Dollars Fired Fired Fired Diesels Total Higher (Lower) Output $ 9,903 $(40,533) $ 7,033 $(1,004) $(24,601) Higher (Lower) Price of Fuel (7,021) 2,928 (9,920) 23 (13,990) $ 2,882 $(37,605) $(2,887) $ (981) $(38,591) Total generation for the three and nine months ended September 30, 1995 increased 4.5% and 3.5% from the comparable periods in 1994, respectively. The increased generation was due to higher system sales for the three months ended September 30, 1995 and lower power purchases for the nine months ended September 30, 1995. Other Operation, Maintenance and Depreciation Expenses - PP&L Other operating expenses decreased $8.1 million and $11.4 million, respectively, for the three and nine months ended September 30, 1995 over the comparable periods in 1994. These decreases were primarily due to the regulatory effects of accounting for Statement of Financial Accounting Standards (SFAS) 106, "Employees' Accounting for Postretirement Benefits Other Than Pensions", as discussed in 'Post Retirement Benefits Other Than Pensions'. Excluding these effects, other operating expense increased $19.2 million and $32.3 million, respectively, for the three and nine months ended September 30, 1995. For the three months ended September 30, 1995, $14.3 million of the increase was applicable to the costs associated with PP&L's workforce reductions while another $6.5 million was due to its increased re- engineering efforts and computer network support costs. The increase for the nine months ended September 30, 1995 was due to $17.7 million applicable to the costs associated with PP&L's workforce reductions with an additional $17.0 million applicable to increased costs for computer network support which should increase future productivity. Maintenance expense decreased $4.7 and $10.0 million, respectively, for the three and nine months ended September 30, 1995. This decrease is primarily due to PP&L's continuing efforts to reduce maintenance costs and achieve longer operating cycles at selected fossil-fueled plants. Depreciation expense increased $8.7 million and $26.1 million, respectively, for the three and nine months ended September 30, 1995, compared to the same period in 1994. Higher depreciation expense reflects the annual increase associated with the method of depreciating the Susquehanna station and the depreciation of new property placed in service by PP&L. The PUC decision allows PP&L to levelize the annual amount of depreciation on pre-1989 property for its Susquehanna station at $173 million for the period October 1, 1995 through December 31, 1998. This levelization eliminates the previously scheduled annual increase in depreciation expense resulting from the modified sinking fund method of depreciation. As part of its proposal to levelize depreciation, PP&L agreed to automatically reduce annual Susquehanna station depreciation on January 1, 1999 with a related reduction in base rates to reflect the return to straight line depreciation. PP&L continues its ongoing re-engineering and cost reduction efforts, which are expected to impact the size of PP&L's workforce. As a result of these efforts, PP&L on November 13, 1995, announced that about 300 bargaining unit positions will be eliminated throughout its service territory. Although no specific targets have been set, PP&L currently expects that the present level of 6,730 full time employees will decline to 6,000 or fewer employees over the next few years. As the workforce declines, additional costs may be incurred due to the reductions, in amounts that are not currently determinable. See Financial Note 8 for detailed information on workforce reductions. Postretirement Benefits Other Than Pensions - PP&L As a result of the PUC decision, PP&L recorded in September 1995 a $27.0 million credit to income that represents the amount resulting from the adoption of SFAS 106 that would have been deferred from January 1, 1993 through September 30, 1995 but for a 1994 Pennsylvania Commonwealth Court (Commonwealth Court) decision [now awaiting possible Pennsylvania Supreme Court review] which reversed a PUC order and ruled that PP&L could not recover these deferred costs. At that time, PP&L began to expense the increased costs applicable to operations that would otherwise have been deferred and wrote off such costs deferred from January 1, 1993. For the three and nine months ended September 30, 1995, retiree benefit costs charged to operating expense decreased $27.3 million and $43.7 million, respectively, from the comparable periods in 1994. The change for the third quarter is primarily due to the PUC decision in September 1995 while the decrease for the nine month periods is due to the PUC decision and the charge of $17.0 million ($10.8 million of which is applicable to 1993) in the second quarter of 1994 as a result of the Commonwealth Court decision. See Financial Notes 3 and 7 for more details on the PUC decision and "New Regulatory Assets - PP&L". Income Taxes - Resources/PP&L For the three months ended September 30, 1995 income tax expense increased $44.4 million, or 79.3%, over the comparable period in 1994. This is primarily due to an increase in Resources' pre-tax income of $61.6 million, expensing deferred tax assets of $11.4 million as a result of the PUC decision, and recognizing deferred tax liabilities of $4.1 million relative to undeveloped coal reserves. Partially offsetting these increases was a $1.2 million decrease resulting from the reduction of the Pennsylvania corporate net income tax rate from 11.99% to 9.99%. For the nine months ended September 30, 1995 income tax expense increased $36.6 million, or 20.1%, over the comparable period in 1994. This resulted primarily from an increase in Resources' pre-tax income of $46.0 million and the one-time adjustments related to the PUC decision and undeveloped coal reserves described above. Partially offsetting these increases was a $5.9 million decrease resulting from the reduction of the Pennsylvania corporate net income tax rate. See Financial Note 3 for more details on "Rate Matters". Voluntary Early Retirement Program - PP&L In the PUC decision, PP&L was permitted to recover the PUC- jurisdictional portion of the cost, or $65.7 million, of its 1994 voluntary early retirement program in customer rates over a period of five years. The estimated annual savings of $35 million were also reflected in the allowed base rates. See Financial Notes 3 and 7 for more details on the PUC decision and "New Regulatory Assets - PP&L". Other Income and (Deductions) - Other-Net - Resources 'Other-net' decreased for the three and nine months ended September 30, 1995, $20.5 and $15.1 million, respectively, compared to the same periods in 1994. These decreases are primarily due to a $10.5 million charge to expense associated with evaluating and responding to PECO Energy Company's unsolicited proposal to acquire Resources and the $8.9 million write-off of the Susquehanna Unit No. 1 deferred operating and capital costs which were disallowed in the PUC decision. Partially offsetting these decreases was an increase of $2.9 million in the equity earnings in PP&L's subsidiaries for the nine months ended September 30, 1995 over the comparable period in 1994. Fourth Quarter 1995 Events - PP&L In October 1995, a PP&L subsidiary entered into an agreement to sell one of its subsidiaries that owns coal mining assets. PP&L has determined these assets will not be required for future operations. PP&L estimates that after-tax income of approximately $24 million will be recorded in the fourth quarter upon closing this transaction. PP&L is reviewing the level of spare parts at its power plants and the capitalized costs of a new information system. The potential write-off from the above items is not yet determinable, but may eliminate a substantial portion of the gain associated with the sale of the coal assets. Financial Condition Reduction in Capital Expenditure Requirements - PP&L The schedule below shows PP&L's current capital expenditure projections for the years 1995-2000. This schedule reflects the $671 million reduction in capital expenditures over the period 1996 through 2000, as previously discussed. Capital Expenditure Requirements (a) ------------Projected--------------- 1995 1996 1997 1998 1999 2000 (Millions of Dollars) Construction expenditures Generating facilities $102 $ 80 $ 63 $ 68 $ 56 $ 61 Transmission and distribution facilities 167 146 140 142 145 150 Environmental 42 33 25 33 25 3 Other 60 49 30 22 18 17 371 308 258 265 244 231 Nuclear fuel owned and leased 54 91 64 64 65 66 Other leased property 39 7 7 7 8 8 Total $464 $406 $329 $336 $317 $305 (a) Construction expenditures include Allowance for Funds Used During Construction which is expected to be less than $20 million in each of the years 1995-2000. A significant portion of the reduction in construction expenditures during this period reflects PP&L's decision to not install flue gas desulfurization equipment (FGD) on the two 750,000 kilowatt coal-fired generating units at the Montour station with an estimated capital cost of $413 million. Instead of relying on the FGD to achieve compliance with the Phase II requirements of the Federal Clean Air Act Amendments of 1990 (Clean Air Act), PP&L plans to purchase low sulfur coal, consume banked emission allowances and purchase additional emission allowances. PP&L also has reduced its projected construction expenditures for transmission and distribution facilities during this period by about $120 million and reduced its expenditures for construction improvements at fossil-fueled and hydro generating stations by $78 million from the amounts included in the 1995 Construction Budget. Reductions in construction expenditures previously expected to be spent for the development of a new customer information system and other projects over the 1996-2000 period account for another $60 million of reductions in capital spending. Financing Programs - Resources/PP&L Resources will continue to obtain common equity capital through the operation of the DRIP and PP&L's Employee Stock Ownership Plan (ESOP). From January through October 1995, Resources obtained $72.2 million of common equity through the DRIP. It is expected that the DRIP will be continued during the years 1996 and 1997, resulting in proceeds of about $70 million annually, and that the ESOP will be continued during the years 1996 through 2000, with expected proceeds of about $8 million annually. In August 1995, PP&L issued $55 million of First Mortgage Bonds, 6.15% Pollution Control Bonds Series K due 2029, that provided for the refunding of $55 million First Mortgage Bonds, 9.375% Pollution Control Bonds Series G, on September 1, 1995. In addition, PP&L plans to issue up to $250 million of first mortgage bonds in 1995 to retire higher cost bonds purchased in the open market earlier in 1995 and to reduce its short-term debt. PP&L also anticipates the issuance of $116 million of unsecured notes in early 1996 in order to redeem higher-cost bonds through the maintenance and replacement fund provisions of PP&L's Mortgage. Except for funds derived from sales of common stock by Resources, as described above, Resources expects that internally generated funds (after provision for dividends) will be adequate to meet its capital requirements and $415 million of debt maturities for the years 1996-2000. PP&L has no preferred stock sinking fund requirements during 1996-2000. To enhance financing flexibility, a $250 million revolving credit arrangement is maintained with a group of banks and is used principally as a back-up for PP&L's commercial paper, and $45 million in credit arrangements are maintained with a group of banks to provide back-up for PP&L's commercial paper and short-term borrowings of certain subsidiaries. No borrowings were outstanding at September 30, 1995 under these arrangements. Financial Indicators - Resources The ratio of pre-tax income to interest charges was 3.5 and 3.3, respectively, for the nine months ended September 30, 1995 and 1994. The annual per share dividend rate on common stock remained unchanged at $1.67 per share. The ratio of the market price to book value of common stock was 145% at September 30, 1995 compared with 123% at September 30, 1994. Commitments and Contingent Liabilities - PP&L There have been no material changes related to PP&L's commitments and contingent liabilities since PP&L filed its 1994 Form 10-K, except for the discussions in Financial Note 11, "Commitments and Contingent Liabilities", regarding the denial of plaintiff's motion for class certification in the Fuel Oil Dealers' Litigation and environmental matters. Increasing Competition See "Earnings-Resources" for a discussion of PP&L's strategic initiatives to improve financial performance and enhance its competitive position. Regulatory Developments - PP&L In May 1994, the PUC ordered a generic investigation to examine the role of competition in Pennsylvania's electric utility industry. The purpose of the investigation is to solicit input regarding the potential impact of competition on the state's electric utilities and their customers. The first phase of the investigation was a paper proceeding to gather and analyze data at both the wholesale and retail levels of the electric utility industry. Interested parties filed written comments addressing the following specific topics: wheeling - issues and impact, consumer issues, safety and reliability, the impact of market structure changes and legal issues. PP&L submitted comments in response to the PUC order. The second phase of the investigation will involve hearings to accept testimony from interested parties. These hearings, commencing in December 1995, will be presided over by the PUC Commissioners and an Administrative Law Judge. In March 1995, the Federal Energy Regulatory Commission (FERC) issued a major Notice of Proposed Rulemaking (NOPR) primarily dealing with open access to transmission lines and recovery of stranded costs. The NOPR would require all utilities to file open access tariffs available to all wholesale sellers and buyers of electricity. The tariffs must offer point- to-point and network services, as well as ancillary services. A utility would have to offer these services to all eligible customers on a basis comparable to the services the utility provides to itself. A utility must take service under its transmission access tariff for its own wholesale sales and purchases. The NOPR would not affect existing transmission agreements. The NOPR also provides that utilities are entitled to recover all "legitimate, prudent and verifiable stranded costs" incurred as a result of rendering transmission services pursuant to their tariffs. The FERC proposes to provide recovery mechanisms for wholesale stranded costs, including stranded costs resulting from municipalization. The NOPR contains filing requirements for utilities to seek recovery of wholesale stranded costs. Wholesale contracts signed after July 11, 1994 must contain explicit provisions authorizing recovery of stranded costs. For contracts signed before this date, a utility may seek recovery if it can show that it had a reasonable expectation of continuing to serve the customer after the contract term and that it has made reasonable efforts to mitigate any stranded costs. PP&L's contracts with its 18 FERC wholesale customers were signed before July 11, 1994. The states have responsibility for adopting policies concerning recovery of stranded costs resulting from retail wheeling transactions. Under the NOPR, the FERC will assert jurisdiction over such costs only if the states lack authority to deal with stranded costs. Initial comments on the open access and stranded cost recovery portions of the NOPR were due by August 7, 1995. PP&L filed comments on the NOPR. New Markets - Resources One of Resources' strategic initiatives is to invest in power-related businesses outside of PP&L's service territory, both domestically and in foreign countries. To take advantage of these new business opportunities, PP&L formed a holding company structure, effective April 27, 1995, after receiving all necessary regulatory approvals and shareowner approval at PP&L's 1995 annual meeting. As a result of this restructuring, PP&L became a direct subsidiary of Resources. In March 1994, PP&L incorporated a new subsidiary, PMDC, and made an initial investment of $50 million in this new subsidiary. Effective April 27, 1995, PMDC became a subsidiary of Resources. PMDC will engage in unregulated business activities through investments in world-wide power markets. On July 13, 1995, PMDC invested $10.1 million as part of a consortium that is part owner of an electric generating company in Bolivia and , on October 11, 1995, committed to invest up to $10 million as a partner in a fund which will invest in Latin American generation, transmission and distribution business. In July 1995, Resources formed another unregulated subsidiary, Spectrum, to pursue opportunities to offer energy-related products and services to PP&L's existing customers and to others beyond PP&L's service territory. Other subsidiaries may be formed to take advantage of new business opportunities. Proposed Acquisition by PECO Energy Company On August 14, 1995, PECO publicly announced a proposal to acquire Resources. The PECO proposal was made to the Board of Directors of Resources. Under this proposal, each share of Resources common stock would have been converted into 0.865 of a share of PECO common stock. On September 5, 1995, the Resources' Board of Directors, after due consideration and review of the PECO proposal, unanimously voted to reject the PECO proposal. The Resources' Board of Directors concluded that the PECO proposal was not in the best interests of Resources, its shareowners, customers, employees or the communities it serves. On October 23, 1995, PECO made a revised acquisition proposal for consideration by the Resources' Board of Directors. Under the revised proposal, Resources' shareowners would have received 0.921 shares of PECO common stock for each share of outstanding Resources' common stock which they owned. PECO stated that the revised proposal was its "final offer." On November 1, 1995, Resources' Board of Directors, after a comprehensive analysis, unanimously voted to reject PECO's revised proposal. The Board concluded that PECO's revised proposal was not in the best interests of Resources and its shareowners, customers, employees or the communities it serves. Later that same day, PECO withdrew its proposal to acquire Resources and stated that it would take no further action to pursue such a transaction. Certain Litigation On October 2, 1995, a shareowner of Resources sent a letter to the Board (Demand Letter) which, among other things, requested that Resources "commence legal proceedings" against each of the directors "for failing to prudently exercise [their] fiduciary duties to Resources and its shareholders" in regard to the PECO proposal. Resources' Board considered the Demand Letter at meetings held on October 25 and November 1, 1995, and determined unanimously in the exercise of its business judgment that commencement by Resources of legal proceedings against the directors as requested in the Demand Letter would not be in the best interests of Resources. On November 1, 1995, Resources filed an action for declaratory judgment in the Court of Common Pleas for Lehigh County, Pennsylvania against this shareowner. The action seeks, among other things, a judgment that the Resources Board's determination to refuse the shareowner's demand was a valid exercise of its business judgment. PP&L RESOURCES, INC. AND PENNSYLVANIA POWER & LIGHT COMPANY AND SUBSIDIARIES PART II. OTHER INFORMATION Item 1. Legal Proceedings Reference is made to Note 3 to Financial Statements for information concerning rate matters. Reference is made to Note 11 to Financial Statements for information concerning two complaints filed against PP&L by fuel oil dealers alleging that PP&L's promotion of electric heat pumps and off-peak storage systems had violated and continues to violate the federal antitrust laws. Reference is made to Management's Discussion and Analysis of Financial Condition and Results of Operations - "Proposed Acquisition by PECO Energy Company - Certain Litigation" for information concerning a Demand Letter sent to the Resources Board by a shareowner and a declaratory judgment action by Resources. In August 1995, Jersey Central Power & Light Company (JCP&L) filed a complaint against the Company with the Federal Energy Regulatory Commission (FERC). JCP&L purchases 945 MW of capacity and energy from PP&L pursuant to an agreement that was accepted by FERC in 1984. (Under the terms of that agreement, beginning on January 1, 1996, the amount of capacity and energy purchased by JCP&L decreases yearly by 189 MW until the contract terminates on December 31, 1999). In its complaint, JCP&L alleges that PP&L inappropriately allocated certain costs to JCP&L related to Susquehanna depreciation, auxiliary facilities and services, PP&L's voluntary early retirement program, environmental liability reserves, and other items. JCP&L also alleges that it should receive Clean Air Act emission allowances from PP&L. JCP&L is seeking refunds (with interest) in an unspecified amount, an amendment to the agreement, and corrections by PP&L of its billing practices. On September 18, 1995, PP&L filed an answer denying JCP&L's allegations and requesting that FERC dismiss the complaint. PP&L cannot predict the final outcome of this proceeding. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 4 - Copy of the Sixty-fourth Supplemental Indenture, dated as of August 1, 1995, to PP&L's Mortgage and Deed of Trust, dated as of October 1, 1945, pursuant to which PP&L's First Mortgage Bonds, Pollution Control Series K, were issued. 27 - Financial Data Schedule (b) Reports on Form 8-K Report Dated October 6, 1995 Item 5. Other Events Information regarding the Pennsylvania Public Utility Commission's final order with respect to the base rate case filed by PP&L. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature for each undersigned company shall be deemed to relate only to matters having reference to such company or its subsidiary. PP&L Resources, Inc. (Registrant) Pennsylvania Power & Light Company (Registrant) Date: November 14, 1995 R. E. Hill Senior Vice President-Financial and Treasurer (PP&L Resources, Inc.) Senior Vice President-Financial (Pennsylvania Power & Light Company) J. J. McCabe Vice President & Controller (PP&L Resources, Inc. and Pennsylvania Power & Light Company) EX-27 2
UT This schedule contains summary financial information extracted from the consolidated statement of income, consolidated balance sheet, consolidated statement of cash flows for the form 10-Q dated September 30, 1995 and is qualified in its entirety by reference to such financial statements. 0000922224 PP&L RESOURCES, INC. 1,000 9-MOS DEC-31-1995 SEP-30-1995 PER-BOOK 7,142,204 344,677 666,985 1,316,305 0 9,470,171 1,584 1,488,692 1,060,137 2,550,413 295,000 171,375 2,827,356 14,887 0 120,000 30,000 0 150,734 79,396 3,231,010 9,470,171 2,018,947 210,171 1,363,956 1,574,127 444,820 (21,302) 423,518 169,473 254,045 20,826 233,219 197,209 0 538,897 1.48 1.48
EX-4 3 PENNSYLVANIA POWER & LIGHT COMPANY TO BANKERS TRUST COMPANY (successor to Morgan Guaranty Trust Company of New York, formerly Guaranty Trust Company of New York) As Trustee under Pennsylvania Power & Light Company's Mortgage and Deed of Trust, Dated as of October 1, 1945 _____________________________ Sixty-Fourth Supplemental Indenture Providing among other things for First Mortgage Bonds, Pollution Control Series K _____________________________ Dated as of August 1, 1995 SIXTY-FOURTH SUPPLEMENTAL INDENTURE SIXTY-FOURTH SUPPLEMENTAL INDENTURE, dated as of the 1st day of August, 1995 made and entered into by and between PENNSYLVANIA POWER & LIGHT COMPANY, a corporation of the Commonwealth of Pennsylvania, whose address is Two North Ninth Street, Allentown, Pennsylvania 18101 (hereinafter sometimes called the Company), and BANKERS TRUST COMPANY (successor to MORGAN GUARANTY TRUST COMPANY OF NEW YORK, formerly GUARANTY TRUST COMPANY OF NEW YORK), a corporation of the State of New York, whose address is 4 Albany Street, New York, New York 10006 (hereinafter sometimes called the Trustee), as Trustee under the Mortgage and Deed of Trust, dated as of October 1, 1945 (hereinafter called the Mortgage and, together with any indentures supplemental thereto, hereinafter called the Indenture), which Mortgage was executed and delivered by Pennsylvania Power & Light Company to secure the payment of bonds issued or to be issued under and in accordance with the provisions of the Mortgage, reference to which said Mortgage is hereby made, this instrument (hereinafter called the Sixty-fourth Supplemental Indenture) being supplemental thereto; WHEREAS, said Mortgage was or is to be recorded in various Counties in the Commonwealth of Pennsylvania, which Counties include or will include all Counties in which this Sixty-fourth Supplemental Indenture is to be recorded; and WHEREAS, an instrument, dated August 5, 1994, was executed by the Company appointing Bankers Trust Company as Trustee in succession to said Morgan Guaranty Trust Company of New York (resigned) under the Indenture, and by Bankers Trust Company accepting said appointment, which instrument was or is to be recorded in various Counties in the Commonwealth of Pennsylvania; and WHEREAS, by the Mortgage the Company covenanted that it would execute and deliver such supplemental indenture or indentures and such further instruments and do such further acts as might be necessary or proper to carry out more effectually the purposes of the Indenture and to make subject to the lien of the Indenture any property thereafter acquired and intended to be subject to the lien thereof; and WHEREAS, the Company executed and delivered, as supplements to the Mortgage, the following supplemental indentures: Designation Dated as of First Supplemental Indenture July 1, 1947 Second Supplemental Indenture December 1, 1948 Third Supplemental Indenture February 1, 1950 Fourth Supplemental Indenture March 1, 1953 Fifth Supplemental Indenture August 1, 1955 Sixth Supplemental Indenture December 1, 1961 Seventh Supplemental Indenture March 1, 1964 Eighth Supplemental Indenture June 1, 1966 Ninth Supplemental Indenture November 1, 1967 Tenth Supplemental Indenture December 1, 1967 Eleventh Supplemental Indenture January 1, 1969 Twelfth Supplemental Indenture June 1, 1969 Thirteenth Supplemental Indenture March 1, 1970 Fourteenth Supplemental Indenture February 1, 1971 Fifteenth Supplemental Indenture February 1, 1972 Sixteenth Supplemental Indenture January 1, 1973 Seventeenth Supplemental Indenture May 1, 1973 Eighteenth Supplemental Indenture April 1, 1974 Nineteenth Supplemental Indenture October 1, 1974 Twentieth Supplemental Indenture May 1, 1975 Twenty-first Supplemental Indenture November 1, 1975 Twenty-second Supplemental Indenture December 1, 1976 Twenty-third Supplemental Indenture December 1, 1977 Twenty-fourth Supplemental Indenture April 1, 1979 Twenty-fifth Supplemental Indenture April 1, 1980 Twenty-sixth Supplemental Indenture June 1, 1980 Twenty-seventh Supplemental Indenture June 1, 1980 Twenty-eighth Supplemental Indenture December 1, 1980 Twenty-ninth Supplemental Indenture February 1, 1981 Thirtieth Supplemental Indenture February 1, 1981 Thirty-first Supplemental Indenture September 1, 1981 Thirty-second Supplemental Indenture April 1, 1982 Thirty-third Supplemental Indenture August 1, 1982 Thirty-fourth Supplemental Indenture October 1, 1982 Thirty-fifth Supplemental Indenture November 1, 1982 Thirty-sixth Supplemental Indenture February 1, 1983 Thirty-seventh Supplemental Indenture November 1, 1983 Thirty-eighth Supplemental Indenture March 1, 1984 Thirty-ninth Supplemental Indenture April 1, 1984 Fortieth Supplemental Indenture August 15, 1984 Forty-first Supplemental Indenture December 1, 1984 Forty-second Supplemental Indenture June 15, 1985 Forty-third Supplemental Indenture October 1, 1985 Forty-fourth Supplemental Indenture January 1, 1986 Forty-fifth Supplemental Indenture February 1, 1986 Forty-sixth Supplemental Indenture April 1, 1986 Forty-seventh Supplemental Indenture October 1, 1986 Forty-eighth Supplemental Indenture March 1, 1988 Forty-ninth Supplemental Indenture June 1, 1988 Fiftieth Supplemental Indenture January 1, 1989 Fifty-first Supplemental Indenture October 1, 1989 Fifty-second Supplemental Indenture July 1, 1991 Fifty-third Supplemental Indenture May 1, 1992 Fifty-fourth Supplemental Indenture November 1, 1992 Fifty-fifth Supplemental Indenture February 1, 1993 Fifty-sixth Supplemental Indenture April 1, 1993 Fifty-seventh Supplemental Indenture June 1, 1993 Fifty-eighth Supplemental Indenture October 1, 1993 Fifty-ninth Supplemental Indenture February 15, 1994 Sixtieth Supplemental Indenture March 1, 1994 Sixty-first Supplemental Indenture March 15, 1994 Sixty-second Supplemental Indenture September 1, 1994 Sixty-third Supplemental Indenture October 1, 1994 which supplemental indentures were or are to be recorded in various Counties in the Commonwealth of Pennsylvania; and WHEREAS, the Company executed and delivered its Supplemental Indenture, dated July 1, 1954, creating a security interest in certain personal property of the Company, pursuant to the provisions of the Pennsylvania Uniform Commercial Code, as a supplement to the Mortgage, which Supplemental Indenture was filed in the Office of the Secretary of the Commonwealth of Pennsylvania on July 1, 1954, and all subsequent supplemental indentures were so filed; and WHEREAS, in addition to the property described in the Mortgage, as heretofore supplemented, the Company has acquired certain other property, rights and interests in property; and WHEREAS, the Company has heretofore issued, in accordance with the provisions of the Mortgage, as supplemented, the following series of First Mortgage Bonds: Principal Principal Amount Amount Series Issued Outstanding 3% Series due 1975 $93,000,000 None 2-3/4% Series due 1977 20,000,000 None 3-1/4% Series due 1978 10,000,000 None 2-3/4% Series due 1980 37,000,000 None 3-1/2% Series due 1983 25,000,000 None 3-3/8% Series due 1985 25,000,000 None 4-5/8% Series due 1991 30,000,000 None 4-5/8% Series due 1994 30,000,000 None 5-5/8% Series due 1996 30,000,000 $30,000,000 6-3/4% Series due 1997 30,000,000 30,000,000 6-1/2% Series due 1972 15,000,000 None 7% Series due 1999 40,000,000 40,000,000 8-1/8% Series due June 1, 1999 40,000,000 40,000,000 9% Series due 2000 50,000,000 None 7-1/4% Series due 2001 60,000,000 60,000,000 7-5/8% Series due 2002 75,000,000 75,000,000 7-1/2% Series due 2003 80,000,000 80,000,000 Pollution Control Series A 28,000,000 None 9-1/4% Series due 2004 80,000,000 None 10-1/8% Series due 1982 100,000,000 None 9-3/4% Series due 2005 125,000,000 None 9-3/4% Series due November 1, 2005 100,000,000 None 8-1/4% Series due 2006 150,000,000 None 8-1/2% Series due 2007 100,000,000 None 9-7/8% Series due 1983-1985 100,000,000 None 15-5/8% Series due 2010 100,000,000 None 11-3/4% Series due 1984 30,000,000 None Pollution Control Series B 70,000,000 None Pollution Control Series C 20,000,000 None 14% Series due December 1, 1990 125,000,000 None 15% Series due 1984-1986 50,000,000 None 14-3/4% Series A due 1986 30,000,000 None 14-3/4% Series B due 1986 20,000,000 None 16-1/2% Series due 1987-1991 52,000,000 None 16-1/8% Series due 1992 100,000,000 None 16-1/2% Series due 1986-1990 92,500,000 None 13-1/4% Series due 2012 $100,000,000 None Pollution Control Series D 70,000,000 None 12-1/8% Series due 1989-1993 50,000,000 None 13-1/8% Series due 2013 125,000,000 None Pollution Control Series E 37,750,000 None 13-1/2% Series due 1994 125,000,000 None Pollution Control Series F 115,500,000 None 12-3/4% Series due 2014 125,000,000 None Pollution Control Series G 55,000,000 $55,000,000 12% Series due 2015 125,000,000 None 10-7/8% Series due 2016 125,000,000 None 9-5/8% Series due 1996 125,000,000 None 9% Series due 2016 125,000,000 None 9-1/2% Series due 2016 125,000,000 None 9-1/4% Series due 1998 125,000,000 None 9-5/8% Series due 1998 125,000,000 None 10% Series due 2019 125,000,000 None 9-1/4% Series due 2019 250,000,000 250,000,000 9-3/8% Series due 2021 150,000,000 150,000,000 7-3/4% Series due 2002 150,000,000 150,000,000 8-1/2% Series due 2022 150,000,000 150,000,000 Pollution Control Series H 90,000,000 90,000,000 6-7/8% Series due 2003 100,000,000 100,000,000 7-7/8% Series due 2023 200,000,000 200,000,000 5-1/2% Series due 1998 150,000,000 150,000,000 6-1/2% Series due 2005 125,000,000 125,000,000 6% Series due 2000 125,000,000 125,000,000 6-3/4% Series due 2023 150,000,000 150,000,000 Pollution Control Series I 53,250,000 53,250,000 6.55% Series due 2006 150,000,000 150,000,000 7.30% Series due 2024 150,000,000 150,000,000 6-7/8% Series due 2004 150,000,000 150,000,000 7-3/8% Series due 2014 100,000,000 100,000,000 Pollution Control Series J 115,500,000 115,500,000 7.70% Series due 2009 200,000,000 200,000,000 which bonds are also sometimes called bonds of the First through Seventy-first Series, respectively; and WHEREAS, Section 8 of the Mortgage provides that the form of each series of bonds (other than the First Series) issued thereunder shall be established by Resolution of the Board of Directors of the Company and that the form of such series, as established by said Board of Directors, shall specify the descriptive title of the bonds and various other terms thereof, and may also contain such provisions not inconsistent with the provisions of the Indenture as the Board of Directors may, in its discretion, cause to be inserted therein expressing or referring to the terms and conditions upon which such bonds are to be issued and/or secured under the Indenture; and WHEREAS, Section 120 of the Mortgage provides, among other things, that any power, privilege or right expressly or impliedly reserved to or in any way conferred upon the Company by any provision of the Indenture, whether such power, privilege or right is in any way restricted or is unrestricted, may be in whole or in part waived or surrendered or subjected to any restriction if at the time unrestricted or to additional restriction if already restricted, and the Company may enter into any future covenants, limitations or restrictions for the benefit of any one or more series of bonds issued thereunder, or the Company may cure any ambiguity contained therein or in any supplemental indenture or may establish the terms and provisions of any series of bonds other than said First Series, by an instrument in writing executed and acknowledged by the Company in such manner as would be necessary to entitle a conveyance of real estate to record in all of the States in which any property at the time subject to the lien of the Indenture shall be situated; and WHEREAS, the Company now desires to create a new series of bonds and to add to its covenants and agreements contained in the Mortgage, as heretofore supplemented, certain other covenants and agreements to be observed by it and to alter and amend in certain respects the covenants and provisions contained in the Mortgage; and WHEREAS, the execution and delivery by the Company of this Sixty-fourth Supplemental Indenture, and the terms of the bonds of the Seventy-second Series, hereinafter referred to, have been duly authorized by the Board of Directors of the Company by appropriate Resolutions of said Board of Directors; NOW, THEREFORE, THIS INDENTURE WITNESSETH: That Pennsyl- vania Power & Light Company, in consideration of the premises and of One Dollar to it duly paid by the Trustee at or before the ensealing and delivery of these presents, the receipt whereof is hereby acknowledged, and in further evidence of assurance of the estate, title and rights of the Trustee and in order further to secure the payment both of the principal of and interest and premium, if any, on the bonds from time to time issued under the Indenture, according to their tenor and effect and the performance of all the provisions of the Indenture (including any modification made as in the Mortgage provided) and of said bonds, hereby grants, bargains, sells, releases, conveys, assigns, transfers, mortgages, pledges, sets over and confirms (subject, however, to Excepted Encumbrances as defined in Section 6 of the Mortgage) unto Bankers Trust Company, as Trustee under the Indenture, and to its successor or successors in said trust, and to said Trustee and its successors and assigns forever, all property, real, personal and mixed, of the kind or nature specifically mentioned in the Mortgage, as heretofore supplemented, or of any other kind or nature, acquired by the Company after the date of the execution and delivery of the Sixty-third Supplemental Indenture (except any herein or in the Mortgage, as heretofore supplemented, expressly excepted and except any which may not lawfully be mortgaged or pledged under the Indenture), now owned or, subject to the provisions of Section 87 of the Mortgage, hereafter acquired by the Company (by purchase, consolidation, merger, donation, construction, erection or in any other way) and wheresoever situated, including (without in anywise limiting or impairing by the enumeration of the same the scope and intent of the foregoing) all lands, power sites, flowage rights, water rights, water locations, water appropriations, ditches, flumes, reservoirs, reservoir sites, canals, raceways, dams, dam sites, aqueducts, and all other rights or means for appropriating, conveying, storing and supplying water; all rights of way and roads; all plants for the generation of electricity by steam, water and/or other power; all power houses, gas plants, street lighting systems, standards and other equipment incidental thereto, telephone, radio and television systems, air-conditioning systems and equipment incidental thereto, water works, water systems, steam heat and hot water plants, substations, lines, service and supply systems, bridges, culverts, tracks, ice or refrigeration plants and equipment, offices, buildings and other structures and the equipment thereof; all machinery, engines, boilers, dynamos, electric, gas and other machines, regulators, meters, transformers, generators, motors, electrical, gas and mechanical appliances, conduits, cables, water, steam heat, gas or other pipes, gas mains and pipes, service pipes, fittings, valves and connections, pole and transmission lines, wires, cables, tools, implements, apparatus, furniture and chattels; all municipal and other franchises, consents or permits; all lines for the transmission and distribution of electric current, gas, steam heat or water for any purpose including towers, poles, wires, cables, pipes, conduits, ducts and all apparatus for use in connection therewith; all real estate, lands, easements, servitudes, licenses, permits, franchises, privileges, rights of way and other rights in or relating to real estate or the occupancy of the same and (except as herein or in the Mortgage, as heretofore supplemented, expressly excepted) all the right, title and interest of the Company in and to all other property of any kind or nature appertaining to and/or used and/or occupied and/or enjoyed in connection with any property hereinbefore or in the Mortgage, as heretofore supplemented, described. TOGETHER with all and singular the tenements, hereditaments, prescriptions, servitudes, and appurtenances belonging or in anywise appertaining to the aforesaid property or any part thereof, with the reversion and reversions, remainder and remainders and (subject to the provisions of Section 57 of the Mortgage) the tolls, rents, revenues, issues, earnings, income, product and profits thereof, and all the estate, right, title and interest and claim whatsoever, at law as well as in equity, which the Company now has or may hereafter acquire in and to the aforesaid property and franchises and every part and parcel thereof. IT IS HEREBY AGREED by the Company that, subject to the provisions of Section 87 of the Mortgage and to the extent permitted by law, all the property, rights, and franchises acquired by the Company (by purchase, consolidation, merger, donation, construction, erection or in any other way) after the date hereof, except any herein or in the Mortgage, as heretofore supplemented, expressly excepted, shall be and are as fully granted and conveyed hereby and as fully embraced within the lien hereof and the lien of the Indenture, as if such property, rights and franchises were now owned by the Company and were specifically described herein and conveyed hereby. IT IS HEREBY DECLARED by the Company that all the property, rights and franchises now owned or hereafter acquired by the Company have been, or are, or will be owned or acquired with the intention to use the same in carrying on the business or branches of business of the Company, and it is hereby declared that it is the intention of the Company that all thereof, except any herein or in the Mortgage, as heretofore supplemented, expressly excepted, shall (subject to the provisions of Section 87 of the Mortgage and to the extent permitted by law) be embraced within the lien of this Sixty-fourth Supplemental Indenture and the lien of the Indenture. PROVIDED that the following are not and are not intended to be now or hereafter granted, bargained, sold, released, conveyed, assigned, transferred, mortgaged, pledged, set over or confirmed hereunder and are hereby expressly excepted from the lien and operation of this Sixty-fourth Supplemental Indenture and from the lien and operation of the Indenture, viz: (1) cash, shares of stock, bonds, notes and other obligations and other securities not hereafter specifically pledged, paid, deposited, delivered or held under the Indenture or covenanted so to be; (2) goods, wares, merchandise, equipment, apparatus, materials, or supplies held for the purpose of sale or other disposition in the usual course of business; fuel, oil and similar materials and supplies consumable in the operation of any of the properties of the Company; construction equipment acquired for temporary use; all aircraft, rolling stock, trolley coaches, buses, motor coaches, automobiles and other vehicles and materials and supplies held for the purposes of repairing or replacing (in whole or part) any of the same; all timber, minerals, mineral rights and royalties; (3) bills, notes and accounts receivable, judgments, demands and choses in action, and all contracts, leases and operating agreements not specifically pledged under the Indenture or covenanted so to be; the Company's contractual rights or other interest in or with respect to tires not owned by the Company; (4) the last day of the term of any lease or leasehold which may be or become subject to the lien of the Indenture; and (5) electric energy, gas, steam, ice, and other materials or products generated, manufactured, produced or purchased by the Company for sale, distribution or use in the ordinary course of its business; provided, however, that the property and rights expressly excepted from the lien and operation of the Indenture in the above subdivisions (2) and (3) shall (to the extent permitted by law) cease to be so excepted in the event and as of the date that the Trustee or a receiver or trustee shall enter upon and take possession of the Mortgaged and Pledged Property in the manner provided in Article XIII of the Mortgage by reason of the occurrence of a Default as defined in Section 65 thereof, as supplemented by the provisions of this Sixty-fourth Supplemental Indenture. TO HAVE AND TO HOLD all such properties, real, personal and mixed, granted, bargained, sold, released, conveyed, assigned, transferred, mortgaged, pledged, set over or confirmed by the Company as aforesaid, or intended so to be, unto Bankers Trust Company, as Trustee, and its successors and assigns forever. IN TRUST NEVERTHELESS for the same purposes and upon the same terms, trusts and conditions and subject to and with the same provisos and covenants as are set forth in the Mortgage, as heretofore supplemented, this Sixty-fourth Supplemental Indenture being supplemental to the Mortgage. AND IT IS HEREBY COVENANTED by the Company that all the terms, conditions, provisos, covenants and provisions contained in the Mortgage, as heretofore supplemented, shall affect and apply to the property hereinbefore described and conveyed and to the estate, rights, obligations and duties of the Company and the Trustee and the beneficiaries of the trust with respect to said property, and to the Trustee and its successors as Trustee of said property in the same manner and with the same effect as if the said property had been owned by the Company at the time of the execution of the Mortgage, and had been specifically and at length described in and conveyed to the Trustee by the Mortgage as a part of the property therein stated to be conveyed. The Company further covenants and agrees to and with the Trustee and its successors in said trust under the Indenture, as follows: ARTICLE I Seventy-second Series of Bonds SECTION 1. There shall be a series of bonds designated "Pollution Control Series K" (herein sometimes referred to as the "Seventy-second Series"), each of which shall also bear the descriptive title First Mortgage Bonds, and the form thereof, which shall be established by Resolution of the Board of Directors of the Company, shall contain suitable provisions with respect to the matters hereinafter in this Section specified. Bonds of the Seventy-second Series shall be limited to $55,000,000 in aggregate principal amount except as provided in Section 16 of the Mortgage and shall mature on August 1, 2029, and shall be issued as fully registered bonds in denominations of Five Thousand Dollars and in any multiple or multiples of Five Thousand Dollars; they shall bear interest at the rate of 6.15% per annum, payable semi-annually on February 1 and August 1 of each year; the principal of and interest on each said bond to be payable at the office or agency of the Company in the City of Philadelphia, Pennsylvania, in such coin or currency of the United States of America as at the time of payment is legal tender for public and private debts. Bonds of the Seventy-second Series shall be dated as in Section 10 of the Mortgage provided. (I) On and after August 1, 2005, bonds of the Seventy- second Series shall be redeemable, prior to maturity, at the option of the Company in whole at any time, or in part in such principal amount as may be directed by the Company from time to time, upon notice, as provided in Section 52 of the Mortgage, mailed at least forty-five (45) days prior to the date fixed for redemption unless the registered owner shall agree to accept a shorter notice, at the following redemption prices, expressed in percentages of the principal amount of the bonds to be redeemed: Optional Redemption Price Redemption Period August 1, 2005 through July 31, 2006 102% August 1, 2006 through July 31, 2007 101 August 1, 2007 and thereafter 100 in each case, together with accrued interest to the date fixed for redemption. (II) Bonds of the Seventy-second Series shall also be redeemable in whole at any time, or in part in such principal amount as an Officers' Certificate received by the Trustee shall state is identical to the principal amount of 1995 Series A Bonds (as hereinafter defined) being redeemed pursuant to Extraordinary Optional Redemption (a) referred to in such 1995 Series A Bonds from time to time, prior to maturity, upon like notice, by the application (either at the option of the Company or pursuant to the requirements of the Indenture) of cash delivered to or deposited with the Trustee pursuant to the provisions of Section 64 of the Mortgage at the redemption price of 100% of the principal amount of the bonds to be redeemed in each case, together with accrued interest to the date fixed for redemption. (III) Bonds of the Seventy-second Series shall also be redeemable at the option of the Company in whole at any time prior to maturity upon like notice whenever the Company shall elect to deliver and the Trustee shall receive an Officers' Certificate certifying that the Company has, within the preceding 90 days, merged or consolidated with another corporation having capital stock and surplus (including retained earnings) of at least $50,000,000 as of any date (hereinafter called the "Financial Date") within 180 days prior to the effective date of such merger or consolidation, such Officers' Certificate to be accompanied by a certified copy of the document effecting the merger or consolidation, and a balance sheet of such other corporation certified by such other corporation's chief financial officer or an independent certified public accountant as of the Financial Date. Any such redemption shall be at the redemption price of 100% of the principal amount of the bonds to be redeemed, together with accrued interest to the date fixed for redemption. (IV) In the event that any Pollution Control Revenue Refunding Bonds, 1995 Series A (Pennsylvania Power & Light Company Project), issued under the Trust Indenture dated as of May 1, 1973, as supplemented (hereinafter called the "Trust Indenture") by the Lehigh County Industrial Development Authority (hereinafter called the "Authority")(such Bonds herein called "1995 Series A Bonds") are to be redeemed in accordance with Section 5.06 of the Ninth Supplemental Indenture to the Trust Indenture, bonds of the Seventy-second Series in a principal amount equal to the principal amount of the 1995 Series A Bonds so to be redeemed, shall be redeemed by the Company, on the date fixed for redemption of such bonds of the Seventy-second Series, at the redemption price of 100% of the principal amount of the bonds to be redeemed, together with accrued interest to the date fixed for redemption. The Trustee may conclusively presume that no redemption of bonds of the Seventy-second Series is required pursuant to the first paragraph of this subsection (IV) unless and until it shall have received a written notice from the trustee under the Trust Indenture, stating that the 1995 Series A Bonds are to be redeemed in accordance with such Section 5.06 of the Ninth Supplemental Indenture to the Trust Indenture and specifying the principal amount of the 1995 Series A Bonds so to be redeemed and specifying a date for the redemption of an equal principal amount of the bonds of the Seventy-second Series, which shall be a date within 90 days from the date of such written notice but not earlier than 80 days from the receipt of such written notice by the Trustee. (V) Bonds of the Seventy-second Series shall be redeemed in whole whenever the Trustee shall receive a written demand (hereinafter called "Default Redemption Demand") from the trustee under the Trust Indenture for redemption stating that the principal of all bonds then outstanding under the Trust Indenture has been declared to be immediately due and payable pursuant to the provisions of Section 9.02 thereof. The Trustee shall within 10 days of receiving the Default Redemption Demand mail a copy to the Company stamped or otherwise marked to show the date of receipt by the Trustee. The Company shall fix a redemption date and shall mail the Trustee notice of such selection at least 30 days prior to the date so selected. Such redemption date may be any day not more than 180 days after the receipt of the Default Redemption Demand by the Trustee. If the Trustee does not receive notice of such selection by the Company within 150 days after the Default Redemption Demand was received by the Trustee, then the redemption date shall be the 180th day after such receipt. The Trustee shall mail notice of the redemption date (hereinafter called the "Default Redemption Notice") to the trustee under the Trust Indenture not more than 10 nor less than 5 days prior to the date fixed for redemption. The Trustee shall not mail any Default Redemption Notice (and no such redemption shall be made) if the Trustee receives a written cancellation of the Default Redemption Demand from the trustee under the Trust Indenture prior to the mailing of the Default Redemption Notice. Notwithstanding the provisions of Section 52 of the Mortgage, the holders of bonds of the Seventy-second Series by the acceptance of such bonds waive 30 days notice of any redemption pursuant to this subsection (V). Any such redemption shall be at the redemption price of 100% of the principal amount of the bonds to be redeemed, together with accrued interest to the date fixed for redemption. (VI) The Company hereby waives its right to have any notice of redemption pursuant to subsection (IV) or (V) of this Section 1 state that such notice is subject to the receipt of the redemption moneys by the Trustee before the date fixed for redemption. Notwithstanding the provisions of Section 52 of the Mortgage, any such notice under such subsections shall not be conditional. The Company covenants that any cash delivered to the Trustee under the provisions of subsection (I) of Section 39 of the Mortgage, as supplemented, will not be applied to the redemption of any bonds of the Seventy-second Series so long as any bonds of the Ninth through Tenth, Twelfth through Thirteenth, Fifteenth through Seventeenth, Forty-fifth or Fifty-fourth through Seventy- first Series remain Outstanding. (VII) At the option of the registered owner, any bonds of the Seventy-second Series, upon surrender thereof, for cancellation, at the office or agency of the Company in the Borough of Manhattan, The City of New York, shall be exchangeable for a like aggregate principal amount of bonds of the same series, interest rate and maturity of other authorized denominations. Bonds of the Seventy-second Series shall be transferable, upon the surrender thereof for cancellation, together with a written instrument of transfer in form approved by the registrar duly executed by the registered owner or by his duly authorized attorney, at the office or agency of the Company in the Borough of Manhattan, The City of New York. The Company hereby waives any right to make a charge for any exchange or transfer of bonds of the Seventy-second Series. For the purposes of subsections (IV) and (V) of this Section 1, a demand from the trustee under the Trust Indenture shall be executed on behalf of such trustee by its President or a Vice President or a Trust Officer and shall be deemed received by the Trustee when delivered at its corporate trust office in the Borough of Manhattan, The City of New York. The Trustee may conclusively rely as to the truth of the statements contained therein, upon any such demand. ARTICLE II Maintenance and Replacement Fund Covenant -- Dividend Covenant -- Other Related Provisions of the Mortgage SECTION 2. Subject to the provisions of Section 3 hereof, the Company covenants and agrees that the provisions of Section 39 of the Mortgage, which were to remain in effect so long as any bonds of the First Series remained Outstanding, shall remain in full force and effect so long as any bonds of the Seventy-second Series are Outstanding. Clause (d) of subsection (II) of Section 4 of the Mortgage, as heretofore amended, is hereby further amended by inserting the words "and Seventy-second Series" after the words "and Seventy- first Series" each time such words appear therein. Clause (6) and clause (e) of Section 5 of the Mortgage and Section 29 of the Mortgage, as heretofore amended, are hereby further amended by inserting therein "Seventy-second," before "Seventy-first," each time such words occur therein. ARTICLE III Miscellaneous Provisions SECTION 3. The Company reserves the right to make such amendments to the Mortgage, as supplemented, as shall be necessary in order to delete subsection (I) of Section 39 of the Mortgage, and each holder of bonds of the Seventy-second Series hereby consents to such deletion without any other or further action by any holder of bonds of the Seventy-second Series. SECTION 4. The terms defined in the Mortgage, as heretofore supplemented, shall, for all purposes of this Sixty-fourth Supplemental Indenture, have the meanings specified in the Mortgage, as heretofore supplemented. SECTION 5. Whenever in this Sixty-fourth Supplemental Indenture either of the parties hereto is named or referred to, this shall, subject to the provisions of Articles XVI and XVII of the Mortgage, be deemed to include the successors and assigns of such party, and all the covenants and agreements in this Sixty- fourth Supplemental Indenture contained by or on behalf of the Company, or by or on behalf of the Trustee shall, subject as aforesaid, bind and inure to the respective benefits of the respective successors and assigns of such parties, whether so expressed or not. SECTION 6. A breach of a specified covenant or agreement of the Company contained in this Sixty-fourth Supplemental Indenture shall become a Default under the Indenture upon the happening of the events provided in Section 65(g) of the Mortgage with respect to such a covenant or agreement. SECTION 7. The Trustee hereby accepts the trusts herein declared, provided, created or supplemented and agrees to perform the same upon the terms and conditions herein and in the Mortgage, as heretofore supplemented, set forth and upon the following terms and conditions: The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Sixty-fourth Supplemental Indenture or for or in respect of the recitals contained herein, all of which recitals are made by the Company solely. Each and every term and condition contained in Article XVII of the Mortgage, as heretofore amended by said First through Sixty-third Supplemental Indentures, shall apply to and form part of this Sixty-fourth Supplemental Indenture with the same force and effect as if the same were herein set forth in full with such omissions, variations and insertions, if any, as may be appropriate to make the same conform to the provisions of this Sixty-fourth Supplemental Indenture. SECTION 8. Nothing in this Sixty-fourth Supplemental Inden- ture, expressed or implied, is intended, or shall be construed, to confer upon, or to give to, any person, firm or corporation, other than the parties hereto and the holders of the bonds and coupons Outstanding under the Indenture, any right, remedy or claim under or by reason of this Sixty-fourth Supplemental Indenture or by any covenant, condition, stipulation, promise or agreement hereof, and all the covenants, conditions, stipulations, promises and agreements in this Sixty-fourth Supplemental Indenture contained by or on behalf of the Company shall be for the sole and exclusive benefit of the parties hereto, and of the holders of the bonds and coupons Outstanding under the Indenture. SECTION 9. This Sixty-fourth Supplemental Indenture shall be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. PENNSYLVANIA POWER & LIGHT COMPANY does hereby constitute and appoint JOHN R. BIGGAR, Vice President - Finance and Treasurer of PENNSYLVANIA POWER & LIGHT COMPANY, to be its attorney for it, and in its name and as and for its corporate act and deed to acknowledge this Sixty-fourth Supplemental Indenture before any person having authority by the laws of the Commonwealth of Pennsylvania to take such acknowledgment, to the intent that the same may be duly recorded, and BANKERS TRUST COMPANY does hereby constitute and appoint JAMES MCDONOUGH, Trust Officer of BANKERS TRUST COMPANY, to be its attorney for it, and in its name and as and for its corporate act and deed to acknowledge this Sixty-fourth Supplemental Indenture before any person having authority by the laws of the Commonwealth of Pennsylvania to take such acknowledgment, to the intent that the same may be duly recorded. IN WITNESS WHEREOF, PENNSYLVANIA POWER & LIGHT COMPANY has caused its corporate name to be hereunto affixed, and this instrument to be signed and sealed by its President or one of its Vice Presidents, and its corporate seal to be attested by its Secretary or one of its Assistant Secretaries for and in its behalf, in the City of Allentown, Pennsylvania, and BANKERS TRUST COMPANY has caused its corporate name to be hereunto affixed, and this instrument to be signed and sealed by one of its Vice Presidents or one of its Trust Officers, and its corporate seal to be attested by one of its Assistant Treasurers, in The City of New York, as of the day and year first above written. PENNSYLVANIA POWER & LIGHT COMPANY By______________________________ Vice President Attest: _______________________________________ Assistant Secretary BANKERS TRUST COMPANY, as Trustee By___________________________________ Trust Officer Attest: ________________________________________ Assistant Treasurer COMMONWEALTH OF PENNSYLVANIA ) ) ss.: COUNTY OF LEHIGH ) I HEREBY CERTIFY that on this 4th day of August, A.D. 1995, before me, the subscriber, a Notary Public of the Commonwealth aforesaid, commissioned for the City of Allentown, in the County of Lehigh, personally appeared JOHN R. BIGGAR, Vice President - Finance and Treasurer of PENNSYLVANIA POWER & LIGHT COMPANY, known to me to be the attorney named in the foregoing Indenture, and by virtue and in pursuance of the authority therein conferred upon such attorney, acknowledged said Indenture to be the act and deed of said PENNSYLVANIA POWER & LIGHT COMPANY. WITNESS my hand and notarial seal the day and year aforesaid. ________________________________________________ CATHERINE J. BROBST STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) I HEREBY CERTIFY that on this 4th day of August, A.D. 1995, before me, the subscriber, a Notary Public of the State aforesaid, commissioned for the County of New York, personally appeared JAMES MCDONOUGH, Trust Officer of BANKERS TRUST COMPANY, known to me to be the attorney named in the foregoing Indenture, and by virtue and in pursuance of the authority therein conferred upon such attorney, acknowledged said Indenture to be the act and deed of the said BANKERS TRUST COMPANY. I FURTHER CERTIFY that I am not a director or officer of said BANKERS TRUST COMPANY. WITNESS my hand and notarial seal the day and year aforesaid. ______________________________ SHARON V. ALSTON Notary Public, State of New York No. 31-4966275 Qualified in New York County Commission Expires May 7, 1996 Bankers Trust Company hereby certifies that its precise name and address as Trustee hereunder are: Bankers Trust Company 4 Albany Street New York, New York 10006 BANKERS TRUST COMPANY By_______________________________ Trust Officer -----END PRIVACY-ENHANCED MESSAGE-----