PPL

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 1995, for PP&L Resources, Inc. (Resources) and its principal subsidiary, Pennsylvania Power & Light Company (PP&L). Effective April 27, 1995, PP&L Resources became the parent holding company of PP&L, marking the first filing for Resources under the Securities Exchange Act of 1934. PP&L accounts for approximately 99% of Resources' assets, revenues, and earnings. The company operates as an electric utility in Pennsylvania, with nonutility activities managed through subsidiaries like Power Markets Development Company (PMDC) and the newly formed Spectrum Energy Services Corporation.

Key Financial Metrics

Note: Figures are unaudited and presented in thousands of dollars unless otherwise noted.

Material Changes vs. Prior Period

• Revenue Decline: Operating revenues decreased by $73.0 million (5.2%) compared to the first six months of 1994. This was primarily driven by milder weather in Q1 1995 reducing system sales by $87 million, lower energy revenues, and a reduction in the Pennsylvania corporate net income tax rate.
• Net Income Reduction: Net income fell to $146.0 million from $153.1 million in the prior year period. EPS decreased from $1.00 to $0.93. Excluding weather and one-time adjustments, the decline was attributed to a 6-cent per share increase in depreciation expenses related to the Susquehanna station and new property.
• Fuel Expense Savings: Fuel expenses decreased by $46.8 million due to higher nuclear generation, lower oil-fired generation, and reduced unit fuel costs.
• Depreciation Increase: Depreciation expense rose by $17.4 million year-over-year, reflecting the modified sinking fund method for the Susquehanna station and new assets placed in service.
• One-Time Adjustments: The 1995 period included a $5.6 million (4 cents per share) income credit from a settlement regarding previously disallowed replacement power costs. The 1994 period included a $15.1 million (10 cents per share) charge for write-offs of deferred retiree benefits and disallowed replacement power costs.

Guidance, Outlook, and Risks

Rate Matters and Regulatory Outlook

PP&L filed a request in December 1994 for a $261 million (11.7%) increase in base rates. On July 31, 1995, an Administrative Law Judge (ALJ) recommended a significantly lower increase of $61.7 million. PP&L plans to file exceptions to this recommendation. A final order from the Pennsylvania Public Utility Commission (PUC) is expected in late September 1995. The outcome remains uncertain and could materially impact future earnings and dividend capacity.

Management Commentary and Strategy

Management is pursuing a strategy of cost reduction and workforce optimization, projecting a decline in full-time employees from 6,883 to 6,000 or fewer over the next three years. A voluntary severance program initiated in Q2 1995 involved 75 employees at a cost of $6.1 million, with expected annual savings of $4 million. Resources is also expanding into unregulated markets through PMDC and Spectrum Energy Services.

Risks and Contingencies

• Environmental Compliance: Potential capital expenditures for environmental compliance (acid rain, nitrogen oxides, hazardous emissions) could reach up to $1.0 billion beyond 1997. Additional operating costs are not currently determinable but could be material.
• Legal Proceedings: PP&L faces antitrust litigation from fuel oil dealers (class certification denied in April 1995) and a lawsuit from a nonutility generator alleging improper curtailment of power purchases. Superfund liabilities exist for the Heleva and Novak Landfill sites, though PP&L's share is not expected to be material.
• Competition: Regulatory developments, including FERC rules on open access to transmission lines and stranded cost recovery, may impact the utility's market position and revenue streams.

Investor Verification Checklist

• Rate Case Outcome: Verify the final PUC order regarding the base rate increase, as the ALJ recommendation ($61.7M) is significantly lower than the request ($261M).
• Depreciation Methodology: Confirm the long-term impact of the Susquehanna station depreciation method on future earnings, which is currently driving a significant expense increase.
• Environmental Capital Expenditures: Monitor the actual capital spend required for Phase II acid rain and hazardous emissions compliance, which could exceed $1 billion.
• Workforce Reduction Costs: Track the realization of the projected $4 million annual savings from the voluntary severance program against any additional restructuring costs.
• Legal Exposure: Review the status of the antitrust litigation and Superfund remediation costs to ensure no material liabilities have emerged.