PPL

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 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 PP&L (electric delivery and wholesale marketing in Pennsylvania), PP&L Global (international power investments), and various energy-related businesses. The reporting period reflects the company's transition to a competitive market environment following the Pennsylvania Public Utility Commission's (PUC) restructuring order, which mandated a 4% rate reduction for retail customers effective January 1, 1999.

Key Financial Metrics (Six Months Ended June 30, 1999)

Note: PP&L Resources reported a significant extraordinary loss of $948 million in the prior year (1998) related to restructuring, which is not present in the 1999 period.

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased by 20.5% ($352 million) compared to the six months ended June 30, 1998. This was driven by a 26.4% increase in wholesale energy marketing and trading revenues ($130 million) and growth in energy-related businesses.
• Profitability: Net income for PP&L Resources was $183 million, a stark contrast to the $793 million net loss in the same period of 1998. The 1998 loss was primarily due to a one-time extraordinary charge of $948 million related to the PUC restructuring and asset impairments.
• Operating Expenses: Total operating expenses rose to $1,645 million from $1,334 million in 1998. This increase was largely due to higher energy purchases ($174 million increase) to support increased wholesale trading volumes and unplanned outages, partially offset by lower depreciation and amortization expenses ($74 million decrease) following the 1998 asset write-downs.
• Electric Sales: Electricity delivered to retail customers increased by 6.6% (1,050 million kWh) year-over-year. However, PP&L lost some commercial and industrial customers to alternate suppliers under the new "Electric Choice" program, though this was offset by gains from its subsidiary, PP&L EnergyPlus.

Guidance, Outlook, and Risks

• Securitization and Rate Reductions: In August 1999 (post-period), PP&L issued $2.42 billion in transition bonds to securitize stranded costs. This is expected to reduce customer rates by approximately 1% and lower interest expenses by $24.8 million, with 75% of savings passed to customers.
• Acquisitions and Divestitures:
  • PP&L Global acquired a controlling interest (66.7%) in Emel (Chile) for $95 million and signed an agreement to acquire 13 Montana power plants for $1.586 billion (expected completion late 1999).
  • PP&L agreed to sell its Sunbury plant and Lady Jane Collieries assets for approximately $106 million, expected to contribute 25 cents per share to 1999 earnings.
  • SWEB (U.K. subsidiary) agreed to sell its electricity supply business for $256 million.
• Regulatory and Environmental Risks:
  • Competition: Ongoing transition to a competitive market may lead to further loss of retail customers to third-party suppliers.
  • Environmental Compliance: Potential material costs associated with Clean Air Act requirements (NOx and SO2 reductions) and groundwater remediation. Estimated capital costs for NOx reduction on three coal units could be $35 million per unit.
  • U.K. Regulation: Proposed rate reductions of 21-26% for SWEB by the U.K. regulator could impact future earnings, though the final impact is currently unpredictable.
• Year 2000 Compliance: The company reported that all mission-critical systems for power generation and delivery were "Year 2000 ready" as of July 1, 1999. Estimated total remediation costs are $14 million, with $12 million incurred through June 30, 1999.

Investor Verification Checklist

• Extraordinary Items: Verify that the 1998 net loss was driven by non-recurring restructuring charges ($948 million) and that 1999 earnings reflect normalized operations.
• Wholesale Trading Exposure: Review the volatility of wholesale energy marketing revenues, which increased significantly but are subject to market price fluctuations.
• Debt Structure: Confirm the impact of the August 1999 transition bond issuance on the debt profile and interest expense, noting the reduction in long-term debt via tender offers.
• Regulatory Settlements: Monitor the final approval and financial impact of the Montana power plant acquisition and the U.K. rate reduction proposal for SWEB.
• Environmental Liabilities: Assess the potential for material future costs related to Clean Air Act compliance and site remediation, which are currently estimated as "not determinable" but potentially material.