Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 1999, for PP&L Resources, Inc. (the parent holding company) and its principal subsidiary, PP&L, Inc. PP&L Resources operates primarily through PP&L, which provides electricity delivery in eastern and central Pennsylvania and engages in wholesale energy marketing. The company is navigating a significant transition to a competitive retail market under Pennsylvania's Customer Choice Act, which began on January 1, 1999.
Key Financial Metrics
| Metric (Millions of Dollars) | Q1 1999 | Q1 1998 |
|---|---|---|
| Total Operating Revenues | $1,067 | $880 |
| Operating Income | $262 | $236 |
| Net Income | $120 | $101 |
| Earnings Per Share (Basic & Diluted) | $0.76 | $0.60 |
| Cash Provided by Operating Activities | $122 | $174 |
| Net Cash Used in Investing Activities | ($70) | ($183) |
| Net Cash Used in Financing Activities | ($107) | $107 |
| Cash and Cash Equivalents (End of Period) | $140 | $148 |
| Total Assets | $9,729 | $9,607 |
| Long-Term Debt | $2,962 | $2,983 |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased by $187 million (21.3%) to $1,067 million. This was driven by a $52 million increase in wholesale energy and trading activities and a $51 million increase in electric operations, despite a mandated 4% rate reduction for retail customers effective January 1, 1999.
- Profitability: Net income rose 18.8% to $120 million. Earnings per share increased to $0.76 from $0.60. Excluding weather variances, EPS was $0.79 in 1999 versus $0.71 in 1998.
- Expense Management: Depreciation and amortization expenses decreased by $37 million due to asset write-downs from the 1998 restructuring. However, "Other operating expenses" increased by $54 million due to the loss of regulatory credits available in 1998 and higher costs associated with the competitive market transition.
- Cash Flow: Operating cash flow decreased by $52 million to $122 million, primarily due to lower margins on retail revenues and higher operating expenses. Investing cash outflows decreased significantly ($113 million improvement) due to reduced investment in unconsolidated affiliates by PP&L Global.
Guidance, Outlook, and Risks
Management Guidance
PP&L Resources forecasts earnings per share of $2.15 for 1999, $2.40 for 2000, and $2.60 for 2001. These forecasts assume a market clearing price for generation 12% higher than previous forecasts and that 29% of customer load will "shop" for electricity in 1999. If the company successfully securitizes up to $2.85 billion of stranded costs later in 1999, the 2000 and 2001 EPS forecasts could improve by 5 and 10 cents, respectively.
Strategic Initiatives
- Securitization: PP&L plans to issue transition bonds to securitize stranded costs, with proceeds intended to retire debt and repurchase equity.
- Acquisitions: PP&L Global has signed definitive agreements to acquire 13 Montana power plants for $1.586 billion, expected to close by the end of 1999. It also anticipates closing the acquisition of Bangor Hydro-Electric assets in May 1999.
- Stock Repurchases: The Board authorized the purchase of an additional 4 million shares of common stock in April 1999.
Risks and Contingencies
- Regulatory and Market Risk: The company faces risks related to the transition to a competitive market, including customer attrition to alternate suppliers and volatility in wholesale energy prices.
- Environmental Compliance: Significant capital expenditures may be required to meet Clean Air Act standards (NOx and SO2 reductions) and address groundwater contamination. Costs for future compliance beyond 2002 are not determinable but could be material.
- Year 2000 Compliance: The company estimates total remediation costs of approximately $14 million, with $10 million spent through March 31, 1999. While 83% of mainframe applications are compliant, risks remain regarding grid reliability and third-party supplier compliance.
Investor Verification Checklist
- Securitization Approval: Verify the status of the Pennsylvania Public Utility Commission (PUC) approval for the $2.85 billion transition bond issuance, which is critical for the improved 2000-2001 earnings guidance.
- Montana Acquisition Closing: Monitor the regulatory approvals required to close the $1.586 billion acquisition of Montana power plants by PP&L Global.
- Customer Retention Rates: Track the actual percentage of retail customers "shopping" for electricity versus the 29% forecast, as this directly impacts revenue stability.
- Environmental Capital Expenditures: Review future filings for updates on capital costs related to NOx reduction systems and groundwater remediation, which are currently estimated as "not determinable" but potentially material.
- Year 2000 Readiness: Confirm the completion of testing and implementation for mission-critical systems by the July 1, 1999, deadline to avoid operational disruptions.