Shareowners of Pennsylvania Power & Light Co. voted at the company's annual meeting Wednesday (4/26) to form a holding company called PP&L Resources Inc.
PP&L Resources will be the parent company of Pennsylvania Power & Light Co. The new company also will be the parent of any other existing or future subsidiaries, including Power Markets Development Co., a subsidiary formed by the utility in March 1994 to invest in electric power projects domestically and overseas.
"The new holding company structure will allow us to operate more effectively in both a nonregulated and a regulated environment," Hecht told the 1,386 shareowners gathered at Lehigh University's Stabler Arena near Bethlehem. "This new structure demonstrates PP&L's intent to be a successful competitor in the new electric power business."
With the creation of PP&L Resources, all current holders of Pennsylvania Power & Light Co. stock will instead become holders of an equal number of shares in PP&L Resources. Hecht will be chairman, president and chief executive officer of the holding company and of PP&L. All members of PP&L's current board of directors also will serve on the PP&L Resources board. The holding company structure will become effective Thursday (4/27).
About 104 million shares were voted in favor of the holding company proposal, roughly 94 percent of those voted on that issue. Shareowners also elected five directors, overwhelmingly ratified the appointment of Price Waterhouse LLP as independent auditors, and approved minor changes in existing officer and director compensation programs.
This year marks the 75th anniversary of PP&L. "We're proud of our accomplishments at PP&L," Hecht said, "from the days of Thomas Edison to the days of nuclear power."
PP&L has been successful since 1920 because of its strong commitment to customers, and its ability to anticipate changes and take advantage of them, Hecht said. "The electric utility industry is undergoing dramatic change -- change that will alter the course of our industry as much as the incandescent light bulb, as much as nuclear fission, as much as the energy crisis of the 1970s," he said.
Noting that the Federal Energy Regulatory Commission recently proposed rules to further increase competition in the wholesale side of the electric utility business, Hecht said he expects that states also will move toward greater competition in retail markets.
"This increased competition in our business comes as no surprise," he said. "In recent years, we and others have seen these changes on the horizon." He said PP&L has taken the actions necessary to respond to the changes and take advantage of them.
PP&L has restructured, changing the organization to be more efficient and more responsive to customers, Hecht said. The "re- engineering" of PP&L is being done with input from employees at all levels. "This process is based on the conviction that front-line employees are crucial to improving work processes," he said.
Re-engineering has led to a reduction in PP&L's work force, Hecht said. "In the past decade, the number of full-time employees has dropped from a high of 8,400 to fewer than 6,900 today," he said.
"We are sensitive to the human consequences of these necessary steps," he said. "We have taken appropriate actions to treat every employee with respect and, within the capability of our resources, have provided affected employees with financial and other support."
Hecht explained PP&L's reasons for filing its first request to increase base rates in 10 years. It became increasingly clear, he said, that cost reductions and improved operations would not be enough to offset the effects of inflation, and the increasing depreciation costs for the Susquehanna nuclear plant. "We needed to deal with a number of important financial issues that clearly required increased revenues," he said. PP&L has requested a $261 million increase, an average of 11.7 percent of base rates.
If the total amount of the request is granted by the Pennsylvania Public Utility Commission, residential electric rates will have increased only by about 8 percent since 1985, Hecht noted, while the cost of living, as measured by the Consumer Price Index, has "We have earned our place as an industry leader not by sticking to what we had always done," Hecht told shareowners. "On the contrary, we have prospered because we have anticipated the challenges and opportunities that have shaped the electric utility industry."
In his overview of company operations, Frank Long, executive vice president and chief operating officer, covered some of the specifics of PP&L's efforts to take advantage of change within the industry.
"We replaced a geographic alignment of operations with a new structure based on the services we perform for customers," he said. "We reinvented our approach to physical work at our generating plants, in our substations and on our power lines."
Long said PP&L's employee involvement effort, called the
Continuous Performance Improvement Process, is "leading the way to overall business improvement through its principles of partnership, teamwork and cultural change."
A key part of preparing for competition is cost reduction, Long said. The early retirement program will cut operating costs by about $35 million per year. "In the future, we expect big cost savings from a number of ongoing re-engineering projects," he said.
Long said PP&L employees have responded to change -- and to the uncertainty it brings -- "with pride in their work, dedication to customers and the highest level of professionalism in the industry."
Long applauded PP&L employees for their improving safety performance. The number of lost-time accidents is down by nearly 50 percent, he said, and there are fewer motor vehicle accidents as compared to last year.
PP&L's Susquehanna nuclear plant recently set a world record for boiling water reactor plants with a 286-day consecutive run for both units, Long said. The run surpassed the old record by more than 30 days. "Extended safe runs by Susquehanna provide substantial energy savings for our customers," he said.
Ron Hill, senior vice president-Financial, brought shareowners up to date on the company's financial results.
"Since coming out of the economic recession in 1991," Hill said, "energy sales have grown at about 2.5 to 3.5 percent annually." The solid growth in sales, however, has not produced a corresponding growth in revenues. "Earnings per share have remained essentially flat over the last five years," Hill said, excluding the effects of one-time charges in 1994 to pay for an early retirement program and to write down the value of undeveloped coal reserves.
The major reasons earnings did not grow were increasing depreciation expenses for the Susquehanna nuclear plant and for new environmental compliance equipment, and price reductions to attract and retain large industrial customers, Hill said. Also, a portion of the increased sales comes from expanded electricity use by existing industrial customers, generally billed at lower rates.
"The company has been aggressively taking steps to reduce expenses," Hill said. PP&L has held the line on wages, benefits and operating costs, he said, and has refinanced securities. As the result of refinancing, he said, interest and preferred-stock dividend expenses were $43 million less in 1994 than they were in 1990.
The price of PP&L's common stock, like the price of utility stocks in general, declined substantially during 1994, Hill said. The two principal reasons for the decline are changes in interest rates -- utility stocks are interest-rate sensitive -- and the fact that investors are concerned about how deregulation and increased competition will affect the industry.
PP&L chose not to increase the common stock dividend for 1995, "taking into consideration the company's recent earnings performance and the relatively high percentage of earnings being paid as dividends." He said PP&L is acutely aware of the importance of dividends to investors, but decided to strike a balance between immediate investment return and the company's need to retain earnings for reinvestment in the business.
The outcome of the rate increase request will be known in September, Hill said. Depending on the decision, "the company's near- term financial health will be significantly affected." He said PP&L remains confident the rate request is prudent, and that the level of the request is justified.
Hill said the company is taking a series of steps now to ensure long-term financial health for PP&L. "Our strategies are sound," he said, "and we are confident that we will be successful in the future."
The five nominees for the company's board of directors, overwhelmingly elected by shareowners, were: Derek C. Hathaway, chairman, president and chief executive officer of Harsco Corp., Camp Hill, Pa.; Stuart Heydt, president and chief executive officer of Geisinger Health System, Danville, Pa.; Clifford L. Jones, former president of the Capital Region Economic Development Corp., Camp Hill, Pa.; Vice Admiral Robert Y. Kaufman USN (Ret.), chairman and president of Yogi Inc., Potomac, Md.; and Ruth Leventhal, former provost and dean of Penn State Harrisburg.
All except Hathaway were current members of the board. With the exception of Kaufman, who under PP&L's directors retirement policy will retire from the board as of the 1996 annual meeting, all will serve three-year terms.
Hathaway, 50, has been associated with Harsco since 1979 when Dartmouth Investments Limited, which he founded in the United Kingdom in 1966, was acquired by Harsco. He moved to Harsco's Corporate Headquarters in 1986 and became Harsco's senior vice president- Operations in 1986. He was named president and chief operating officer Hecht said the company "is very fortunate to have a director with the business experience and background that Derek Hathaway brings to our board. We believe his experience will serve us well as the electric utility industry becomes increasingly deregulated and driven by competition and the economics of the energy marketplace."