PPL

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 1999, for PP&L Resources, Inc. (the parent holding company) and its principal subsidiary, PP&L, Inc. (the regulated utility). PP&L Resources operates through two primary segments: PP&L, which provides electricity delivery in Pennsylvania and engages in wholesale energy marketing, and PP&L Global, which invests in and develops power projects internationally (notably in the U.K., Chile, and El Salvador) and domestically. The filing reflects significant restructuring activities, including the securitization of stranded costs and a proposed corporate realignment to separate generation and marketing functions.

Key Financial Metrics (Nine Months Ended Sept 30, 1999)

Note: 1998 results included a $948 million extraordinary charge related to PUC restructuring and FERC settlements, resulting in a net loss for the prior period.

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 20% to $3,457 million (from $2,884 million in 1998). This was driven by a 14.6% increase in wholesale energy marketing and trading revenues and a 13.2% increase in electric revenues, despite a 4% rate reduction for delivery customers effective January 1, 1999.
• Profitability Turnaround: Net income improved from a $658 million loss in the first nine months of 1998 to a $286 million profit in 1999. The 1998 loss was heavily impacted by a $948 million extraordinary charge. Excluding one-time adjustments, earnings per share increased by $0.25 year-over-year.
• Debt Restructuring: In August 1999, PP&L issued $2.42 billion in transition bonds to securitize stranded costs. Proceeds were used to repurchase $1.467 billion of first mortgage bonds (resulting in a $59 million extraordinary charge) and to fund a $417 million share repurchase by PP&L Resources.
• Consolidation Changes: PP&L Global consolidated the financial results of Emel (Chile) and EC (El Salvador) in the third quarter of 1999 following the acquisition of majority control, adding significant international revenue and expenses.

Guidance, Outlook, and Risks

• Corporate Realignment: Management approved a plan to restructure the company by transferring generation assets to a new subsidiary and separating wholesale marketing functions. This is expected to be completed in mid-2000, subject to regulatory approval.
• Acquisitions: PP&L Global signed agreements to acquire 13 Montana power plants for $1.546 billion, expected to close in Q1 2000. Additionally, the sale of the Sunbury plant and coal processing assets is expected to contribute approximately 27 cents per share to 1999 earnings in the fourth quarter.
• Regulatory Risks:
  • U.K. Rates: The U.K. regulator proposed a 20-25% rate reduction for PP&L Global's Western Power Distribution (WPD) subsidiary. Management is evaluating potential material write-downs of the investment.
  • Environmental Compliance: Compliance with Clean Air Act NOx and particulate standards could require approximately $120 million in capital expenditures by 2003. Future costs for environmental remediation and water treatment are not determinable but could be material.
• Year 2000 Compliance: The company reports being over 98% complete with Year 2000 remediation, with mission-critical systems deemed "ready." Estimated total remediation costs are $13.5 million, with $12.3 million incurred through September 30, 1999.
• Market Risk: The company utilizes interest rate swaps and treasury locks to hedge debt issuance risks. As of September 30, 1999, the estimated fair value of forward interest rate swaps was a gain of $22.5 million.

Investor Verification Checklist

• Extraordinary Items: Verify the impact of the $59 million debt extinguishment charge and the $78 million deferred tax credit released due to securitization on current earnings.
• U.K. Regulatory Impact: Monitor the final rate reduction decision for WPD in the U.K., as a material write-down of the investment is possible.
• Montana Acquisition: Confirm the closing of the $1.546 billion Montana power plant acquisition and the associated financing terms (65% project credit, non-recourse).
• Environmental Liabilities: Review future capital requirements for NOx reduction systems and potential natural resource damage claims under Superfund and state statutes.
• Corporate Realignment: Track regulatory approvals (PUC, FERC, NRC) required to finalize the separation of generation and marketing assets.