ALLENTOWN, Pa. — Saying that the company already has made significant progress in capitalizing on opportunities in the energy business, the chairman of PP&L Resources, Inc. (NYSE: PPL) told shareowners Friday (4/23) that he anticipates even greater returns as the company pursues an aggressive growth strategy.
"Our growth initiatives have led to strong financial returns that you saw over the past year as well as an expectation of solid future earnings growth," said William F. Hecht, PP&L Resources chairman, president and chief executive officer. "Our business plans call for earnings per share to grow at a compound annual rate of 7.9 percent over the next three years."
A key component of the company's growth strategy is an objective to more than double its U.S. generating capacity over the next five years, making the company one of the largest owners of generation in the country.
Speaking to 500 shareowners at PP&L Resources' annual meeting at Lehigh University's Stabler Arena, Hecht said the acquisition of new businesses, in combination with the successes of the company's wholesale and retail marketing operations, contributed to a $700 million increase in revenues for 1998 versus the previous year.
"This increase in revenues is hard evidence that PP&L Resources is growing," said Hecht. The dramatic increase in revenues in 1998 moved PP&L Resources up 66 places on the Fortune 500 list -- to 401. Hecht said revenue growth can be expected to continue as the company completes its acquisition of more than 2,700 megawatts of generating capacity in Montana and Maine. Closing on both of these acquisitions is expected later this year.
Hecht said that PP&L Resources is achieving substantial success in three basic business lines:
- Delivery — or distribution — of energy, both electricity and natural gas to homes and businesses in Pennsylvania, as well as in the United Kingdom and Latin America.
- Generation of electricity through the operation of high-performing power plants in key domestic and overseas markets.
- Marketing of energy to other utilities and traders at the wholesale level, as well as to end users at the retail level.
As a result of the expansion of the company's delivery business, Hecht said, PP&L Resources now is involved in the daily lives of more than 3.3 million customers around the world. He said the company is continuing to explore opportunities to further expand its delivery business — both domestically and internationally.
The company already has announced plans to increase its generating capacity by more than 50 percent to 12,000 megawatts. But that's just the beginning, Hecht said.
"Over the next five years, it is our intention to increase our U.S. generation holdings by another 7,500 megawatts so that PP&L Resources has in the neighborhood of 20,000 megawatts of domestic capacity," said Hecht. "This expansion is positioning us to be an even lower-cost, more profitable generation supplier as new markets open up around the country."
The company's marketing efforts also have been very successful, Hecht said. "Our sales in the wholesale market increased by 70 percent in 1998, and we now are buying and selling electricity, natural gas and oil in 28 states as well as in Canada," said Hecht. On the retail side, he said, the company will actually increase the amount of electricity it sells to end-use customers in 1999 compared to what it sold to customers in 1998 in the regulated market.
John R. Biggar, PP&L Resources' senior vice president and chief financial officer, said during the meeting that the company's total return on common stock improved dramatically in 1998, reaching nearly 23 percent, almost double the 1997 rate. "We outperformed the index of electric companies in the Standard & Poors 500 and the Edison Electric Institute index of investor-owned electric utilities," said Biggar.
Biggar also provided details on the company's earnings forecast.
"Based on assumptions of increased wholesale prices for energy and increased load growth, higher affiliated company earnings and higher margins on sales by PP&L EnergyPlus, as well as fewer shares of common stock outstanding, we are forecasting earnings per share of $2.15 this year, $2.40 for 2000 and $2.60 for 2001," said Biggar. The company's 1998 adjusted earnings were $2.07 per share.
"We also expect to see strong growth in PP&L Resources' free cash flow over the next three years," Biggar said.
In developing its financial forecast, the company made a number of assumptions about the business conditions that it expects to encounter in the next three years, Biggar said. "We have made realistic assumptions that avoid being either too aggressive or too conservative," he said, "and our experience so far in 1999 indicates that our assumptions are on target."
He said that the company's current earnings forecast does not include the effects of its planned issuance of securitization bonds for up to $2.85 billion of transition costs. Biggar said the company plans to securitize its transition costs early in the third quarter of 1999, subject to state Public Utility Commission approval. "The securitization of PP&L's transition costs is expected to improve the 2000 earnings forecast by 5 cents per share to $2.45, and the 2001 forecast by 10 cents per share to $2.70," said Biggar.
Biggar noted that issuing these bonds also is good news for PP&L, Inc., customers, whose rates may decrease by an average of about 1 percent over the 10 years the bonds will be outstanding.
He said a portion of the cash derived from securitization will be made available to PP&L Resources for investment in projects or for the repurchase of common stock on the open market. "We have already repurchased 3 million shares of common stock and have announced plans to acquire an additional 4 million shares in open market transactions," said Biggar.
Shareowners also heard from Frank Long, the company's executive vice president and chief operating officer, who provided additional information on the company's successes in both the retail and wholesale energy market and the continued excellent operation of PP&L, Inc.'s power plants.
During the meeting, shareowners ratified the appointment of PricewaterhouseCoopers LLP as the company's independent auditors and approved amendments to incentive compensation plans for company officers and key employees.
Shareowners also elected three directors to three-year terms: Frederick M. Bernthal, president of Universities Research Association, Washington, D.C.; William J. Flood, secretary-treasurer of Highway Equipment & Supply Co., Drums, Pa.; and Long.
About 76 percent of the approximately 158 million outstanding common shares were voted at the meeting.
Directors continuing in office are (term expiration in parentheses): E. Allen Deaver, former executive vice president of Armstrong World Industries, Inc., Lancaster, Pa. (2000); Elmer D. Gates, vice chairman of Fuller Company, Bethlehem, Pa. (2000); Hecht (2001); Stuart Heydt, chief executive officer, Penn State Geisinger Health System, Harrisburg, Pa. (2001); Norman Robertson, former senior vice president and chief economist of Mellon Bank, Pittsburgh, Pa. (2000); and Marilyn Ware, chairman of American Water Works Company, Inc., Voorhees, N.J. (2001).
The above directors also serve as directors of PP&L, Inc., the company's largest subsidiary. Holders of PP&L, Inc., preferred stock approved changes to that company's articles of incorporation to improve financial flexibility related to the authorization of stock, indebtedness and payment of dividends.