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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _________ to ___________
Commission File Registrant; State of Incorporation; IRS Employer
Number Address and Telephone Number Identification No.
- --------------- ----------------------------------- ------------------
1-11459 PP&L Resources, Inc. 23-2758192
(Exact name of Registrant as
specified in its charter)
(Pennsylvania)
Two North Ninth Street
Allentown, PA 18101
(610) 774-5151
1-905 PP&L, Inc. 23-0959590
(Exact name of Registrant as
specified in its charter)
(Pennsylvania)
Two North Ninth Street
Allentown, PA 18101
(610) 774-5151
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ------------------- ------------------------
Common Stock of PP&L Resources, Inc. New York & Philadelphia
Stock Exchanges
Preferred Stock of PP&L, Inc.
4-1/2% New York & Philadelphia Stock Exchanges
3.35% Series Philadelphia Stock Exchange
4.40% Series New York & Philadelphia Stock Exchanges
4.60% Series Philadelphia Stock Exchange
Company-Obligated Mandatorily Redeemable Securities of PP&L, Inc.
8.20% Series ($25 stated value)(a) New York Stock Exchange
8.10% Series ($25 stated value)(b) New York Stock Exchange
(a) Issued by PP&L Capital Trust and guaranteed by PP&L, Inc.
(b) Issued by PP&L Capital Trust II and guaranteed by PP&L, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
PP&L Resources, Inc. [ ]
PP&L, Inc. [ X ]
Indicate by check mark whether the Registrants (1) have 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
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
PP&L Resources, Inc. Yes X No
----- -----
PP&L, Inc. Yes X No
----- -----
The aggregate market value of the voting common stock held by non-affiliates of
PP&L Resources, Inc. at January 31, 1999 was $4,208,205,601. PP&L Resources,
Inc. held all 157,300,382 outstanding common shares, no par value, of PP&L, Inc.
The aggregate market value of the voting preferred stock held by non-affiliates
of PP&L, Inc. at January 31, 1999 was $92,518,336.
The number of shares of PP&L Resources, Inc. Common Stock, $.01 par value,
outstanding on January 31, 1999 was 157,684,519, excluding 16,996,129 shares
held as treasury stock.
Documents incorporated by reference:
Registrants have incorporated herein by reference certain sections of their
1999 Notices of Annual Meetings and Proxy Statements which will be filed with
the Securities and Exchange Commission not later than 120 days after December
31, 1998. Such Proxy Statements will provide the information required by Part
III of this Report.
PP&L RESOURCES, INC.
PP&L, INC.
FORM 10-K ANNUAL REPORT TO
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 1998
------------------------------------
TABLE OF CONTENTS
-----------------
This combined Form 10-K is separately filed by PP&L Resources, Inc. and
PP&L, Inc. Information contained herein relating to PP&L, Inc. is filed by PP&L
Resources, Inc. and separately by PP&L, Inc. on its own behalf. PP&L, Inc.
makes no representation as to information relating to PP&L Resources, Inc. or
its subsidiaries, except as it may relate to PP&L, Inc.
Item Page
- ---- ----
PART I
------
1. Business .............................................
2. Properties ...........................................
3. Legal Proceedings ....................................
4. Submission of Matters to a Vote of Security Holders ..
Executive Officers of the Registrants ................
PART II
-------
5. Market for the Registrant's Common Equity and Related
Stockholder Matters ..................................
6. Selected Financial Data ..............................
7. Review of the Financial Condition and
Results of Operations ...............................
8. Financial Statements and Supplementary Data
Report of Independent Accountants ..................
Management's Report on Responsibility for Financial
Statements .......................................
Financial Statements:
PP&L Resources, Inc.
Consolidated Statement of Income for each of the
Three Years Ended December 31, 1998, 1997 and
1996..............................................
Consolidated Statement of Cash Flows for each of
the Three Years Ended December 31, 1998, 1997
and 1996..........................................
Consolidated Balance Sheet at December 31, 1998 and
1997 .............................................
Consolidated Statement of Shareowners' Common
Equity for each of the Three Years Ended December
31, 1998, 1997 and 1996...........................
Consolidated Statement of Preferred Stock at
December 31, 1998 and 1997 .......................
Consolidated Statement of Company-Obligated
Mandatorily Redeemable Securities at
December 31, 1998 and 1997 .......................
Consolidated Statement of Long-Term Debt at
December 31, 1998 and 1997 .......................
PP&L, Inc.
Consolidated Statement of Income for each of the
Three Years Ended December 31, 1998, 1997 and
1996..............................................
Consolidated Statement of Cash Flows for each of
the Three Years Ended December 31, 1998, 1997
and 1996..........................................
Consolidated Balance Sheet at December 31, 1998 and
1997 .............................................
Consolidated Statement of Shareowner's Common
Equity for each of the Three Years Ended December
31, 1998, 1997 and 1996 ..........................
Consolidated Statement of Preferred Stock at
December 31, 1998 and 1997 .......................
Notes to Financial Statements ......................
Supplemental Financial Statement Schedule:
II - Valuation and Qualifying Accounts and
Reserves for the Three Years Ended
December 31, 1998 .............................
Quarterly Financial, Common Stock Price and
Dividend Data ......................................
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ................
PART III
--------
10. Directors and Executive Officers of the Registrants ..
11. Executive Compensation ...............................
12. Security Ownership of Certain Beneficial
Owners and Management ................................
13. Certain Relationships and Related Transactions .......
PART IV
-------
14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K ................................
Shareowner and Investor Information ..................
Signatures ...........................................
Exhibit Index ........................................
Computation of Ratio of Earnings to Fixed Charges ....
Glossary of Terms and Abbreviations
AFUDC (Allowance for Funds Used During Construction) - the cost of equity and
debt funds used to finance construction projects that is capitalized as part of
construction cost.
ATLANTIC - Atlantic City Electric Company
BG&E - Baltimore Gas & Electric Company
CERCLA - Comprehensive Environmental Response, Compen-sation and Liability Act
CLEAN AIR ACT (Federal Clean Air Act Amendments of 1990) - legislation enacted
to address environmental issues including acid rain, ozone and toxic air
emissions.
CTC - competitive transition charge
CUSTOMER CHOICE ACT - (Pennsylvania Electricity Generation Customer Choice and
Competition Act) - legislation enacted to restructure the state's electric
utility industry to create retail access to a competitive market for generation
of electricity
DelSur - Distributidora Electricidad del Sur S.A., an electric distribution
company in El Salvador
DEP - Pennsylvania Department of Environmental Protection
DISTRICT COURT - United States District Court for the Eastern District of
Pennsylvania.
DOE - Department of Energy
DRIP (Dividend Reinvestment Plan) - program available to shareowners of PP&L
Resources' common stock and PP&L preferred stock to reinvest dividends in PP&L
Resources' common stock instead of receiving dividend checks.
EGS - electric generation supplier
EITF - Emerging Issues Task Force, an organization that aids the FASB in
identifying emerging issues that may require FASB action.
EMEL - Empresas Emel, S.A., a Chilean electric distribution holding company
EMF - electric and magnetic fields
ENERGY ACT (Energy Policy Act of 1992) - legislation passed by Congress to
promote competition in the electric energy market for bulk power.
ENERGY MARKETING CENTER - organization within PP&L responsible for marketing and
trading wholesale energy
EPA - Environmental Protection Agency
ESOP - Employee Stock Ownership Plan
FASB (Financial Accounting Standards Board) - a rulemaking organization that
establishes financial accounting and reporting standards.
FGD - flue gas desulfurization equipment installed at coal-fired power plants to
reduce sulfur dioxide emissions.
FERC (Federal Energy Regulatory Commission) - federal agency that regulates
interstate transmission and sale of electricity and related matters.
GRT - Gross Receipts Tax
H.T. LYONS - H.T. Lyons, Inc., a PP&L Resources unregulated subsidiary
specializing in mechanical contracting and engineering.
IBEW - International Brotherhood of Electrical Workers
ISO - Independent System Operator
ITC - intangible transition charge
JCP&L - Jersey Central Power & Light Company
MAJOR UTILITIES - Atlantic, BG&E and JCP&L
McCarl's - McCarl's Inc., a PP&L Resources unregulated subsidiary specializing
in mechanical contracting and engineering.
MCCLURE - McClure Company, a PP&L Resources unregulated subsidiary specializing
in mechanical contracting and engineering.
MSHA - Mine Safety and Health Administration
NOX - nitrogen oxide
NPDES - National Pollutant Discharge Elimination System
NRC (Nuclear Regulatory Commission) - federal agency that regulates operation of
nuclear power facilities
NUG (Non-Utility Generator) - generating plants not owned by regulated
utilities. If the NUG meets certain criteria, its electrical output must be
purchased by public utilities as required by PURPA.
OCA - Pennsylvania Office of Consumer Advocate
OSM - United States Office of Surface Mining
PA. CNI - Pennsylvania corporate net income tax
PCB (Polychlorinated Biphenyl) - additive to oil used in certain electrical
equipment up to the late-1970s. Now classified as a hazardous chemical.
PECO - PECO Energy Company
PENN FUEL GAS - Penn Fuel Gas, Inc., a PP&L Resources regulated subsidiary
specializing in natural gas distribution, transmission and storage services, and
the sale of propane.
PJM (PJM Interconnection, L.L.C.) - operates the electric transmission network
and electric energy market in the mid-Atlantic region of the U.S.
PLAN - PP&L's non-contributory defined benefit pension plan.
PP&L - PP&L, Inc.
PP&L CAPITAL FUNDING - PP&L Capital Funding, Inc., PP&L Resources' financing
subsidiary.
PP&L CAPITAL TRUST - a Delaware statutory business trust created to issue
Preferred Securities, whose common stock is held by PP&L.
PP&L CAPITAL TRUST II -- a Delaware statutory business trust created to issue
Preferred Securities, whose common stock is held by PP&L.
PP&L ENERGYPLUS - Refers to PP&L, Inc. d/b/a PP&L EnergyPlus, and PP&L
EnergyPlus Co., a PP&L, Inc. unregulated subsidiary which is involved in retail
electric generating supply. During 1998, PP&L, Inc. d/b/a PP&L EnergyPlus
provided retail electric generating supply in the Pennsylvania retail pilot
program. As a result of the PUC restructuring settlement, PP&L EnergyPlus became
a separate subsidiary of PP&L, Inc. in September 1998. As of January 1999, PP&L
EnergyPlus Co. is providing retail electric generating supply to customers
throughout Pennsylvania.
PP&L GLOBAL - PP&L Global, Inc., a PP&L Resources unregulated subsidiary which
invests in and develops world-wide power projects
PP&L RESOURCES - PP&L Resources, Inc., the parent holding company of PP&L, PP&L
Global and other subsidiaries.
PP&L SPECTRUM - PP&L Spectrum, Inc., a PP&L Resources unregulated subsidiary
which offers energy-related products and services.
PP&L'S MORTGAGE - PP&L's Mortgage and Deed of Trust, dated October 1, 1945.
PREFERRED SECURITIES - Company-obligated mandatorily re-deemable preferred
securities of subsidiary trusts holding solely company debentures (issued by two
Delaware statutory business trusts).
PUC (Pennsylvania Public Utility Commission) - state agency that regulates
certain ratemaking, services, accounting, and operations of Pennsylvania
utilities.
PUC DECISION - final order issued by the PUC on September 27, 1995 pertaining to
PP&L's base rate case filed in December 1994.
PUC FINAL ORDER - Final order issued by the PUC on August 27, 1998, approving
the settlement of PP&L Inc.'s restructuring proceeding.
PUHCA - Public Utility Holding Company Act of 1935
PURPA (Public Utility Regulatory Policies Act of 1978) - legislation passed by
Congress to encourage energy conservation, efficient use of resources, and
equitable rates.
RCRA - 1976 Resource Conservation and Recovery Act
SBRCA - Special Base Rate Credit Adjustment
SEC - Securities and Exchange Commission
SER - Schuylkill Energy Resources, Inc.
SFAS (Statement of Financial Accounting Standards) - accounting and financial
reporting rules issued by the FASB.
SO2 - Sulfur dioxide
STAS (State Tax Adjustment Surcharge) - rate adjustment mechanism to customer
bills for changes in certain state taxes.
SUPERFUND - federal and state legislation that addresses remediation of
contaminated sites.
SWEB - South Western Electricity plc, a British regional electric utility
company.
U.K. - United Kingdom
VEBA (Voluntary Employee Benefit Association Trust) - trust accounts for health
and welfare plans for future payments to employees, retirees or their
beneficiaries.
VERP - Voluntary Early Retirement Program
YEAR 2000 - a set of date-related problems that may be experienced by software
systems or applications.
PART I
------
ITEM 1. BUSINESS
----------------
Terms and abbreviations appearing in "BUSINESS" are explained in the
glossary.
BACKGROUND
PP&L Resources is a holding company with headquarters in Allentown, PA.
Its subsidiaries include PP&L, which provides electricity delivery service in
eastern and central Pennsylvania, sells retail electricity throughout
Pennsylvania and markets wholesale electricity in 28 states and Canada; PP&L
EnergyPlus (a subsidiary of PP&L), which sells competitively-priced energy and
energy services to newly deregulated markets; PP&L Global, an international
independent power company which invests in and develops world-wide power
projects; PP&L Spectrum, which markets energy-related services and products;
PP&L Capital Funding, which provides debt funding for PP&L Resources and its
subsidiaries other than PP&L; Penn Fuel Gas, which provides natural gas
distribution, transmission and storage services and sells propane; and H.T.
Lyons and McClure, which are mechanical contractor and engineering firms. In
February 1999, PP&L Resources acquired McCarl's Inc., another mechanical
contractor and engineering firm. Other subsidiaries may be formed by PP&L
Resources to take advantage of new business opportunities.
The financial condition and results of operations of PP&L and PP&L Global
are currently the principal factors affecting PP&L Resources' financial
condition and results of operations.
The electric utility industry, including PP&L, has experienced and will
continue to experience a significant increase in the level of competition in the
energy supply market. The Energy Act amended the PUHCA to create a new class of
independent power producers, and amended the Federal Power Act to provide open
access to electric transmission systems for wholesale transactions. In
addition, in December 1996 the Customer Choice Act was enacted in Pennsylvania
to restructure the state's electric utility industry in order to create retail
access to a competitive market for the generation of electricity. See "PUC
Restructuring Proceeding" in Note 3 to Financial Statements and "Increasing
Competition" in Review of Financial Condition and Results of Operations for a
discussion of competition-related proceedings before the PUC and PP&L's
involvement in those proceedings.
PP&L is subject to regulation as a public utility by the PUC and is subject
in certain of its activities to the jurisdiction of the FERC under Parts I, II
and III of the Federal Power Act. PP&L Resources and PP&L have been exempted by
the SEC from the provisions of PUHCA applicable to them as holding companies.
PP&L is subject to the jurisdiction of the NRC in connection with the
operation of the two nuclear-fueled generating units at PP&L's Susquehanna
station. PP&L owns a 90% undivided interest in each of the Susquehanna units and
Allegheny Electric Cooperative, Inc. owns a 10% undivided interest in each of
those units.
PP&L also is subject to the jurisdiction of certain federal, regional,
state and local regulatory agencies with respect to air and water quality, land
use and other environmental matters. The operations of PP&L are subject to the
Occupational Safety and Health Act of 1970, and the coal cleaning and loading
operations of a PP&L subsidiary are subject to the Federal Mine Safety and
Health Act of 1977.
PP&L provides electricity delivery service to approximately 1.3 million
customers in a 10,000 square mile territory in 29 counties of eastern and
central Pennsylvania, with a population of approximately 2.6 million persons.
This service area has 129 communities with populations over 5,000, the largest
cities of which are Allentown, Bethlehem, Harrisburg, Hazleton, Lancaster,
Scranton, Wilkes-Barre and Williamsport. In addition to delivery of its own
generation or purchased power, PP&L is delivering power supplied by licensed
EGS' pursuant to the Customer Choice Act.
During 1998, about 96% of total operating revenue was derived from electric
energy sales and marketing activities, with 26% coming from residential
customers, 22% from commercial customers, 15% from industrial customers, 34%
from wholesale sales and 3% from others.
PP&L operates its generation and transmission facilities as part of the
PJM. The PJM operates the electric transmission network and electric energy
market in the mid-Atlantic region of the United States. Bulk electricity is
transmitted to wholesale users throughout a geographic area including all or
part of Pennsylvania, New Jersey, Maryland, Delaware, Virginia and the District
of Columbia. PP&L is also a party to the Mid-Atlantic Area Coordination
Agreement, which provides for the coordinated planning of generation and
transmission facilities by the companies included in the PJM.
In November 1997, the FERC ordered the restructuring of the PJM into an
ISO, in order to accommodate greater competition and broader participation in
the power pool. The purpose of the ISO is to separate operation of, and access
to, the transmission grid from the PJM electric utilities' generation interests.
The electric utilities continue to own the transmission assets, but the ISO
directs the control and operation of the transmission facilities. See
"Increasing Competition" in the Review of Financial Condition and Results of
Operations for further details on this PJM restructuring.
To take advantage of opportunities in the competitive energy marketplace,
PP&L created an Energy Marketing Center in 1995. The group operates a 24-hour
trading floor and a marketing effort with responsibility for all PP&L wholesale
power transactions. The Energy Marketing Center has allowed PP&L to buy and
sell energy at the most competitive prices and to expand these activities beyond
PP&L's traditional service territory.
Pursuant to the Joint Settlement Petition in its PUC restructuring
proceeding, PP&L transferred its retail marketing function to a new subsidiary,
PP&L EnergyPlus, in September 1998. PP&L EnergyPlus has a PUC license to act as
an EGS. This license permits PP&L EnergyPlus to offer retail electric supply to
customers throughout Pennsylvania. In 1999, PP&L EnergyPlus will offer such
supply to industrial and commercial customers throughout the state. At this
time, PP&L EnergyPlus has decided not to pursue residential customers in the
competitive marketplace based on economic considerations.
Other wholly-owned subsidiary companies of PP&L principally are engaged in
oil and gas pipeline operations, holding cash reserves and passive financial
investing.
PP&L Global, PP&L Resources' second largest subsidiary after PP&L, is an
international independent power company with current investments of $671
million. PP&L Global has ownership and operational interests in distribution
companies in the U.K., Chile and El Salvador that deliver electricity to more
than 2 million customers. PP&L Global also has investment interests in
Argentina, Peru, Spain, Portugal, Bolivia and Brazil. PP&L Global's major
investments to date are SWEB, Emel and DelSur.
During 1998, PP&L Global reached an agreement to acquire the generation
facilities of Bangor-Hydro Electric Company in Maine, totaling 95 megawatts, as
well as certain associated transmission rights, for $89 million.
In addition, during 1998 PP&L Global signed definitive agreements to
purchase 13 Montana power plants, with 2,614 megawatts of generating capacity,
for $1.586 billion. The acquisition is subject to several conditions, including
the receipt of required state and federal regulatory approvals and third-party
consents. The agreements also provide for PP&L Global's acquisition of related
transmission assets for $182 million.
PP&L Global also has announced plans to develop a 520 megawatt gas-fired
power plant in Kingman, Arizona, a 500 - 600 megawatt gas-fired plant in
Wallingford, Connecticut, and a 500 - 600 megawatt gas-fired plant in eastern
Pennsylvania.
PP&L Resources has established growth in its generation capability, along
with expansion of its energy marketing operations, as a key element of its
business strategy. In
addition to the current generating assets of PP&L and the announced acquisitions
and developments of PP&L Global discussed above, PP&L Resources plans to add
another 7,500 mW of generation within the next five years.
FINANCIAL CONDITION
See "Earnings" and "Financial Indicators" in the Review of the Financial
Condition and Results of Operations for this information.
CAPITAL EXPENDITURE REQUIREMENTS
See "Financial Condition - Capital Expenditure Requirements" in the Review
of the Financial Condition and Results of Operations for information concerning
PP&L's estimated capital expenditure requirements for the years 1999-2003. See
Note 14 to Financial Statements for information concerning PP&L's estimate of
the cost to comply with the federal clean air legislation enacted in 1990, to
address groundwater degradation and waste water control at PP&L facilities and
to comply with solid waste disposal regulations adopted by the DEP.
POWER SUPPLY
PP&L's system capacity (winter rating) at December 31, 1998 was as follows:
Net
Kilowatt
Plant Capacity
----- --------
Nuclear-fueled steam station
Susquehanna 1,995,000 (a)
---------
Coal-fired steam stations
Montour 1,525,000
Brunner Island 1,469,000
Sunbury 389,000 (b)
Martins Creek 300,000
Keystone 210,000 (c)
Conemaugh 194,000 (d)
Holtwood 73,000 (e)
---------
Total coal-fired 4,160,000
---------
Gas and oil-fired steam station
Martins Creek 1,592,000
Combustion turbines and diesels 364,000
Hydroelectric 146,000
---------
Total generating capacity 8,257,000
---------
Firm purchases
Hydroelectric 139,000 (f)
Qualifying facilities 338,000
---------
Total firm purchases 477,000
---------
Total system capacity 8,734,000
=========
____________________________
(a) PP&L's 90% undivided interest.
(b) PP&L has announced its intention to sell the Sunbury station in
1999.
(c) PP&L's 12.34% undivided interest.
(d) PP&L's 11.39% undivided interest.
(e) Holtwood is scheduled to be closed on May 1, 1999.
(f) From Safe Harbor Water Power Corporation.
The system capacity shown in the preceding tabulation does not reflect
two-party sales and purchases, contractual bulk power sales to JCP&L and BG&E,
and installed capacity credit sales and purchases with other utilities. The net
effect of these transactions is to reduce system capacity by 1,039,000 kilowatts
at the end of December 1998 to 7,695,000 kilowatts.
The capacity of generating units is based upon a number of factors,
including the operating experience and physical condition of the units, and may
be revised from time to time to reflect changed circumstances.
During 1998, PP&L produced about 41.7 billion kWh in plants it owned. PP&L
also purchased 28.8 billion kWh, and had 35.3 billion kWh in non-system energy
sales.
During 1998, 59% of the energy generated by PP&L's plants came from coal-
fired stations, 35% from nuclear operations at the Susquehanna station, 4% from
the Martins Creek gas and oil-fired station and 2% from hydroelectric stations.
The maximum one-hour demand recorded on PP&L's system is 6,688,000
kilowatts, which occurred on January 14, 1999. The maximum recorded one-hour
summer demand is 6,046,000 kilowatts, which occurred on July 15, 1997. These
peak demands do not include energy sold to Atlantic, BG&E or JCP&L.
PP&L purchases energy from and sells energy to other utilities and FERC-
certified power marketers. PP&L enters into these transactions on an hourly,
daily, weekly, monthly or longer-term basis.
PP&L has a FERC short-term capacity and/or energy sales tariff enabling
PP&L to sell to other utilities and marketers. As of the end of 1998, ninety
utilities and marketers had signed service agreements under this cost-based
tariff. Transactions under these agreements allow PP&L to make more efficient
use of its generating resources and are intended to provide benefits to both
PP&L and the other parties. Under this tariff, PP&L may also sell power
purchased from third parties, which increases PP&L's capabilities for profitable
wholesale transactions.
PP&L also has FERC authorization to sell electric energy and capacity at
market-based rates to wholesale customers located both inside and outside the
PJM control area. Seventy parties have signed service and power sales
agreements for transactions under this market-based rates tariff.
PP&L has an export license to sell capacity and/or energy to electric
utilities in Canada. This export license allows PP&L to sell either its own
capacity and energy not required to serve domestic obligations or power
purchased from other utilities.
See Note 5 to Financial Statements for additional information concerning
the sale of capacity and energy to Atlantic, BG&E and JCP&L.
In addition to the 338,000 kilowatts of qualifying facility generation
included in the total system capacity table above, PP&L is purchasing about
12,000 kilowatts of output from various other non-utility generating companies.
In an effort to reduce operating costs and position itself for the
competitive marketplace, PP&L in August 1998 announced the closing of its
Holtwood coal-fired generating station, effective May 1, 1999. The adjacent
hydroelectric plant will continue to operate. In addition, PP&L announced its
intention to sell its Sunbury coal-fired generating station in 1999.
FUEL SUPPLY
Coal
----
During 1998, about 55% of the coal delivered to PP&L's generating stations
was purchased under contracts and 45% was obtained through open market
purchases. Contracts with non-affiliated coal producers provided PP&L with
about 4.2 million tons of coal in 1998 and are expected to provide PP&L with
about 5.0 million tons in 1999. PP&L's requirements for additional coal are
expected to be obtained by contracts and open market purchases.
The amount of coal carried in inventory at PP&L's generating stations
varies from time to time depending on market conditions and plant operations.
As of December 31, 1998, PP&L's coal supply was sufficient for at least 34 days
of operations.
The coal burned in PP&L's generating stations contains both organic and
pyritic sulfur. Mechanical cleaning processes are utilized to reduce the
pyritic sulfur content of the coal. The reduction of the pyritic sulfur content
by either mechanical cleaning or blending has lowered the total sulfur content
of the coal burned to levels which permit compliance with current sulfur dioxide
emission regulations established by the DEP. For information concerning PP&L's
plans to achieve compliance with the federal clean air legislation enacted in
1990, see "Environmental Matters" in Note 14 to Financial Statements.
PP&L owns a 12.34% undivided interest in the Keystone station and an 11.39%
undivided interest in the Conemaugh station, both of which are generating
stations located in western Pennsylvania. The owners of the Keystone station
have a long-term contract with a coal supplier to provide at least two-thirds of
that station's requirements through 1999 and declining amounts thereafter until
the contract expires at the end of 2004. The balance of the Keystone station
requirements are purchased in the open market. The coal supply requirements for
the Conemaugh
station are being met from several sources through a blend of long-term and
short-term contracts and spot market purchases.
Oil and Natural Gas
- -------------------
PP&L's Martins Creek generating station Units 3 and 4 burn both oil and
natural gas. During 1998, 100% of the oil requirements for the Martins Creek
units was purchased on the spot market. As of December 31, 1998, PP&L has no
long-term agreements for these requirements.
During 1998, all of the natural gas consumed at Martins Creek was purchased
and transported under short-term agreements that were one month or less in
duration. PP&L does not have any long-term agreements to purchase gas or gas
transportation.
PP&L's oil and natural gas purchasing and sales functions are now performed
by the Energy Marketing Center. The addition of oil and gas to the Energy
Marketing Center's electricity trading enhances wholesale and retail marketing
efforts and provides a diversified energy portfolio to offer customers.
Additionally, the new trading activities create opportunities to optimize
electric generation efficiency and minimize fuel costs.
Nuclear
-------
PP&L has entered into uranium supply and conversion agreements that satisfy
100% of the uranium requirements for the Susquehanna units through 1999,
approximately 45% of the requirements for the period 2000-2002 and, including
options, an additional 25% of the requirements for the period 2003-2005.
Deliveries under these agreements are expected to provide sufficient quantities
of uranium to permit Unit 1 to operate into the first quarter of 2002 and Unit 2
to operate into the first quarter of 2001.
PP&L has entered into an agreement that satisfies 100% of its enrichment
requirements through 2004. Assuming that other portions of the nuclear fuel
cycle are met, deliveries under this agreement are expected to provide
sufficient enrichment to permit Unit 1 to operate into the first quarter of 2006
and Unit 2 to operate into the first quarter of 2007.
PP&L has entered into an agreement that, including options, satisfies 100%
of its fabrication requirements through 2006. Assuming that other portions of
the nuclear fuel cycle are met, deliveries under this agreement are expected to
provide sufficient fabrication to permit Unit 1 to operate into the first
quarter of 2008 and Unit 2 to operate into the first quarter of 2007.
PP&L estimates that there is sufficient storage capacity in the spent
nuclear fuel pools at Susquehanna to accommodate the fuel that is expected to be
discharged through the end of 1999.
Federal law requires the federal government to provide for the permanent
disposal of commercial spent nuclear fuel. Pursuant to the requirements of that
law, the DOE has initiated an analysis of a site in Nevada for a permanent
nuclear waste repository. Progress on characterization of a proposed disposal
facility has been slow, and the repository is not expected to be operational
before 2010. Thus, expansion of Susquehanna's on-site spent fuel storage
capacity is necessary. To support this expansion, PP&L has contracted for the
design and construction of a spent fuel storage facility employing dry cask fuel
storage technology at the Susquehanna station. The facility will be modular so
that additional storage capacity can be added as needed. PP&L currently expects
that the new facility will be available to start receiving nuclear spent fuel in
1999. See "Financial Condition - Capital Expenditure Requirements" in the Review
of the Financial Condition and Results of Operations.
Federal law also provides that certain costs of spent nuclear fuel disposal
are the responsibility of the generators of such wastes. In January 1997, PP&L
joined over 30 other utilities in a lawsuit in the U.S. Court of Appeals for the
District of Columbia Circuit seeking assurance of the DOE's performance of its
contractual obligation to accept the spent nuclear fuel and suspension of the
payment of fees to that agency pending such performance. In November 1997, the
Court denied the utilities' requested relief and held that the contracts between
the utilities and the DOE provide a potentially adequate remedy (i.e., monetary
damages) if the DOE fails to begin disposal of spent nuclear fuel by January 31,
1998. However, the Court also precluded the DOE from arguing that its delay in
contract performance was "unavoidable".
YEAR 2000
See "Year 2000" in the Review of the Financial Condition and Results of
Operations for information.
ENVIRONMENTAL MATTERS
PP&L is subject to certain present and developing federal, regional, state
and local laws and regulations with respect to air and water quality, land use
and other environmental matters. See "Financial Condition - Capital Expenditure
Requirements" in the Review of the Financial Condition and Results of Operations
for information concerning environmental expenditures during 1998 and PP&L's
estimate of those expenditures during the years 1999-2003. PP&L believes that it
is presently in substantial compliance with applicable environmental laws and
regulations.
See "Environmental Matters" in Note 14 to Financial Statements for
information concerning federal clean air legislation enacted in 1990,
groundwater degradation and waste water control at PP&L facilities, the DEP's
solid waste disposal regulations and PP&L's agreement with the DEP concerning
remediation at certain sites of past operations. Other environmental laws,
regulations and developments that may have a substantial impact on PP&L are
discussed below.
Air
---
The Clean Air Act includes, among other things, provisions that: (a)
require the prevention of significant deterioration of existing air quality in
regions where air quality is better than applicable ambient standards; (b)
restrict the construction of and revise the performance standards for new coal-
fired and oil-fired generating stations; and (c) authorize the EPA to impose
substantial noncompliance penalties of up to $25,000 per day of violation for
each facility found to be in violation of the requirements of an applicable
state implementation plan. The DEP administers the EPA's air quality
regulations through the Pennsylvania State Implementation Plan and has
concurrent authority to impose penalties for noncompliance. At this time, PP&L
is meeting all requirements of Phase I of the Clean Air Act.
In December 1997, international negotiators reached agreement in Kyoto,
Japan to strengthen the 1992 United Nations Global Climate Change Treaty by
adding legally-binding greenhouse gas emission limits. This Agreement -
formally called the Kyoto Protocol - if ratified by the U.S. Senate and
implemented, would require the United States to reduce its greenhouse gas
emissions to 7% below 1990 levels by the period 2008 to 2012. Compliance under
the Agreement, if implemented, could result in increased capital and operating
expenses for PP&L in amounts which are not now determinable but which could be
material.
Water
-----
To implement the requirements established by the Federal Water Pollution
Control Act of 1972, as amended by the Clean Water Act of 1977 and the Water
Quality Act of 1987, the EPA has adopted regulations including effluent
standards for steam electric stations. The DEP administers the EPA's effluent
standards through state laws and regulations relating, among other things, to
effluent discharges and water quality. The standards adopted by the EPA
pursuant to the Clean Water Act may have a significant impact on PP&L's existing
facilities, depending on the DEP's interpretation and future amendments to its
regulations.
The EPA and DEP limitations, standards and guidelines for the discharge of
pollutants from point sources into surface waters are implemented through the
issuance of NPDES permits. PP&L has the NPDES permits necessary for the
operation of its facilities.
Pursuant to the Surface Mining and Reclamation Act of 1977, the OSM has
adopted effluent guidelines which are applicable to PP&L subsidiaries as a
result of their past coal mining and
continued coal processing activities. The EPA and the OSM limitations,
guidelines and standards also are enforced through the issuance of NPDES
permits. In accordance with the provisions of the Clean Water Act and the
Reclamation Act of 1977, the EPA and the OSM have authorized the DEP to
implement the NPDES program for Pennsylvania sources. Compliance with applicable
water quality standards is assured by DEP review of NPDES permit conditions.
PP&L's subsidiaries have received NPDES permits for their mines and related
facilities.
Solid and Hazardous Waste
-------------------------
The RCRA regulates the generation, transportation, treatment, storage and
disposal of hazardous wastes. RCRA also imposes joint and several liability on
generators of solid or hazardous waste for clean-up costs. A revision of RCRA
in late-1984 lowered the threshold for the amount of on-site hazardous waste
generation requiring regulation and incorporated underground tanks used for the
storage of petroleum and petroleum products as regulated units. Based upon the
results of a survey of its solid waste practices, PP&L in the past has filed
notices with the EPA indicating that hazardous waste is occasionally generated
at all of its steam electric generating stations and service centers. PP&L has
established specific operating procedures for handling this hazardous waste.
Therefore, at this time, RCRA and related DEP regulations are not expected to
have a significant additional impact on PP&L.
The provisions of Superfund authorize the EPA to require past and present
owners of contaminated sites and generators of any hazardous substance found at
a site to clean-up the site or pay the EPA or the state for the costs of clean-
up. The generators and past owners can be liable even if the generator
contributed only a minute portion of the hazardous substances at the site.
Present owners can be liable even if they contributed no hazardous substances to
the site.
The Pennsylvania Superfund law also gives the DEP broad authority to
identify hazardous or contaminated sites in Pennsylvania and to order owners or
responsible parties to clean-up the sites. If responsible parties cannot or
will not perform the clean-up, the DEP can hire contractors to clean-up the
sites and then require reimbursement from the responsible parties after the
clean-up is completed. To date, PP&L has principally been involved in federal,
rather than state, Superfund sites.
PP&L has completed removal of coal tar from one subsurface accumulation at
a former coal gasification plant site in Monroe County, Pennsylvania and
currently expects that significant additional remedial action will not be
required. PP&L has entered into agreements with the adjacent property owner and
DEP to share the past and future costs of remediating this site. PP&L's share
of these costs, including future monitoring, is approximately $3 million, all of
which has been spent or accrued.
PP&L has removed coal tar in two brick pits on the site of a former gas
plant and from river sediment adjacent to the site in Columbia, Pennsylvania.
The cost of investigation and remediation of the areas of the site where such
action has been required is estimated at $3 million, all of which has been spent
or accrued. There also is coal tar contamination of the soil and groundwater at
the site. Further remediation of these other areas of the site may be required,
the costs of which are not now determinable but could be material.
PP&L at one time also owned and operated several other gas plants in its
service area. None of these sites is presently on the Superfund list. However,
a few of them may be possible candidates for listing at a future date. PP&L
expects to continue to investigate and, if necessary, remediate these sites.
The cost of this work is not now determinable but could be material.
PP&L is involved in several other sites where it may be required, along
with other parties, to contribute to investigation and 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 investigation 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, to be held
responsible for clean-up of such sites. Such natural resource damage claims
against PP&L could result in additional material liabilities.
See Item 3 "LEGAL PROCEEDINGS" for information concerning an EPA order and
a complaint filed by the EPA in federal district court against PP&L and 35
unrelated parties for remediation of a Superfund site in Berks County,
Pennsylvania; a complaint filed by PP&L and 16 unrelated parties in federal
district court against other parties for contribution under Superfund relating
to the Novak landfill Superfund site in Lehigh County, Pennsylvania and a
related action by the EPA against PP&L and 29 unrelated parties to recover the
agency's past and future costs at the Novak landfill site; an action by the EPA
for reimbursement of the EPA's past response costs and remediation at the site
of a former metal salvaging operation in Montour County, Pennsylvania; and
PP&L's challenge to the DEP's right to collect fees for emissions from PP&L's
coal-fired units.
Low-Level Radioactive Waste
---------------------------
Under federal law, each state is responsible for the disposal of low-level
radioactive waste generated in that state. States may join in regional compacts
to jointly fulfill their responsibilities. The states of Pennsylvania,
Maryland, Delaware and West Virginia are members of the Appalachian States Low-
Level Radioactive Waste Compact. Efforts to develop a regional disposal
facility in Pennsylvania were suspended by the DEP in 1998. The Commonwealth
retains the legal authority to resume the siting process should it be necessary.
Low-level radioactive waste resulting from the operation of Susquehanna are
currently being sent to Barnwell, South Carolina for disposal. In the event
that this disposal option becomes unavailable or no longer cost-effective, the
low-level radioactive waste will be stored on-site at Susquehanna. PP&L cannot
predict the future availability of low-level waste disposal facilities or the
cost of such disposal.
General
-------
Concerns have been expressed by some members of the scientific community
and others regarding the potential health effects of EMFs. These fields are
emitted by all devices carrying electricity, including electric transmission and
distribution lines and substation equipment. Federal, state and local officials
have focused attention on this issue. PP&L supports the current efforts to
determine whether EMFs cause any human health problems and is taking low cost or
no cost steps to reduce EMFs, where practical, in the design of new transmission
and distribution facilities. PP&L is unable to predict what effect, if any, the
EMF issue might have on PP&L operations and facilities and the associated cost,
or what, if any, liabilities PP&L might incur related to the EMF issue.
In addition to the matters described above, PP&L and its subsidiaries have
been cited from time to time for temporary violations of the DEP and the EPA
regulations with respect to air and water quality and solid waste disposal in
connection with the operation of their facilities and may be cited for such
violations in the future. As a result, PP&L and its subsidiaries may be subject
to certain penalties which are not expected to be material in amount.
PP&L is unable to predict the ultimate effect of evolving environmental
laws and regulations upon its existing and proposed facilities and operations.
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.
FRANCHISES AND LICENSES
PP&L has authority to provide electric public utility service throughout
its entire service area as a result of grants by the Commonwealth of
Pennsylvania in corporate charters to PP&L and companies to which it has
succeeded and as a result of certification thereof by the PUC. PP&L has been
granted the right to enter the streets and highways by the Commonwealth subject
to certain conditions. In general, such conditions have been met by ordinance,
resolution, permit, acquiescence or other action by an appropriate local
political subdivision or agency of the Commonwealth. PP&L also has an export
license from the DOE to sell capacity and/or energy to electric utilities in
Canada.
PP&L operates Susquehanna Unit 1 and Unit 2 pursuant to NRC operating
licenses which expire in 2022 and 2024, respectively. PP&L operates two
hydroelectric projects pursuant to licenses which were renewed by the FERC in
1980: Wallenpaupack (44,000 kilowatts capacity) and Holtwood (102,000 kilowatts
capacity). The Wallenpaupack license expires in 2004 and the Holtwood license
expires in 2014.
PP&L also owns one-third of the capital stock of Safe Harbor Water Power
Corporation, which holds a project license which extends until 2030 for the
operation of its hydroelectric plant. The total capacity of the Safe Harbor
plant is 417,500 kilowatts, and PP&L is entitled by contract to one-third of the
total capacity (139,000 kilowatts).
EMPLOYEE RELATIONS
As of December 31, 1998, PP&L Resources and its subsidiaries had
approximately 7,600 employees including 6,344 full-time PP&L employees.
Approximately 65 percent of PP&L's full-time employees are represented by the
IBEW. PP&L reached a new labor agreement with the IBEW in 1998. This agreement
expires in May 2002.
ITEM 2. PROPERTIES
------------------
Reference is made to the "Utility Plant" section of Note 1 to Financial
Statements as well as to "Power Plant Operations" in the Review of the Financial
Condition and Results of Operations for information concerning investments in
property, plant and equipment. Substantially all electric utility plant is
subject to the lien of PP&L's Mortgage. For a description of PP&L's service
territory and additional information concerning the properties of PP&L, see Item
1, "BUSINESS - Power Supply" and "BUSINESS - Fuel Supply."
See Item 1 "BUSINESS-Background" for a discussion of PP&L Global's
investments.
ITEM 3. LEGAL PROCEEDINGS
-------------------------
Reference is made to Note 3 to Financial Statements for information
concerning PP&L's restructuring proceeding before the PUC under the Customer
Choice Act.
Reference is made to "Increasing Competition" in the Review of the
Financial Condition and Results of Operations for information concerning pending
proceedings before the FERC regarding wholesale customers and restructuring of
the PJM.
Reference is made to Item 1 "BUSINESS - Fuel Supply" for information
concerning a lawsuit against the DOE for failure of that agency to perform
certain contractual obligations.
In 1998, PP&L settled all outstanding disputes and litigation with SER, a
non-utility generating company from which PP&L purchases power under PURPA. This
litigation related to the power purchase agreement between the parties and SER's
status as a qualifying cogeneration facility. Specifically, in August 1998 PP&L
executed an agreement with SER providing that, effective January 1, 1999, the
PP&L/SER power purchase agreement will be amended to provide that SER will
receive 6.6 cents/kWh for generation up to 79.5 MW, as long as SER operates a
"qualifying facility" under FERC rules. Generation in excess of 79.5 MW will
continue to be sold at rates in the existing power purchase agreement. Subject
to regulatory requirements, SER will be permitted, but not required, to sell
generation above 80.5 MW to third parties.
In November 1998, PP&L and SER executed a second settlement providing that:
(i) SER will make two cash payments totaling $30 million to PP&L in December
1998; (ii) PP&L will retain approximately $8 million in payments withheld from
SER from March through December 1998 as a result of PP&L's reduction in the rate
paid to SER for purchased power; (iii) SER will pay PP&L an additional $4.5
million in total, plus interest, over the remaining 11 years of the power
purchase agreement; (iv) PP&L and SER will conclude all outstanding litigation
and disputes; and (v) PP&L will grant SER normal and emergency minimum operating
levels and curtailment terms like those in place for most of PP&L's other NUGs.
Both cash payments totaling $30 million were made by SER to PP&L in December
1998.
In April 1991, the U.S. Department of Labor through its MSHA issued
citations to one of PP&L's coal-mining subsidiaries for alleged coal-dust sample
tampering at one of the subsidiary's mines. Citations were also issued against
the independent operator of another subsidiary mine, who is also contesting the
citations issued with respect to that mine. The MSHA at the same time issued
similar citations to more than 500 other coal-mine operators. After the U.S.
Court of Appeals for the District of Columbia Circuit affirmed the ruling of the
Mine Safety and Health Review Commission in favor of one of the mine operators
in a test case, the Secretary of Labor in September 1998 moved to vacate and
dismiss all of the pending cases against the mine operators, including the PP&L
subsidiary. MSHA has indicated that it intends to withdraw all of its citations,
which would conclude all of these pending cases against the mine operators,
including PP&L's subsidiary.
In August 1994, PP&L filed a rate complaint with the federal Interstate
Commerce Commission, now the Surface Transportation Board, challenging
Consolidated Rail Corporation's (Conrail's) coal transportation rates from
interchange points with connecting carriers to PP&L's power plants. In September
1995, PP&L amended its complaint to add the connecting carriers, CSX Corporation
and Norfolk Southern Corporation, as additional defendants. In September 1997,
PP&L reached an agreement with the carriers to settle this case. The settlement
was conditioned on the outcome of the joint Norfolk Southern/CSX application to
take control of Conrail. The Surface Transportation Board approved the Conrail
takeover in July 1998. Under the terms of the settlement, PP&L began paying
lower coal transportation rates in October 1998.
In August 1991, PP&L and 35 other unrelated parties received an EPA order
under CERCLA requiring that certain remedial actions be taken at a former oil
recovery site in Berks County, Pennsylvania, which has been included on the
federal Superfund list. PP&L had been identified by the EPA as a potentially
responsible party, along with over 100 other parties. The EPA order required
remediation by the 36 named parties of four specific areas of the site. Remedial
action under this order has been completed at a cost of approximately $2
million, of which PP&L's interim share was approximately $50,000.
The EPA at the same time filed a complaint under Section 107 of CERCLA in
the District Court against PP&L and the same 35 unrelated parties. The complaint
asks the District Court to hold
the parties jointly and severally liable for all EPA's past costs at the site
and future costs of remediating some of the remaining areas of the site. The EPA
claims it has spent approximately $21 million to date. PP&L and a group of the
other named parties have sued approximately 460 other parties in District Court,
claiming that these parties contributed waste to the site, and demanding that
these companies contribute to the clean-up costs.
In July 1993, PP&L and 33 of the 35 unrelated parties received an EPA order
under Section 106 of CERCLA requiring remediation of the remaining areas of the
site identified by the EPA. The current estimate of remediating the remainder of
the site is approximately $18 million. These costs would be shared among the
responsible parties. PP&L and other parties to the lawsuit have reached a
settlement among themselves and the federal government regarding these claims.
PP&L's share of the settlement amount is not material.
In December 1991, PP&L and 16 unrelated parties filed complaints against 64
other parties in District Court seeking reimbursement under CERCLA for costs the
plaintiffs have incurred and will incur to investigate and remediate the Novak
landfill site in Lehigh County, Pennsylvania. In January 1997, the EPA filed an
action against PP&L and 29 other parties under Section 107 of CERCLA to recover
the EPA's past costs at the site, which it alleges are in excess of $990,000.
The parties have settled these actions. In addition, the EPA has issued an order
under Section 106 of CERCLA against PP&L and several other parties to jointly
remediate the site. The current estimate of implementing this remedy is
approximately $17 million. PP&L's share of the remediation cost at this site is
not expected to be material.
In April 1993, PP&L received an order under Section 106 of CERCLA requiring
that actions be taken at the site of a former metal salvaging operation in
Montour County, Pennsylvania. The EPA took similar action with two other
potentially responsible parties at the site. The Company has reached a
settlement with the EPA for this site for an amount that is not material.
PP&L challenged the DEP's right to collect air emission fees for hazardous
air pollutants (HAPs) from PP&L's coal-fired units and air emission fees for
emissions from PP&L's Phase I-affected units from 1995 through 1999. (Phase I-
affected units were those units required by the Clean Air Act, or which
voluntarily opted into the requirement, to make certain reductions in SO2 and
NOx emissions by 1995; all others must make these reductions by 2000.) The HAPs
emissions fees are approximately $200,000 per year. The emission fees for Phase
I-affected units from 1995 through 1999 are estimated at $1.6 million. PP&L and
the DEP have finalized a settlement of this litigation, under which (i) PP&L
will pay reduced fees for the Phase I-affected units from 1995-1999 and will pay
all HAPs fees as assessed; and (ii) no penalties or interest will be imposed by
DEP.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
There were no matters submitted to a vote of security holders,
through the solicitation of proxies or otherwise, during the fourth quarter of
1998.
EXECUTIVE OFFICERS OF THE REGISTRANTS
-------------------------------------
Officers of PP&L Resources and PP&L are elected annually by their Boards of
Directors to serve at the pleasure of the respective Boards. There are no
family relationships among any of the executive officers, or any arrangement or
understanding between any executive officer and any other person pursuant to
which the officer was selected.
There have been no events under any bankruptcy act, no criminal proceedings
and no judgments or injunctions material to the evaluation of the ability and
integrity of any executive officer during the past five years.
Listed below are the executive officers as of December 31, 1998:
PP&L RESOURCES, INC.:
Effective Date of
Election to
Name Age Position Present Position
- ------------------ --------- --------- -----------------
William F. Hecht 55 Chairman, President
and Chief Executive February 24, 1995
Officer
Frank A. Long 58 Executive Vice
President February 24, 1995
Robert G. Byram* 53 Senior Vice President-
Generation and Chief
Nuclear Officer - PP&L April 1, 1997
John R. Biggar 54 Senior Vice President
and Chief Financial
Officer November 1, 1998
Robert D. Fagan* 53 President - PP&L Global,
Inc. December 20, 1995
Robert J. Grey 48 Senior Vice President,
General Counsel and
Secretary March 1, 1996
Terry H. Hunt 50 Senior Vice President-
Strategic Planning October 1, 1998
Joseph J. McCabe 48 Vice President and
Controller August 1, 1995
* Mr. Byram and Mr. Fagan have been designated executive officers of PP&L
Resources by virtue of their respective positions at PP&L Resources
subsidiaries.
PP&L, Inc.
Effective Date of
Election to
Name Age Position Present Position
- ------------------ --------- --------- -----------------
William F. Hecht 55 Chairman, President
and Chief Executive Janaury 1, 1993
Officer
Frank A. Long 58 Executive Vice
President and Chief January 1, 1993
Operating Officer
Robert G. Byram 53 Senior Vice President-
Generation and Chief
Nuclear Officer April 1, 1997
John R. Biggar 54 Senior Vice President
and Chief Financial November 1, 1998
Officer
Robert J. Grey 48 Senior Vice President,
General Counsel and March 1, 1996
Secretary
Terry H. Hunt 50 Senior Vice President-
Strategic Planning October 1, 1998
Joseph J. McCabe 48 Vice President and
Controller August 1, 1995
Each of the above officers, with the exception of Messrs. Fagan, Grey, Hunt
and McCabe, has been employed by PP&L for more than five years as of December
31, 1998. Mr. Fagan joined PP&L Global in November 1994. Prior to that time,
he was Vice President and General Manager at Mission Energy Company. Mr. McCabe
joined PP&L in May 1994 and was previously a partner of Deloitte & Touche LLP.
Mr. Grey joined PP&L in March 1995. He had been General Counsel of Long Island
Lighting Company since 1992. Mr. Hunt joined PP&L in October 1998. He also is
the President and CEO of Penn Fuel Gas and its subsidiaries.
Prior to their election to the positions shown above, the following
executive officers held other positions within PP&L since January 1, 1994: Mr.
Byram was Senior Vice President - Nuclear; Mr. Biggar was Vice President-
Finance, Vice President - Finance and Treasurer and Senior Vice President-
Financial; Mr. Grey was Vice President, General Counsel and Secretary, and Mr.
McCabe was Controller.
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S
COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
-------------------
Additional information for this item is set forth in the sections entitled
"Quarterly Financial, Common Stock Price and Dividend Data" and "Shareowner and
Investor Information" of this report. The number of common shareowners is set
forth in the section entitled "Selected Financial and Operating Data" in Item 6.
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
1998 (a) 1997 (a) 1996 1995 (a) 1994 (a)
PP&L Resources, Inc.
- ------------------------------------------------------------------------------------------------------------------------------
Income Items -- millions
Operating revenues................................... $ 3,786 $ 3,077 $ 2,926 $ 2,752 $ 2,725
Operating income (g)................................. 827 800 810 836 719
Net Income (Loss).................................... (569) 296 329 323 216 (e)
Balance Sheet Items -- millions (b)
Property, plant and equipment, net................... 4,480 6,820 6,960 6,970 7,195
Recoverable transition costs......................... 2,819
Total assets......................................... 9,607 9,485 9,670 9,492 9,372
Long-term debt....................................... 2,984 2,735 2,832 2,859 2,941
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts
holding solely company debentures.................. 250 250
Preferred stock
With sinking fund requirements..................... 47 47 295 295 295
Without sinking fund requirements.................. 50 50 171 171 171
Common equity........................................ 1,790 2,809 2,745 2,597 2,454
Short-term debt...................................... 636 135 144 89 74
Total capital provided by investors.................. 5,757 6,026 6,187 6,011 5,936
Capital lease obligations............................ 168 171 247 220 225
Financial Ratios
Return on average common equity -- % (f)............ 13.39 10.60 12.30 12.81 8.73
Embedded cost rates (b)
Long-term debt -- %................................ 7.40 7.88 7.89 7.95 8.07
Preferred stock -- %............................... 5.87 5.85 6.09 6.09 6.07
Preferred securities (pre-tax) -- %................ 8.43 8.43
Times interest earned before income taxes (f)........ 3.69 3.39 3.55 3.56 2.73
Ratio of earnings to fixed charges -- total
enterprise basis (c)............................... 3.48 3.22 3.45 3.47 2.70
Ratio of earnings to fixed charges and
dividends on preferred stock
--total enterprise basis (c)...................... 3.12 2.85 2.90 2.91 2.27
Common Stock Data
Number of shares outstanding -- thousands
Year-end........................................... 157,412 166,248 162,665 159,403 155,482
Average............................................ 164,651 164,550 161,060 157,649 153,458
Number of shareowners (b)............................ 100,458 117,293 123,290 128,075 132,632
Earnings (loss) per share - reported................. ($3.46) $ 1.80 $ 2.05 $ 2.05 $ 1.41
Earnings (loss) per share excluding
extraordinary items (f)............................ $ 2.29 $ 1.80 $ 2.05 $ 2.05 $ 1.41
Dividends declared per share......................... $ 1.335 $ 1.67 $ 1.67 $ 1.67 $ 1.67
Book value per share (b)............................. $ 11.37 $ 16.90 $ 16.87 $ 16.29 $ 15.79
Market price per share (b)........................... $ 27.875 $ 23.938 $ 23 $ 25 $ 19
Dividend payout rate -- % (f)........................ 58 93 82 82 119
Dividend yield -- % (d).............................. 4.79 6.98 7.26 6.68 8.79
Price earnings ratio (f)............................. 12.17 13.30 11.22 12.20 13.48
(a) Earnings for 1998, 1997, 1995 and 1994 were affected by several one-time adjustments. Results for 1998
also include the impact of extraordinary items. These adjustments affected net income and certain items
under Financial Ratios and Common Stock Data. See Financial Notes 4, 10 and 11.
(b) At year-end
(c) Computed using earnings and fixed charges of PP&L Resources and its subsidiaries. Fixed charges
consist of interest on short- and long-term debt, other interest charges, interest on capital lease obligations
and the estimated interest component of other rentals. (Extraordinary items excluded from 1998 calculations.)
(d) Based on year-end market prices.
(e) Results for 1994 restated to reflect formation of the holding company.
(f) Results for 1998 based on earnings per share excluding extraordinary items.
(g) Operating income of 1997 and earlier years restated to conform to the current presentation.
Note: See Results of Operations - "Financial Indicators" for selected ratios for 1996, 1997 and 1998 based on
fully-adjusted earnings.
SELECTED FINANCIAL AND OPERATING DATA
1998 (a) 1997 (a) 1996 1995 (a) 1994 (a)
PP&L, Inc.
- ------------------------------------------------------------------------------------------------------------------------
INCOME ITEMS -- millions
Operating revenues..................................... $ 3,643 $ 3,049 $ 2,911 $ 2,752 $ 2,725
Operating income (f)................................... 801 790 809 836 719
Earnings (Loss) available to PP&L Resources, Inc. (587) 308 329 324 215 (d)
BALANCE SHEET ITEMS -- MILLIONS (b)
Property, plant and equipment, net..................... 4,331 6,820 6,960 6,970 7,195
Recoverable transition costs........................... 2,819
Total assets........................................... 8,838 9,472 9,405 9,424 9,321
Long-term debt......................................... 2,569 2,633 2,832 2,859 2,941
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts holding
solely company debentures............................ 250 250
Preferred stock
With sinking fund requirements....................... 295 295 295 295 295
Without sinking fund requirements.................... 171 171 171 171 171
Common equity.......................................... 1,730 2,612 2,617 2,528 2,404
Short-term debt........................................ 80 45 10 89 74
Total capital provided by investors.................... 5,095 6,006 5,925 5,942 5,885
Capital lease obligations 168 171 247 220 225
FINANCIAL RATIOS
Return on average common equity -- % (e)............... 13.61 11.75 12.95 13.10 8.83
Embedded cost rates (b)
Long-term debt -- %.................................. 7.56 7.91 7.89 7.95 8.07
Preferred stock -- %................................. 6.09 6.90 6.09 6.09 6.07
Preferred securities (pre-tax) -- %.................. 8.43 8.43
Times interest earned before income taxes (e).......... 4.22 3.67 3.62 3.58 2.73
Ratio of earnings to fixed charges -- total
enterprise basis (c)................................. 3.93 3.47 3.50 3.48 2.70
Ratio of earnings to fixed charges and
dividends on preferred stock
--total enterprise basis (c)........................ 3.04 2.77 2.93 2.92 2.26
REVENUE DATA
Average price per kWh billed for service area
sales - cents...................................... 7.26 7.36 7.38 7.21 7.24
SALES DATA
Customers (thousands)(b)............................... 1,257 1,247 1,236 1,226 1,213
Electric energy sales delivered -- millions of kWh
Residential.......................................... 11,156 11,434 11,849 11,300 11,444
Commercial........................................... 10,597 10,309 10,288 9,948 9,715
Industrial........................................... 10,220 10,078 10,016 9,845 9,536
Other................................................ 164 143 154 188 236
----------- -------- -------- -------- --------
Service area sales................................. 32,137 31,964 32,307 31,281 30,931
Wholesale energy sales............................. 36,706 21,454 14,341 11,424 10,848
----------- -------- -------- -------- --------
Total electric energy sales delivered.............. 68,843 53,418 46,648 42,705 41,779
----------- -------- -------- -------- --------
NUMBER OF FULL-TIME EMPLOYEES (b)........................ 6,344 6,343 6,428 6,661 7,431
(a) Earnings for 1998, 1997, 1995 and 1994 were affected by several one-time adjustments. Results for 1998 also
include the impact of extraordinary items. This affected earnings available to PP&L Resources and certain items in
Financial Ratios. See Financial Note 4.
(b) At year-end
(c) Computed using earnings and fixed charges of PP&L and its subsidiaries. Fixed charges consist of interest on short-and long-term
debt, other interest charges, interest on capital lease obligations and the estimated interest component of other rentals.
(Extraordinary items excluded from 1998 calculations.)
(d) Results for 1994 restated to reflect formation of the holding company.
(e) Results for 1998 based on earnings per share excluding extraordinary items.
(f) Operating income of 1997 and earlier years restated to conform to the current presentation.
ITEM 7. REVIEW OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PP&L
RESOURCES, INC. AND PP&L, INC.
PP&L Resources is a holding company with headquarters in Allentown, PA.
Its subsidiaries include PP&L, which provides electricity delivery service in
eastern and central Pennsylvania, sells retail electricity throughout
Pennsylvania and markets wholesale electricity in 28 states and Canada; PP&L
EnergyPlus (a subsidiary of PP&L), which sells competitively-priced energy and
energy services to newly deregulated markets; PP&L Global, an international
independent power company which invests in and develops worldwide power
projects; PP&L Spectrum, which markets energy-related services and products;
PP&L Capital Funding, which provides debt funding for PP&L Resources and its
subsidiaries other than PP&L; Penn Fuel Gas, which provides natural gas
distribution, transmission and storage services and sells propane; and H.T.
Lyons and McClure, which are mechanical contractor and engineering firms. In
February 1999, PP&L Resources acquired McCarl's Inc., another mechanical
contractor and engineering firm. Other subsidiaries may be formed by PP&L
Resources to take advantage of new business opportunities.
The financial condition and results of operations of PP&L and PP&L Global
are currently the principal factors affecting the financial condition and
results of operations of PP&L Resources. All fluctuations, unless specifically
noted, are primarily due to activities of PP&L and PP&L Global.
Terms and abbreviations appearing in the Review of the Financial Condition
and Results of Operations are explained in the glossary.
Forward-looking Information
---------------------------
Certain statements contained in this Form 10-K concerning expectations,
beliefs, plans, objectives, goals, strategies, future events or performance and
underlying assumptions and other statements which are other than statements of
historical facts, are "forward-looking statements" within the meaning of the
federal securities laws. Although PP&L Resources and PP&L believe that the
expectations reflected in these statements are reasonable, there can be no
assurance that these expectations will prove to have been correct. These
forward-looking statements involve a number of risks and uncertainties, and
actual results may differ materially from the results discussed in the forward-
looking statements. The following are among the factors that could cause actual
results to differ materially from the forward-looking statements: state and
federal regulatory developments; new state or federal legislation; national or
regional economic conditions; market demand and prices for energy and capacity;
weather variations affecting customer energy usage; competition in retail and
wholesale power markets; the need for and effect of any business or industry
restructuring; PP&L Resources' and PP&L's profitability and liquidity; new
accounting requirements or new applications of existing requirements; operating
performance of plants and other facilities; environmental conditions and
requirements; system conditions (including actual results in achieving Year 2000
compliance by PP&L Resources, its subsidiaries and others) and
operating costs; performance of new ventures; political, regulatory or economic
conditions in foreign countries where PP&L Global makes investments; foreign
exchange rates; and PP&L Resources' and PP&L's commitments and liabilities. Any
such forward-looking statements should be considered in light of such important
factors and in conjunction with PP&L Resources' and PP&L's other documents on
file with the SEC.
New factors that could cause actual results to differ materially from those
described in forward-looking statements emerge from time to time, and it is not
possible for PP&L Resources or PP&L to predict all of such factors, or the
extent to which any such factor or combination of factors may cause actual
results to differ from those contained in any forward-looking statement. Any
forward-looking statement speaks only as of the date on which such statement is
made, and neither PP&L Resources nor PP&L undertakes any obligation to update
the information contained in such statement to reflect subsequent developments
or information.
Results of Operations
---------------------
Earnings
Excluding the effects of weather and several one-time and other
adjustments, most of which are related to the transition to a competitive
electricity market in Pennsylvania, earnings per share were $2.07 in 1998, $2.03
in 1997 and $2.00 in 1996. Abnormal weather in 1998 adversely affected earnings
by 20 cents per share, the largest such effect in more than a decade.
On an as-reported basis, PP&L Resources lost $3.46 per share of common
stock in 1998, versus per share earnings of $1.80 in 1997 and $2.05 in 1996.
The following table highlights the major items that impacted earnings for each
of these years:
1998 1997 1996
------- ------- -----
Earnings per share - excluding
weather, one-time adjustments
and other impacts of restructuring $ 2.07 $ 2.03 $2.00
Weather variances on billed sales (0.20) (0.03) 0.05
One-time adjustments:
PUC restructuring charge (See Note 4) (5.56)
FERC municipalities settlement
(See Note 4) (0.19)
Windfall profits tax (See Note 10) (0.23)
SER settlement 0.11
U.K. tax rate reduction 0.06 0.06
Penn Fuel Gas acquisition costs 0.03 (0.03)
Other impacts of restructuring 0.22
------ ------ -----
Earnings per share - reported $(3.46) $ 1.80 $2.05
====== ====== =====
Earnings in 1998 were negatively impacted by $948 million of after-tax
charges related to the settlement of PP&L's restructuring case before the PUC
and another competition-related case before FERC. Several one-time adjustments
helped earnings, including a reduction in U.K. corporate income tax rates, a
change in the accounting treatment of Penn Fuel Gas acquisition costs and $30
million in proceeds from a settlement with SER regarding a contract dispute over
the power purchase costs.
The PUC restructuring adjustments also provided a favorable impact of about
22 cents per share on third and fourth quarter earnings of 1998. These
adjustments included lower depreciation on impaired generation assets, reduced
accruals for taxes other than income and a regulatory adjustment to the
accounting for unbilled revenues. These favorable impacts were partially offset
by the direct expensing of costs of computer software identified as impaired as
part of the restructuring accounting adjustments.
After eliminating the effects of these adjustments, 1998 earnings improved
by four cents per share over 1997. This earnings improvement reflects higher
weather-normalized sales in all customer classes, particularly in the third and
fourth quarters of 1998. Weather-adjusted delivery sales to customers in
central and eastern Pennsylvania were 2.9% higher in 1998 than in 1997.
Earnings were also favorably affected by increased wholesale electricity
revenues.
These earnings improvements were partially offset by higher operating
expenses incurred in 1998 over 1997. This increase reflects higher costs
associated with computer information systems, and additional payroll, consultant
services and other expenses to meet the requirements of retail competition.
Increased firm transmission costs related to the Energy Marketing Center
activities and a higher provision for uncollectible customer accounts also
increased operating expenses.
Adjusted 1997 earnings were three cents per share higher than in 1996.
This earnings improvement was attributable to higher revenues from bulk power
sales and trading activity of the Energy Marketing Center, which helped offset
the impact of the phase-down of contractual sales to JCP&L. Earnings also
benefited from refinancing activities and, excluding one-time adjustments, the
on-going operations of PP&L Global.
The reduction in contractual bulk power sales to JCP&L and other major
utilities will continue to adversely impact earnings over the next few years.
However, the Energy Marketing Center will resell this returning electric energy
and capacity on the open market, along with its other energy trading activities,
in an effort to offset the loss in revenues from declining contractual sales.
ELECTRIC ENERGY SALES
Electricity sales for 1998, 1997 and 1996 were as follows:
1998 1997 1996
------ ----------------- ------
(Millions of kWh)
Electricity delivered to
retail customers by PP&L (a) 32,137 31,964 32,307
Less: Electricity supplied
during pilot by others 1,999 65
------ ------ ------
Electricity supplied to retail
customers by PP&L 30,138 31,899 32,307
Electricity supplied to retail
customers by PP&L EnergyPlus
during the pilot 1,507
------ ------ ------
Total electricity supplied
to retail customers (a) 31,645 31,899 32,307
Wholesale Energy Sales 36,706 21,454 14,340
(a) kWh for customers residing in PP&L's service territory who are receiving
energy from PP&L or PP&L EnergyPlus will be reflected in both of these
categories.
Under Pennsylvania's competition pilot program, customers were allowed to
choose the supplier of their electricity in 1998. Pilot customers continued to
have the utility that served their territory deliver electricity from the
supplier of choice. "Electricity delivered to retail customers by PP&L" is the
amount of electricity delivered by PP&L to customers in its service territory.
"Electricity supplied to retail customers by PP&L" represents the amount of
electricity supplied to PP&L service territory customers who did not participate
in the pilot program. "Electricity supplied to retail customers by PP&L
EnergyPlus" is electricity supplied to customers within and outside PP&L service
territory who participated in the pilot program and chose PP&L EnergyPlus as
their energy supplier.
Electricity delivered to retail customers increased by 173 million kWh, or
0.5%, from the comparable period in 1997. If normal weather had been
experienced in 1998 and 1997, deliveries would have increased by 2.9%. This
increase is attributable to strong third and fourth quarter deliveries to all
customer classes. Electricity delivered decreased by 343 million kWh, or 1.1%,
in 1997 from 1996. However, if normal weather had been experienced, deliveries
in 1997 would have increased by 0.2%.
Total electricity supplied to retail customers has decreased for the past
two years. This decrease was due to milder weather in both 1998 and 1997 as
compared to 1996, as well as the impact of the competition pilot program.
The increase in wholesale energy sales, which includes sales to other
utilities and energy marketers through contracts, spot market transactions or
power pool arrangements, was primarily the result of
increased activity of the Energy Marketing Center. See "Operating Revenues:
Wholesale Energy Marketing and Trading Activities" for more information.
PP&L Resources has established growth in its generation capability, along
with expansion of its energy marketing operations, as a key element of its
business strategy. In addition to the current generating assets of PP&L and the
announced acquisitions and developments of PP&L Global discussed in Item 1
"BUSINESS-Background," PP&L Resources plans to add another 7,500 mW of
generation within the next five years.
ENERGY MARKETING AND TRADING ACTIVITIES
PP&L, through its Energy Marketing Center, purchases and sells electric
capacity and energy at the wholesale level under its FERC market-based tariff.
PP&L has entered into agreements to sell firm capacity or energy under its
market-based tariff to certain entities located inside and outside of the PJM
power pool. PP&L enters into these agreements to market available energy and
capacity from its generating assets and to profit from market price
fluctuations. If PP&L was unable to meet its obligations under these agreements
to sell firm capacity and energy, under certain circumstances it would be
required to pay damages equal to the difference between the market price to
acquire replacement capacity or energy and the contract price of the undelivered
capacity or energy. Depending on price volatility in the wholesale energy
markets, such damages could be material. Events that could affect PP&L's
ability to meet its firm capacity or energy obligations or cause significant
increases in the market price of replacement capacity and energy include the
occurrence of extreme weather conditions, unplanned generating plant outages,
transmission disruptions, non-performance by counterparties (or their
counterparties) with which it has power contracts and other factors affecting
the wholesale energy markets. Although PP&L attempts to mitigate these risks,
there can be no assurance that it will be able to fully meet its firm
obligations, that it will not be required to pay damages for failure to perform,
or that it will not experience counterparty non-performance in the future.
PP&L's efforts to mitigate risks associated with open contract positions
include maintaining generation capacity to deliver electricity to satisfy its
net firm sales contracts and purchasing firm transmission service. In addition,
the Energy Marketing Center adheres to the Company's risk management policy and
programs, including established credit policies in evaluating counterparty
credit risk. PP&L has not experienced any material losses due to non-
performance by counterparties to date.
During 1998, the Energy Marketing Center entered into commodity forward and
option contracts for the physical purchase and sale of energy; these
transactions were reflected in the financial statements under the accrual method
of accounting. As of January 1, 1999, PP&L adopted mark-to-market accounting
for energy contracts entered into for trading purposes, in accordance with EITF
98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management
Activities" and, as a result, recognized a $6.0 million after-tax credit to
energy
purchases. Under mark-to-market accounting, gains and losses that result from
changes in the market prices on contracts entered into for trading purposes will
be reflected in current earnings. For purposes of EITF 98-10, energy trading
activities refer to energy contracts entered into with the objective of
generating profits on or from exposure to shifts or changes in market prices,
and risk management activities refer to energy contracts that are designated as
and effective as hedges of non-trading activities (i.e., marketing available
capacity and energy and purchasing fuel for consumption). PP&L will continue to
use accrual accounting for energy contracts that are hedges of non-trading
activities until it adopts SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities," which it expects will occur effective January 1, 2000. SFAS
133, which expands the definition of a derivative to include most of PP&L's
commodity contracts that require physical delivery, requires that an entity
recognize all derivatives in the statement of financial position at fair value.
The accounting for changes in the fair value of a derivative will depend on the
intended use of the derivative and the resulting designation.
MARKET RISK SENSITIVE INSTRUMENTS
Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
PP&L Resources actively manages the market risk inherent in its commodity,
debt, foreign currency and equity positions. The Board of Directors of PP&L
Resources has adopted a risk management policy to manage the risk exposures
related to energy prices, interest rates and foreign currency exchange rates.
The policy establishes a Risk Management Committee comprised of certain
executive officers which oversees the risk management function. Nonetheless,
adverse changes in commodity prices, interest rates, foreign currency exchange
rates and equity prices may result in losses in earnings, cash flows and/or fair
values.
The forward-looking information presented below provides only estimates of
what may occur in the future, assuming certain adverse market conditions, due to
reliance on model assumptions. As a result, actual future results may differ
materially from those presented. These disclosures are not precise indicators
of expected future losses, but only indicators of reasonably possible losses.
Commodity Price Risk - Energy Marketing Center
----------------------------------------------
PP&L's risk management program is designed to manage the risks associated
with market fluctuations in the price of electricity, natural gas, oil and
emission allowances. The Company's risk management policy and programs include
risk identification, risk limits management with measurement and controls for
real time risk monitoring. In 1998, PP&L entered into fixed-price forward and
option contracts that required physical delivery of the commodity. In 1999,
PP&L expects to continue to use such contracts as well as other contracts, such
as futures and options that could be settled either in cash or by physical
delivery of the underlying commodity; exchange-for-physical transactions; and
over-the-counter contracts, such
as swap agreements where settlement is generally based on the difference between
a fixed and index-based price for the underlying commodity, and tolling, reverse
tolling, or other contractual arrangements.
PP&L enters into contracts to hedge the impact of market fluctuations on
its energy-related assets, liabilities, and other contractual arrangements. In
addition, as defined by EITF 98-10, PP&L enters into these contracts for trading
purposes to take advantage of market opportunities. PP&L may at times create a
net open position in its portfolio that could result in material losses if
prices do not move in the manner or direction anticipated.
PP&L uses various methodologies to simulate forward price curves in the
energy markets to estimate the size and probability of changes in market value
resulting from commodity price movements. The methodologies require several key
assumptions, including selection of confidence levels, the holding period of the
commodity positions, and the depth and applicability to future periods of
historical commodity price information. As of December 31, 1998, PP&L estimated
that a 10% decline in market prices across all geographic areas and time periods
could have adversely changed the value of PP&L's trading portfolio by
approximately $16 million. For PP&L's non-trading portfolio, a 10% decline in
market prices across all geographic areas and time periods could have positively
changed the value of PP&L's non-trading portfolio by $17 million; however, this
would be offset by the decline in the value of the underlying commodity, the
electricity generated. In addition to commodity price risk, PP&L's commodity
positions are also subject to operational and event risks including, among
others, increases in load demand and forced outages at generating plants.
Beginning in October 1998, the PJM ISO established capacity auctions to
increase price transparency and liquidity. PP&L expects to participate fully in
this capacity market and will apply its existing risk management policies and
procedures to its capacity transactions. In the future, capacity is expected to
evolve into an actively traded commodity, similar to electricity.
Commodity Price Risk - PP&L EnergyPlus
--------------------------------------
PP&L EnergyPlus was created in September 1998 as a retail marketing
subsidiary of PP&L. During 1998, PP&L EnergyPlus entered into various
arrangements, effective in 1999, with retail customers who elect to shop for an
energy provider. These contracts commit PP&L EnergyPlus to the sale of
electricity or natural gas without a specified firm volume. The longest sales
contract extends for three years. To hedge the price risk of these
transactions, PP&L EnergyPlus has entered into forward purchase contracts and
has the ability to supply the electricity through an option contract with the
Energy Marketing Center. Therefore, the potential for near-term losses
associated with PP&L EnergyPlus' commodity position is immaterial.
Interest Rate Risk
------------------
As a result of deregulation and the new competitive environment, PP&L is
exposed to increased interest rate risk. In addition, PP&L
Resources has issued debt to finance unregulated energy investments, which also
increases interest rate risk. PP&L Resources plans to manage its interest
expense risk by using financial derivative products to adjust the mix of fixed
and floating rate interest rates in its debt portfolio, adjust the duration of
its debt portfolio and lock in U.S. treasury rates in anticipation of future
financing, when appropriate. Risk limits were developed using value at risk
methodology and are designed to balance risk exposure to volatility in interest
expense and losses in the fair value of PP&L Resources' long-term fixed rate
debt due to changes in the absolute level of interest rates. As of December 31,
1998, PP&L Resources had no financial derivative instruments outstanding.
PP&L Resources is also exposed to changes in earnings and cash flows as a
result of changes in interest rates for commercial paper and other short-term
debt. At December 31, 1998, PP&L Resources' potential annual maximum exposure to
increased interest expense due to an increase in interest rates over a 30-day
period, based on a confidence level of 97.5%, was estimated at $4.5 million.
This amount has been determined by considering the impact of a hypothetical
increase in interest rates on the company's commercial paper and other short-
term debt balances as of December 31, 1998. Historically, there is a 97.5%
probability that interest rates for commercial paper and other short-term debt
will not increase more than 50 basis points over a 30-day period.
PP&L Resources is also exposed to changes in the fair value of its long-
term, fixed rate debt. At December 31, 1998, PP&L Resources estimated its
potential maximum exposure to a change in the fair value of its long-term fixed
rate debt through an adverse movement in interest rates over a one-day period,
based on a confidence level of 97.5%, at $22 million. Historically, there is a
97.5% probability that fixed interest rates will not increase more than 13 basis
points over a one-day period.
Market events that are inconsistent with historical trends could cause
actual results to exceed estimated levels.
Foreign Operations Risk
-----------------------
PP&L Global has investments in several international operations, most of
which are joint ventures. At December 31, 1998, PP&L Global had investments of
$671 million. These investments are primarily energy-related distribution
facilities. PP&L Global is exposed to foreign currency risk primarily through
investments in affiliates in Latin America and Europe.
PP&L Resources has adopted a foreign currency risk management program that
is designed to limit or hedge future cross-border cash flows for firm
transactions and commitments and to hedge economic exposures such as anticipated
dividends and projected asset sales or acquisitions when there is a high degree
of certainty that the exposure will be realized. As of December 31, 1998, PP&L
Resources did not incur any significant foreign currency-based financing.
As of December 31, 1998, PP&L Resources was party to two forward contracts
to hedge the foreign currency exchange risk associated with dividends declared
but not yet received. PP&L will exchange 16 million British pounds sterling
(BPS) for approximately $27 million on March 31, 1999, based on a contractual
exchange rate of $1.654/BPS. On January 22, 1999, PP&L Resources exchanged 359
million Chilean pesos (ChP) for $0.7 million, based on a contractual exchange
rate of $.00195/ChP. The fair value of these contracts at December 31, 1998,
was immaterial.
Nuclear Decommissioning Fund - Securities Price Risk
----------------------------------------------------
PP&L maintains trust funds, as required by the NRC, to fund certain costs
of decommissioning Susquehanna. As of December 31, 1998, these funds were
invested primarily in domestic equity securities and fixed rate, fixed income
securities and are reflected at fair value on the Consolidated Balance Sheet.
The mix of securities is designed to provide returns to be used to fund
Susquehanna's decommissioning and to compensate for inflationary increases in
decommissioning costs. However, the equity securities included in the trusts
are exposed to price fluctuation in equity markets, and the value of fixed rate,
fixed income securities are exposed to changes in interest rates. PP&L actively
monitors the investment performance and periodically reviews asset allocation in
accordance with PP&L's nuclear decommissioning trust policy statement. A
hypothetical 10% increase in interest rates and 10% decrease in equity prices
would result in a $13.7 million reduction in the fair value of the trust assets.
PP&L's restructuring settlement agreement provides for the collection of
authorized nuclear decommissioning costs through the CTC. Additionally, PP&L is
permitted to seek recovery from customers of up to 96% of any increases in these
costs. Therefore, PP&L securities price risk is expected to remain immaterial.
OPERATING REVENUES: ELECTRIC OPERATIONS
The increase (decrease) in revenues from electric operations was
attributable to the following:
1998 vs 1997 1997 VS 1996
------------- -------------
(Millions of Dollars)
Retail Electric Revenues
Weather effect $(63) $(30)
Sales volume and sales mix effect 67 (1)
Unbilled revenues 10 16
Pilot shopping credit above market price (14)
Other, net 7 9
Energy revenues (29)
Other Electric Revenues 6 4
---- ----
$ 13 $(31)
==== ====
Operating revenues for electric operations increased by $13 million in 1998
over 1997. During the third quarter of 1998, PP&L recognized increased revenues
of $23 million due to the impact on unbilled revenue resulting from a change in
the regulatory treatment of energy costs. Excluding this benefit and the
effects of milder than normal weather experienced in 1998, revenues from
electric operations would have increased by $53 million.
This revenue increase can be attributed to strong retail electric sales in
the third and fourth quarters of 1998. Excluding the effects of weather,
electricity delivered to retail customers increased for all customer classes,
2.9% in total, in 1998 over 1997.
Operating revenues decreased by $31 million in 1997 from 1996. Revenues
from service area sales in 1997 were slightly lower than 1996. The decrease was
attributable to mild weather in 1997 and a change in the regulatory treatment of
energy costs by the PUC. For 1997 and 1998 underrecovered energy costs (up to a
cap of $31.5 million annually) were not recorded as energy revenues, but as
regulatory credits, which offset "Other Operating Expenses."
Operating Revenues: Wholesale Energy Marketing and Trading Activities
The increase (decrease) in revenues from wholesale energy marketing and
trading activities was attributable to the following:
1998 VS 1997 1997 vs 1996
------------- -------------
(Millions of Dollars)
Bilateral sales $496 $183
PJM 63 17
Cost-based contracts (45) (27)
Oil & gas sales 62
Other (3) (4)
---- ----
$573 $169
==== ====
Revenues from wholesale energy marketing and trading activities increased
by $573 million in 1998 and $169 million in 1997 when compared to the prior
years. Revenues have continued to increase despite the phase-down of the
capacity and energy agreement with JCP&L and the end of the capacity and energy
agreement with Atlantic in March of 1998. This increase in revenues reflects
PP&L's continued emphasis on competing in wholesale markets. Energy purchases
have also increased to meet these increased sales. Refer to "Energy Purchases"
for more information.
During 1998, the national energy trading market experienced high prices and
increased volatility. PP&L is actively managing its portfolio to attempt to
capture the opportunities and limit its exposure to these volatile prices.
Refer to "Energy Marketing and Trading Activities" for more information.
PUC RESTRUCTURING PROCEEDING
Refer to Financial Note 3 to Financial Statements for information regarding
the PUC restructuring proceeding.
COST OF ELECTRIC FUEL
Electric fuel expense increased by $14 million in 1998 when compared to
1997. This reflects increased generation at the coal and oil/gas-fired
stations. These units, particularly Martins Creek, were needed as a result of
increased wholesale energy marketing and trading activities of the Energy
Marketing Center. This increase was partially offset by lower fuel prices for
all units, especially oil/gas-fired stations.
Fuel expense for 1997 increased by $18 million from 1996. This increase
was primarily due to PP&L's coal-fired units operating at higher output to
support increased wholesale electric market activity. The increase was slightly
offset by a decrease in the unit fuel prices for coal-fired and gas-fired
generation.
ENERGY PURCHASES
Energy purchases increased by $556 million in 1998 when compared to 1997.
The increase was primarily due to greater quantities of energy purchased to meet
the increased wholesale energy marketing and trading activities of the Energy
Marketing Center, which includes increased purchases of natural gas and capacity
for resale. The related sales are included in wholesale energy sales. The
overall market price of purchased power has also been higher during 1998
compared to 1997 due to market volatility.
Energy purchases in 1997 increased by $152 million over 1996. This
increase was primarily due to increased marketing and trading activities of the
Energy Marketing Center. Higher overall market prices of power during 1997
compared to 1996 contributed to the increase in purchased power costs.
POWER PLANT OPERATIONS
In an effort to reduce operating costs and position itself for the
competitive marketplace, PP&L in August 1998, announced the closing of its
Holtwood coal-fired generating station, effective May 1, 1999. The adjacent
hydroelectric plant will continue to operate. PP&L also announced its intention
to sell its Sunbury coal-fired generating station in 1999.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses in 1998 decreased by $47 million
from 1997. This decrease reflects the write-down of impaired generation-related
assets in connection with the restructuring adjustments recorded in June 1998.
See Note 4 to Financial Statements for additional information.
Depreciation and amortization expenses in 1997 increased by $10 million
from 1996. This increase was primarily due to depreciation on plant additions
and amortization of newly implemented computer software.
OTHER OPERATION AND MAINTENANCE EXPENSES
Other operation and maintenance expenses increased by $90 million from 1997
to 1998. This increase reflects higher costs associated with computer
information systems, and additional payroll, consultant services and other
expenses to meet the requirements of retail competition. This increase also
reflects additional software expenses, increased firm transmission costs related
to the Energy Marketing Center activities and higher provisions for
uncollectible customer accounts. Operation and maintenance costs of Penn Fuel
Gas, which was acquired in 1998, also added to the increase.
These increases were partially offset by credits recorded in connection
with the competition pilot program. The PUC has authorized PP&L to seek future
recovery of the revenue lost in the pilot program. PP&L has established a
regulatory asset for the excess of the shopping credits provided to pilot
customers over the market price of this energy. These credits totaled $14
million in 1998, and were recorded as offsets to "Other Operating Expense."
Other operation and maintenance expenses in 1997 decreased by $25 million
from 1996. Excluding the effect of underrecovered energy costs, operation and
maintenance expenses increased by $7 million in 1997. These increases were
primarily due to costs associated with the pilot program, the PUC restructuring
filing and the FERC transmission access filing.
Prior to 1997, underrecovered energy costs were accrued as energy revenues.
In 1997 and 1998, these underrecovered costs were recorded as regulatory credits
(up to a PUC-mandated cap of $31.5 million), which are reflected in the income
statement as a reduction of "Other Operating Expense." This reflects a change
in the regulatory
treatment of undercollected energy costs by the PUC. See Note 1 to Financial
Statements.
OTHER INCOME AND (DEDUCTIONS)
Other income of PP&L Resources increased by $94 million from 1997 to 1998.
This increase was primarily attributed to two one-time adjustments in 1998 and
1997. PP&L's earnings for 1998 reflect a $30 million, or 11 cents per share,
recovery from SER as a result of a settlement agreement. This settlement
agreement resolved disputes concerning the prices PP&L paid for power purchased
from SER since 1990. Conversely, 1997 earnings included a one-time $37 million,
or 23 cents per share, charge for the U.K. windfall profits tax on privatized
utilities which affected PP&L Global's SWEB investment. The tax has been paid
in full.
The accounting treatment of Penn Fuel Gas acquisition costs also
contributed to the change in other income from 1997 to 1998. The acquisition
was originally contemplated as a pooling of interests, and estimated transaction
costs of about $6 million were charged against earnings in the third quarter of
1997. The transaction was ultimately recorded under purchase accounting, and
the transaction costs were capitalized as part of the investment. Third quarter
1998 earnings were credited by $6 million due to this change.
Other income and deductions for 1997 decreased by $49 million from 1996.
This decrease was primarily due to the windfall profits tax, as well as the
initial expensing of Penn Fuel Gas acquisition costs.
FINANCING COSTS
PP&L Resources reduced its long-term financing costs during the past few
years by retiring long-term debt with the proceeds from the sale of securities
at a lower cost and by repurchasing PP&L preferred stock. Interest on long-term
debt and dividends on preferred stock decreased from $241 million in 1995 to
$228 million in 1998, for a total decrease of $13 million. Interest on short-
term debt, net of capitalized interest and AFUDC borrowed funds, increased from
$12 million in 1995 to $27 million in 1998. This increase reflects PP&L Capital
Funding's commercial paper program initiated in 1998.
INCOME TAXES
Income tax expense for 1998 increased by $22 million, or 9.3%, from 1997.
This was primarily due to an increase in pre-tax book income of $106 million.
Income tax expense for 1997 decreased by $17 million, or 6.7%, from 1996.
This was primarily due to a decrease in pre-tax book income of $54 million.
FINANCIAL CONDITION
-------------------
CAPITAL EXPENDITURE REQUIREMENTS
The schedule below shows PP&L's current capital expenditure projections for
the years 1999-2003 and actual spending for the year 1998.
PP&L'S CAPITAL EXPENDITURE REQUIREMENTS
ACTUAL -------------PROJECTED-------------
1998 1999 2000 2001 2002 2003
(Millions of Dollars)
Construction expenditures
Generating facilities $ 91 $ 97 $117 $125 $104 $ 93
Transmission and
distribution facilities 102 110 123 125 125 135
Environmental 6 13 2 2 42 71
Other 44 26 19 19 18 17
---- ---- ---- ---- ---- ----
Total Construction
Expenditures 243 246 261 271 289 316
Nuclear fuel owned and
leased 55 47 63 65 67 68
Other leased property 26 21 21 21 21 21
---- ---- ---- ---- ---- ----
Total Capital Expen-
ditures $324 $314 $345 $357 $377 $405
==== ==== ==== ==== ==== ====
Construction expenditures include AFUDC and Capitalized Interest which are
expected to be less than $9.5 million in each of the years 1999-2003.
PP&L's capital expenditure projections for the years 1999-2003 total about
$1.8 billion. Capital expenditure plans are revised from time to time to
reflect changes in conditions.
PP&L GLOBAL UNREGULATED INVESTMENTS
PP&L Global continues to pursue opportunities to develop and acquire
electric generation, transmission and distribution facilities in the United
States and abroad.
As of December 31, 1998, PP&L Global had investments of $671 million in
distribution, transmission and generation facilities in the U.K., Bolivia, Peru,
Argentina, Brazil, Spain, Portugal, Chile and El Salvador. PP&L Global's major
investments to date are SWEB, Emel and DelSur.
In 1998, PP&L Global acquired an additional 1,813,000 shares of Emel at a
cost of approximately $32 million, increasing its ownership interest to 37.5%.
In February 1998, PP&L Global and Emel acquired a 75% interest in DelSur, an
electric distribution company serving 193,000 customers in El Salvador, for
approximately $180 million. Under the purchase agreement, PP&L Global directly
acquired 37.5% of DelSur and Emel acquired the other 37.5%. Subsequently, PP&L
Global and Emel acquired an additional 925,000 shares at a cost of
appro