PLA-5491, Annual Financial Report

Annual Financial Report

ML022070358
Person / Time
Site:	Susquehanna
Issue date:	07/16/2002
From:	Shriver B Susquehanna
To:	Document Control Desk, Office of Nuclear Reactor Regulation
References
PLA-5491
Download: ML022070358 (135)

Text

I.,ONTINENTAL I.,OOPERATIVE ERVIC-E-1, maw

CONTENTS 4 & 5 About Continental Cooperative Services 6 & 7 A Message From the Executive Committee and President & CEO 8-11 The Value of Fuel Diversity t & 13 Meeting the Challenges 14 Continental Cooperative Services Fact Sheet 15 Continental Cooperative Services Board of Directors 6 & 17 Soyland Power Cooperative, Inc. Board of Directors 18 Allegheny Electric Cooperative, Inc.

Board of Directors 19 Financial Section Table of Contents 20-40 2001 Allegheny Electric Cooperative, Inc.

Financial Review 42-58 2001 Soyland Power Cooperative, Inc.

Financial Review 14

About Continental Cooperative Services Electricity -

powering our lives each day with heat, light, sound and motion. At Continental Cooperative Services (CCS), the delivery of reli able, affordable and safe power is mis sion one. A dedicated and experi enced team of board members, man agement and employees make certain that wholesale electricity is provided round-the-clock to 26 affiliated elec tric distribution cooperatives in Illinois, New Jersey and Pennsylvania.

CCS-affiliated cooperatives, in turn, provide electric generation to nearly one million ultimate consumers.

CCS, based in Harrisburg, Pa.,

was created in March 2000, the result of a strategic alliance between Allegheny Electric Cooperative, Inc.

(Allegheny), the wholesale power supplier to electric cooperatives in Pennsylvania and New Jersey, and Illinois' Soyland Power Cooperative, Inc. (Soyland). CCS marks the first time two geographically non-contigu ous generation and transmission cooperatives have joined forces in this fashion.

Cooperative electric systems com prising the CCS network are a critical part of local rural infrastructure, pow ering more than 300,000 homes, farms, businesses and industries. In Illinois, the 12 electric distribution cooperatives affiliated with CCS serve nearly one-third of the state's land area across 46 counties. The 13 CCS affiliated cooperatives in Pennsylvania own approximately 12 percent of the state's electric distribution lines, span ning one-third of the Commonwealth in 41 counties. New Jersey's lone electric cooperative maintains roughly 1 percent of the Garden State's total miles of line.

Soyland Power Cooperative, Inc. Territory I1.

2.

3.

4.

5.

6.

7.

Adams Electric Cooperative Coles-Moultrie Electric Cooperative Eastern Illini Electric Cooperative Farmers Mutual Electric Cooperative Illinois Rural Electric Cooperative McDonough Power Cooperative M.J.M. Electric Cooperative, Inc.

8.

Menard Electric Cooperative

9.

Rural Electric Convenience Cooperative Company

10.

Shelby Electric Cooperative

11.

Spoon River Electric Cooperative, Inc.

12.

Western Illinois Electrical Cooperative

(

Allegheny Electric Cooperative, Inc. Territory

1.

Adams Electric Cooperative, Inc.

2.

Bedford Rural Electric Cooperative, Inc.

3.

Central Electric Cooperative, Inc.

4.

Claverack Rural Electric Cooperative, Inc.

5.

New Enterprise Rural Electric Cooperative, Inc.

10.

11.

6.

Northwestern Rural Electric Cooperative Association, Inc.

7.

REA Energy Cooperative, Inc.

8.

Somerset Rural Electric Cooperative, Inc.

9.

Sullivan County Rural Electric Cooperative, Inc.

12.

13.

14.

Sussex Rural Electric Cooperative, Inc.

Tri-County Rural Electric Cooperative, Inc.

United Electric Cooperative, Inc.

Valley Rural Electric Cooperative, Inc.

Warren Electric Cooperative, Inc.

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A Message From the Executive Committee and President & CEO n unity, strength. That phrase, which sums up the core of cooperative business practice, took on extra meaning for Continental Cooperative Services (CCS) following the tragic events of September 11, 2001.

One of our affiliated electric distribution cooperatives, Somerset Rural Electric Cooperative (REC),

based in Somerset, Pa., was directly affected by the coordinated terrorist strikes which took place that morn ing. United Airlines Flight 93 -

a hijacked Boeing 757 carrying 45 heroic passengers and crew slammed into a reclaimed strip mine within the cooperative's service ter ritory. The disaster and resulting fireball melted a three-phase power line and left 14 cooperative con sumers -

eight homes, four unoc-cupied cabins and two businesses without power for much of the day.

Prevented from immediately repairing the damage, Somerset REC staff contacted neighboring private power company GPU Energy. Through quick and gener ous assistance provided by the company, Somerset REC was able to tap off a GPU line to provide service to the eight residences by early evening.

This cooperation between two very different types of electric utilities was just one small example of how the American people came together after September 11 and became a Re-United States once again.

In his historic September 20 address to Congress outlining the war on terrorism, President Bush noted that "we are in a fight for our principles and our first respon sibility is to live by them." For electric cooperatives like CCS, living by our principles means working together and finding ways to more efficiently accomplish our primary mission -

providing reli able, competitively priced electricity that maximizes value to those we serve.

The dynamics of a competitive electricity marketplace, where long-term power contracts are a thing of the past, favor larger sup pliers that can generate and pur chase electricity at the lowest possi ble price. Based on its first full year of operations, CCS has shown that two generation and transmission cooperatives 1,000 miles apart Allegheny Electric Cooperative, Inc.

(Allegheny), serving Pennsylvania

and New Jersey, and Soyland Power Cooperative, Inc. (Soyland),

covering central Illinois -

can effectively channel geographic and product diversities into negotiating leverage. The bottom line -

lower prices for our electric cooperative consumers than would otherwise be possible.

Building off this success, the CCS Board of Directors enters 2002 hard at work examining power supply possibilities detailed in an Integrated Resource Plan (IRP). The IRP provides a techni cal and economic road map to help the board answer key questions about CCS' power supply future.

Through the IRP process, the board, management and staff of CCS restate their belief in this alliance, in its ability to grow and in its ability to prosper within today's vastly restructured energy industry. By living the principle of "cooperation among cooperatives" and marching forward together, CCS provides a way for electric cooperatives to ensure a bright future for consumers everywhere.

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The CCS Executive Committee and President & CEO: Standing, from left to right Alston Teeter, at-large member; David Bergland, vice chairman; Kathryn Cooper-Winters, treasurer; Frank Betley, president & CEO; and Bradley Ludwig, at-large member Seated, from left to right -

David Cowan, chairman; and James Coleman, secretary.

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The Value of Fuel Diversity A

diverse mix of self-owned generation coupled with Ademand-side management capabilities, provides the corner stone for Continental Cooperative Services to fulfill its core mission achieving stable and affordable wholesale power rates for affiliated electric distribution cooperatives in Illinois, New Jersey and Pennsylvania.

"Fuel diversity" affords CCS better balance and increased lever age in a competitive energy market easily shaped by national and glob al events. Crude oil prices, natural gas supplies, drought, even market jitters over regional power crises all affect how electricity markets oper ate and significantly impact power prices.

During 2001, CCS' diversified generation portfolio played a key role in helping us negotiate a favorable new wholesale power supply arrangement with Williams Energy Marketing & Trading (WEM&T) for the supplemental energy needs of CCS load in por tions of Pennsylvania and New Jersey. VWEM&T is a division of the Fortune 500 Williams Company.

Under the contract with WEM&T, which runs through March 31, 2006, WEM&T will receive the output of CCS-member Allegheny's generating assets in Pennsylvania and New Jersey and provide electric cooperative energy requirements (approximately 450 megawatts) within sections of the CCS system. By operating in sever al areas of the U.S. and with approximately 9,000 megawatts of generation under its control, WEM&T will be able to optimize use of CCS-member Allegheny's power resources on a broader scale, then share captured savings with CCS.

Diversified generation holdings should also provide benefits for CCS as we move forward on a Request for Proposals to secure the energy and capacity needs of CCS-mcmber Allegheny in western Pennsylvania starting on December 1, 2002, and the Illinois needs of CCS-membcr Soyland beginning January 1, 2003.

New power supply contracts for the two areas are to be finalized in 2002.

CCS' generation and demand side management mix includes:

Alsey Generating Station A five-unit, natural gas-fired peaking complex located in Scott County, Ill., near the village of Alsey. Owned by CCS-member Soyland and operated by CCS staff, it entered service in July 1999 and has a nameplate peak rating capacity of 125 megawatts.

Alsey Station operates in con junction with a private power com pany when it is more cost effective to run the combustion turbines than purchase power from other providers. It is designed to run during periods of peak electric use roughly 600 "called upon" hours per year on average, but no

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Alsey Generating Station.

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Pearl Station.

more than 937 hours0.0108 days <br />0.26 hours <br />0.00155 weeks <br />3.565285e-4 months <br />. The hourly figures are based on U.S.

Environmental Protection Agency limitations which state that no more than 250 tons of nitrogen oxide can be emitted annually.

Pearl Station A 22-megawatt, coal-fired baseload power plant located in Pike County, Ill., along the Illinois River near the town of Pearl. It first went on-line in 1967.

In fiscal 2001, Pearl produced a plant record 175 million kilowatt hours of electricity, providing 12.1 percent of the energy supplied to the 12 CCS affiliated electric distri bution cooperatives in Illinois.

Niagara Power Project operated by the New York Power Authority.

New York Power Authority Since 1966, CCS-member Allegheny has pur chased power gener ated by federal hydroelectric proj ects located along the Niagara and St.

Lawrence rivers in upstate New York.

Both are operated by the New York Power Authority (NYPA).

Pennsylvania receives an allocation of 47.9 megawatts (MW) from the Niagara Power Project and 20.3 MW from the St.

Lawrence Power Project. Out of this, CCS-member Allegheny and its member electric cooperatives in the Commonwealth receive nearly 42 MW (41 MW from Niagara and 1 MW from St. Lawrence). An additional 2 MW from both proj ects is allocated to Sussex REC, a CCS affiliated electric distribution cooperative.

CCS-member Allegheny han dles all contract negotiations, billing and transmission arrange ments for Pennsylvania utilities that receive NYPA power in its role as state NYPA Bargaining Agent.

Raystown Hydroelectric Project The Raystown Hydroelectric Project, William F. Matson Generating Station, is a two-unit, 21-megawatt, run-of-river hydropower facility located at Raystown Lake and Dam in Huntingdon County, Pa. On aver age, the plant generates approxi mately 3.5 percent of the energy requirements of the 14 CCS affiliat ed electric distribution cooperatives in Pennsylvania and New Jersey.

Due to the effects of record drought impacting the Mid-Atlantic region, Raystown in fiscal 2001 provided approximately 59.4 mil lion kilowatt-hours at delivery,

27 percent below projections based on historic average water flow.

Plant availability of 97.5 percent was recorded, significantly above the small hydro industry average.

CCS staff operates the hydro project in close cooperation with the Baltimore District of the U.S. Army Corps of Engineers. The Corps controls water releases from Raystown, the largest man-made lake in Pennsylvania.

Susquehanna Steam Electric Station CCS-member Allegheny owns 10 per cent of the Susquehanna Steam Electric Station (SSES), a 2,200 megawatt, two-unit nuclear power plant located in Luzerne County, Pa. PPL Susquehanna, a division of Allentown, Pa.-based PPL Corporation, owns the remaining 90 percent Susqut and operates the boiling water reac tor facility.

In fiscal 2001, the 10 percent share of SSES provided 1.75 billion kilowatt-hours of electricity at deliv cry, accounting for 69 percent of Pennsylvania and New Jersey elec-Raystown Hydroelectric Project, William F. Matson Generating Station.

tric cooperative power supply needs. The capacity factor of SSES Unit 1 was 94.3 percent; Unit 2 was 99.5 percent. This works out to an average annual composite capacity factor for the facility of 96.9 percent.

Also during the year, SSES Unit 2 returned to service following a sched uled refueling and maintenance outage. During the outage, workers replaced about 35 percent of the unit's uranium fuel and completed about 2,300 separate maintenance jobs. Both Unit 1 and Unit 2 run on a 24-month refueling cycle.

,hanna Steam Electric Station.

Load Management In 1986, CCS-member Allegheny, along with CCS-affiliated distribution cooperatives in Pennsylvania and New Jersey, launched the Coordinated Load Management System (CLMS) to reduce demand peaks at coopera tive substations.

By shifting electricity use of residential water heaters, electric thermal storage units, dual fuel home heating systems and other special appliances from peak demand periods to times of lesser demand, CLMS improves system efficiency, cuts costly demand charges cooperatives must pay for purchased power and reduces the need for new generating capacity.

CLMS has also been used during summer peaks to reduce CCS capacity obligations under proce dures established by the PJM Interconnection.

In 2001, CLMS reduced coop erative purchased power costs by

$7.4 million, bringing total power cost savings achieved since December 1986 to more than $58 million. Currently, 182 substations are equipped for CLMS and 44,235 load control receivers have been installed on appliances, most ly water heaters, in the homes of volunteer cooperative consumers.

CCS-member Soyland employs a System Control and Data Acquisition (SCADA) system to monitor load levels, transmission Coordinated Load Management System.

facilities and generating plant per formance. Through SCADA, real time decisions about generation or purchased power requirements and consumer load reductions can be made based on forecasts, schedules and actual system performance.

This decision-making capability is key in today's market-based elec tric utility industry.

As part of an energy supply agreement with a local private power company, remote terminal units have been installed on all 50 of the cooperative's interconnec tion points with another private power company. These units, con nected through the SCADA sys tem, allow CCS to furnish real time load signals from one control area to another as a way to help minimize energy imbalance costs incurred under transmission tariffs.

Meeting the Challenge of Electric Competition Through hard work, CCS and its 26 affiliated electric distribution cooperatives in Illinois, New Jersey and Pennsylvania have proven that "competition" and "cooperation" are not mutually exclusive terms.

Even in a deregulated energy envi ronment, electric cooperatives are more than capable of accomplish ing their primary mission: provid ing rural consumers with a reliable source of power at an attractive price.

Illinois, New Jersey and Pennsylvania are three states at the forefront of electric utility competi tion, each with restructur ing laws designed to protect con sumers from the marketplace melt down that occurred in California in early 2001. Among the safeguards:

" Extended and orderly transitions to a fully mature deregulated electric generation market -

a "grace period" that gives regula tors and the marketplace time to correct and adjust to any prob lems that crop up.

"* Rate cuts or rate freezes that result in consumer savings even if no one ever shops for power.

"* More power supply resources than are required and sufficient reserves to maintain reliability into the future.

• No requirement that utilities sell off generation assets or prohibi tion against entering into long term power contracts as a way to lock in low electric generation prices.

In Pennsylvania -

considered the nation's leader in creating a vibrant, robust competitive elec tricity market -

551,106 private power company customers (rough ly 10 percent of the total) were buying kilo watt-hours from alter nate electric generation sup pliers (EGSs) as of December 31, 2001, according to

power shopping" statistics Sreleased by the state Office of Consumer Advocate. The tally was nearly identical to numbers that opened the year, but represented nearly a 25 percent drop-off from the year's shopping peak of 787,846 recorded on April 1.

Outside of two largely urban private power company service areas, very few Keystone State cus tomers were changing suppliers.

The chief reason -

significantly higher wholesale power prices dur ing the year had forced most EGSs into hibernation, leaving con sumers with no lower-cost genera tion options to choose from.

Of Pennsylvania consumers participating in choice on December 31, 530,469 were resi dential, 20,045 were commercial and 592 industrial. Overall, EGS served load stood at nearly 2,323 megawatts (about 9 percent of electricity used in the state).

All electric cooperative con sumer-members in the Commonwealth -

like their pri vate power company counterparts are eligible to shop for power.

However, there has been only lim ited marketing by EGSs in coopcr ative service territories to date.

This EGS reluctance does not come as a surprise. The same economies of scale that kept pri vate power companies from run ning electric lines into the country side more than 60 years ago (which led to the formation of electric cooperatives) are alive and well today. For starters, cooperative service territories remain sparsely populated and boast a high per centage of residential consumers.

Since EGSs are in business to make money, the lack of large commer cial and industrial (C&I) cus tomers in rural areas results in lower profit potential compared to other market opportunities.

Still, the defining reason why EGSs have not targeted Pennsylvania's electric cooperative consumers remains a very competi tive generation price -

one that makes it extremely difficult for EGSs to offer a better deal. This favorable pricing has been achieved by meeting the competitive chal lenge head on and doing the things needed to gear up for customer choice -

organizational restructur ing, budget cutting and forming alliances, all the while maintaining ownership of its generating assets.

CCS affiliated electric distribu tion cooperatives in Illinois have also taken an aggressive approach

to addressing the uncertainties of a competitive marketplace, notably by adding the Alsey Generating Station, a five-unit, 125-megawatt natural gas-fired peaking complex located in Scott County, I11.

Peaking capacity from Alsey has allowed CCS affiliated distribution cooperatives in Illinois to line up significantly lower bids for pur chased power.

Businesses and industries served by private power companies in Illinois have already been phased in for retail choice; residential cus tomers will get a chance to shop on May 1, 2002. As 2001 closed, 21,841 C&I customers in the Prairie State (4 percent of those eligible), comprising 31 percent of total C&I load, had switched suppliers.

Illinois electric cooperatives can "opt out" of competition as long as they do not pursue customers of other utilities. Four of the 12 CCS affiliated electric distribution co operatives in the state have elected to open up their systems, at least on a limited basis, although no cooperative consumers have yet elected to switch.

In New Jersey, all 3.5 million customers of the state's four pri vate power companies were offi cially given the ability to choose an alternate electric generation supplier on November 14, 1999.

However, less than 9,000 of them accounting for 1.3 percent of state electricity use -

were buying power competitively at year's end, a fraction of the activity seen in 2000.

To help jumpstart retail compe-tition in New Jersey, the state Board of Public Utilities in December approved a private power company sponsored plan to auction off a year's worth of wholesale power roughly 17,000-18,000 megawatts via Internet beginning on February 4, 2002. As outlined, alternate generation suppliers offer ing the lowest prices in the joint online bidding will win the right to sell power to the state's regulated utilities for a year, beginning on August 1, 2002.

Just as in Illinois, the Garden State's lone electric cooperative Sussex REC -

is exempt from competition unless it markets out side of its service territory.

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Continental Cooperative Services Fact Sheet Incorporated: March 2000 Members: Allegheny Electric Cooperative, Inc. and Soyland Power Cooperative, Inc.

States Served: Illinois, New Jersey and Pennsylvania Total Meters Served By Affiliated Electric Distribution Cooperatives:

Nearly 300,000, representing approximately one million elec tric cooperative consumers Governance: 26-member board of directors (one director represent ing each affiliated electric distri bution cooperative)

NERC Operating Regions:

• Mid-Atlantic Area Council (MAAC)

• Mid-America Interconnected Network (MAIN)

• East Central Area Reliability Coordination Agreement (ECAR)

Total 2001 System Peak Load: 892 megawatts Generation and Transmission Facilities 417 megawatts of generation

• 263 megawatts of nuclear, coal and hydro baseload generation

- 220 megawatts nuclear base load (Susquehanna Steam Electric Station, Luzerne County, Berwick, Pa.)

- 22 megawatts coal-fired baseload (Pearl Station, Pike County, Pearl, Ill.)

- 21 megawatts hydro base load (Raystown Hydroelectric Project at Raystown Lake, Huntingdon County, Pa.)

• 154 megawatts of oil-and gas-fired peaking units 125-megawatt Alsey Generating Station, a gas fired peaking facility in Scott County, Alsey, Ill. megawatt oil-fired peaker at Pearl, Ill.

- Nine-megawatt diesel peaker at Pittsfield, Ill.

682 miles of transmission lines

• 600 miles of transmission lines in Illinois 0 42 miles of high-voltage trans mission lines in Pennsylvania

• 40 miles of other transmis sion lines in Pennsylvania operated at various voltages in conjunction with member cooperatives Other facilities 0 100 substations in Illinois

• 199 power delivery points in Pennsylvania, one in New Jersey 0

Load management system with maximum peak reduc tion capabilities of 90 megawatts Affiliated Electric Distribution Cooperatives Illinois:

Adams Electric Cooperative, Camp Point, Ill.

Coles-Moultric Electric Cooperative, Mattoon, I11.

Eastern Illini Electric Cooperative, Paxton, I11.

Farmers Mutual Electric Company, Genesco, I11.

Illinois Rural Electric Cooperative, Winchester, Ill.

McDonough Power Cooperative, Macomb, I11.

M.J.M. Electric Cooperative, Inc., Carlinville, Ill.

Menard Electric Cooperative, Petersburg, Ill.

Rural Electric Convenience Cooperative Company, Auburn, Ill.

Shelby Electric Cooperative, Shelbyville, Ill.

Spoon River Electric Cooperative, Inc., Canton, Ill.

Western Illinois Electrical Cooperative, Carthage, Ill.

New Jersey:

Sussex Rural Electric Cooperative, Inc., Sussex, N.J.

Pennsylvania:

Adams Electric Cooperative, Inc.,

Gettysburg, Pa.

Bedford Rural Electric Cooperative, Inc., Bedford, Pa.

Central Electric Cooperative, Inc., Parker, Pa.

Claverack Rural Electric Cooperative, Inc., Wysox, Pa.

New Enterprise Rural Electric Cooperative, Inc., New Enterprise, Pa.

Northwestern Rural Electric Cooperative Association, Inc.,

Cambridge Springs, Pa.

REA Energy Cooperative, Inc.,

Indiana, Pa.

Somerset Rural Electric Cooperative, Inc.,

Somerset, Pa.

Sullivan County Rural Electric Cooperative, Inc.,

Forksville, Pa.

Tri-County Rural Electric Cooperative, Inc.,

Mansfield, Pa.

United Electric Cooperative, Inc., DuBois, Pa.

Valley Rural Electric Cooperative, Inc., Huntingdon, Pa.

Warren Electric Cooperative, Inc., Youngsville, Pa.

CCS Board c David Cowan Chairman Adams Electric Cooperative, Inc.

Gettysburg, Pa.

David Bergland Vice Chairman Spoon River Electric Cooperative, Inc.

Canton, Ill.

James Coleman Secretary Shelby Electric Cooperative Shelbyville, Ill.

Kathryn Cooper-Winters Treasurer Northwestern Rural Electric Cooperative Association Cambridge Springs, Pa.

Bradley Ludwig At-Large Eastern Illini Electric Cooperative Paxton, I1l.

Alston Teeter At-Large Tri-County Rural Electric Cooperative, Inc.

Mansfield, Pa.

Robert Willis Adams Electric Cooperative Camp Point, Ill.

Wayne Hillegass Bedford Rural Electric Cooperative, Inc.

Bedford, Pa.

George (Bud) Francisco Jr.

Central Electric Cooperative, Inc.

Parker, Pa.

John McNamara Claverack Rural Electric Cooperative, Inc.

Wysox, Pa.

Mark Degler Coles-Moultrie Electric Cooperative Mattoon, Ill.

Murray Madsen Farmers Mutual Electric Company Geneseo, Ill.

Merton Pond Illinois Rural Electric Cooperative Winchester, Ill.

William Pollock McDonough Power Cooperative Macomb, Ill.

Dennis Keiser M.J.M. Electric Cooperative, Inc.

Carlinville, I11.

Michael Carls Menard Electric Cooperative Petersburg, Ill.

John Ritchey New Enterprise Rural Electric Cooperative, Inc.

New Enterprise, Pa.

Sam Eckenrod REA Energy Cooperative, Inc.

Indiana, Pa.

David White Rural Electric Convenience Cooperative Company Auburn, Ill.

Lowell Friedline Somerset Rural Electric Cooperative, Inc.

Somerset, Pa.

John Anstadt Sullivan County Rural Electric Cooperative, Inc.

Forksville, Pa.

James Henderson Sussex Rural Electric Cooperative, Inc.

Sussex, N.J.

Stephen Marshall United Electric Cooperative, Inc.

DuBois, Pa.

Robert Holmes Valley Rural Electric Cooperative, Inc.

Huntingdon, Pa.

Dave Turner Warren Electric Cooperative, Inc.

Youngsville, Pa.

Haven Vaughn Western Illinois Electrical Cooperative Carthage, Ill.

Each affiliated electric distribution cooperative has one seat on the CCS Board of Directors.

Soyland Board of Directors Douglas Aeilts, RE.

Sccrctatv-Trcasu rcr 1 1Vanager Mark-Degler*

Director David White*

Assistant Scrctary-Trcasurcr Di)rector Wm. David Champion Jr.

Mauqzicr Murray Madse n*

Director" Bruce Giffin Malu~qer

Soyland Board of Directors Merton Pond*

Dickson Dunsworth I)irector Mall ager Robert Lehmann Lynn Frasco, PE.

Dirccto" ManagCr William Pollock*

Dennis Keiser*

Director Ma nager Michael Carls*

David Stuva Dircctor Manager Richard Boggs Dircctor W. Edward Cox Paul Dion 3Mazager A'fanegev Haven Vaughn*

lirector

• Denotes CCS director.

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Allegheny Board of Directors Alston Teeter Lowell Friedline Chairman Vice Ch airmcan Director Director Stephen Marshall Secretary Director John Ritchey Trcasurer IDirector David Cowan Wayne Hillegass George (Bud)

Director Director Francisco Jr.

Director John McNamara Dircctor Kathryn Cooper-WI~inters

])ircctor Sam Eckenrod John Anstadt Director Dircctor James Henderson Robert Holmes Director D)ircctor Dave Turner I)ircctor All Allegheny Electric Cooperativc, Inc. directors also serlve as CCS directors.

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2001 Allegheny Electric Cooperative, Inc.

Financial Review 2001 Soyland Power Cooperative, Inc.

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Allegheny Electric Cooperative, Inc.

Financial Statements for the Years Ended December 31, 2001 and 2000 and Independent Auditors' Report TABLE OF CONTENTS 21 INDEPENDENT AUDITORS' REPORT FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000:

22 Balance Sheets 23 Statements of Operations 24 Statements of Equities (Deficiencies) 25 Statements of Cash Flows 26-40 Notes to Financial Statements

Deloitte & Touche LLP Twenty-Second Floor S700 Market Street Philadelphia, Pennsylvania 19103-3984 Tel: (215) 246-2300 Fax: (2 15) 569-2441 vvww.deloitte corn Deloitte

&Touche Independent Auditors' Report Board of Directors Allegheny Electric Cooperative, Inc.

We have audited the accompanying balance sheets of Allegheny Electric Cooperative, Inc. as of December 31, 2001 and 2000, and the related statements of operations, of equities (deficiencies), and of cash flows for the years then ended. These financial statements are the responsibility of Allegheny Electric Cooperative, Inc.'s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the financial position of Allegheny Electric Cooperative, Inc. as of December 31, 2001 and 2000, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

ltt4-ý -I-/ A"44e.. "ý Philadelphia, Pennsylvania March 22, 2002 Deloitte Touche Tohmatsu

Allegheny Electric Cooperative, Inc.

BALANCE SHEETS DECEMBER 31, 2001 AND 2000 (In Thousands)

ASSETS ELECTRIC UTILITY PLANT:

In service Construction work-in-process Nuclear fuel in process Less accumulated depreciation and amortization OTHER ASSETS AND INVESTMENTS:

Non-utility property, at cost (net of accumulated depreciation of

$3,897 in 2001 and S3,642 in 2000)

Investments in associated organizations Notes receivable from members, less current portion Other investments Other noncurrent assets CURRENT ASSETS:

Cash and cash equivalents Accounts receivable, including accounts receivable from members of $13,139 in 2001 and S24,500 in 2000 (net of allowance for doubtful accounts of $0 in 2001 and $3,990 in 2000)

Inventories Other current assets RESTRICTED INVESTMENTS DEFERRED CHARGES:

Capital retirement asset Other TOTAL ASSETS EQUITIES (DEFICIENCIES) AND LIABILITIES EQUITIES (DEFICIENCIES):

Memberships Donated capital Patronage capital Other margins and equities (deficiencies)

LONG-TERM DEBT, Less current portion CURRENT LIABILITIES:

Current portion of long-term debt Accounts payable and accrued expenses Accounts payable to affiliated organizations OTHER LIABILITIES AND DEFERRED CREDITS:

Accrued nuclear decommissioning Accrued decontamination and decommissioning of nuclear fuel Deferred income tax obligation from safe harbor lease Other deferred credits TOTAL EQUITIES (DEFICIENCIES) AND LIABILITIES 2001 S

728,656 3,837 12,709 745,202 654,744 90,458 4,297 957 121 36,525 574 42,474 2000 S

725,705 3,332 6,364 735,401 645,057 90.344 4,464 990 148 33,983 261 39,846 23,442 31,807 3,615 1,272 60,136 237,110 2,979 2430,48

$ 430,415 11,422 14,627 4,206 2,038 32,293 18,261 201,268 2,779 204,047 387,533 S

3 3

38 34,122 (30,041) 4,122 293,123 35,395 13,485 441 49,321 34,690 1,233 3,395 1,649 40,967 387,533 38 34,122 (41,070)

(6,907) 330,769 46,567 23,164 1,418 71,149 28,5)3 1,873 3,717 1,3 l1 35,404 S

430,415

Allegheny Electric Cooperative, Inc.

STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2001 AND 2000 (In Thousands)

OPERATING REVENUE, Including sales to members of $143,620 in 2001 and $151,979 in 2000 OPERATING EXPENSES:

Purchased power Transmission:

Operation Maintenance Production:

Operation Maintenance Fuel Depreciation Amortization of Capital Retirement Asset Administrative and general Taxes OPERATING MARGIN BEFORE INTEREST AND OTHER DEDUCTIONS INTEREST AND OTHER DEDUCTIONS:

Interest expense Other deductions, net Operating (loss) gain NON-OPERATING MARGINS:

Net non-operating rental income Other income Interest income Allowance for doubtful accounts - non-operating Other NET MARGIN See notes to financial statements.

2001 46,152 20,700 26 25,742 8,859 8,731 3,500 35,842 6,614 832 20OO 53,044 17,727 39 20,810 9,095 8,832 3,679 37,328 6,190 (2,553) 154,191 1,523 649 2,172 459 1,150 3,009 (3,990) 913 1,082 (6,424) 1,247 1,480 2,727 (9,151) 1,248 17,900 1,590 (991) 433 20,18

$ 150,574

Allegheny Electric Cooperative, Inc.

STATEMENTS OF EQUITIES (DEFICIENCIES)

YEARS ENDED DECEMBER 31, 2001 AND 2000 (In Thousands)

BALANCE, DECEMBER 31, 1999 Net margin BALANCE, DECEMBER 31, 2000 Net margin BALANCE, DECEMBER 31, 2001 See notes to financial statements.

Memberships

$3 3

$3 Donated Capital

$38 38

$38 Other Margins and Patronage Equities Capital (Deficiencies)

$ 34,122

$ (42,611) 1,541 34,122 (41,070) 11,029

$34,122

$ (30,041)

Total

$ (8,448) 1,541 (6,907) 11,029 4,122

Allegheny Electric Cooperative, Inc.

STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001 AND 2000 (In Thousands)

OPERATING ACTIVITIES:

Net margin Depreciation and fuel amortization Amortization of deferred charges and deferred credits (Gain) loss on sale of other investments Changes in assets and liabilities which provided (used) cash:

Accounts receivable Inventories Other current and non-current assets Accounts payable and accrued expenses Accounts payable to members Other liabilities and deferred credits 11,029 10,357 35,716 (233) 17,180 (591)

(668)

(9,679)

(977) 3,102 1,541 10,735 37,623 183 (1,106) 148 1,596 (1,889) 504 1,792 Net cash provided by operating activities INVESTING ACTIVITIES:

Additions to electric utility plant and non-utility property Decrease in notes receivable from members Purchases of restricted investments Purchases of other investments Proceeds from sale of other investments Net cash used in investing activities FINANCING ACTIVITIES:

Payments on long-term debt Net cash used in financing activities (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR CASH AND CASH EQUIVALENTS, END OF YEAR SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid during the year for:

Interest Income taxes (12,020) 11,422 3,198 23ý442

_1,487 207 See notes to financial statements.

2001 2W00 (9,889) 27 (18,261)

(21,678) 21,363 (28,438)

(48,818)

(48,818)

(10,554) 591 (32,331) 32,425 (9,869)

(38,060)

(38,060) 1,335 1,481

Allegheny Electric Cooperative, Inc.

NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001 AND 2000

1.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES Business and Operations - Allegheny Electric Cooperative, Inc. ("Allegheny") is a rural electric cooperative utility established under the laws of the Commonwealth of Pennsylvania. Financing assistance has been provided by the U.S. Department of Agriculture, Rural Utilities Service (RUS) formerly known as the Rural Electrification Administration (REA) and, therefore, Allegheny is subject to certain rules and regulations promulgated for rural electric borrowers by RUS. Allegheny is a generation and transmission cooperative, providing power supply to 14 owner/members who are rural electric distribution cooperatives providing electric power to consumers in certain areas of Pennsylvania and New Jersey and a member which is a non-profit cooperative corporation which is a licensed electric generation supplier in Pennsylvania. Allegheny's primary operating asset is its 10% undivided interest in the Susquehanna Steam Electric Station (SSES), a 2,200 megawatt, two-unit nuclear power plant, co owned by PPL Corporation (PPL) (See Note 3).

Allegheny maintains its accounting records in accordance with the Federal Energy Regulatory Commission's uniform system of accounts as modified and adopted by RUS.

Electric Utility Plant and Depreciation - The Electric utility plant is stated at cost, which includes an allowance for funds used during construction. The straight-line method of depreciation is used for all assets, except nuclear fuel. The cost of units of property retired or replaced is removed from utility plant accounts and charged to accumulated depreciation.

Nuclear Fuel - Nuclear fuel is charged to fuel expense based on the quantity of heat produced for electric generation. Under the Nuclear Waste Policy Act of 1982, the U.S. Department of Energy (DOE) is responsible for the permanent storage and disposal of spent nuclear fuel removed from nuclear reactors. Allegheny currently pays to PPL its portion of DOE fees for such future disposal services.

Cost of Decommissioning Nuclear Plant - Allegheny's portion of the estimated cost of decommissioning SSES is approximately $84 million and is being accrued over the estimated useful life of the plant. Decommissioning costs are included in rates.

Amounts funded to the nuclear decommissioning trust funds for the years ended December 31, 2001 and 2000 were $1.4 million and $1.3 million, respectively. As required by the Nuclear Regulatory Commission (NRC), Allegheny has maintained a Decommissioning Trust Fund (Trust Fund B) which is restricted for use to ultimately decommission SSES.

The accrued nuclear decommissioning liability as of December 31, 2001 and 2000 was $34.7 million and $28.6 million, respectively.

Allowance for Funds Used During Construction - Allowance for funds used during construction represents the cost of directly related borrowed funds used for construction of or additions to an electric utility plant. The allowance is capitalized as a component of the cost of electric utility plant while under construction.

Investments in Associated Organizations - Investments in associated organizations are carried at cost.

Allegheny Electric Cooperative, Inc.

Preliminary Surveys - Costs of preliminary surveys for potential development projects are recorded as deferred charges. If construction of a project results from such surveys, the deferred charges are transferred to the cost of the facilities. If a preliminary survey is abandoned, the costs incurred are charged to operations when the project is determined to be abandoned.

Cash Equivalents - For purposes of the statements of cash flows, Allegheny considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.

Cash equivalents are carried at cost.

Restricted Investments - Allegheny was required by the RUS to establish a trust account for the proceeds from the settlement of litigation (See Note 12). The RUS is a named beneficiary of the trust fund and RUS requires that Allegheny seek prior approval to utilize any of the amounts from this account. Such uses to date have consisted of providing collateral for power supply agreements and for capital expenditures. Any cash balances maintained with suppliers or service providers are, therefore, listed as restricted cash balanced on the balance sheet.

Inventories - Allegheny accounts for certain power plant spare parts using a deferred inventory method.

Under this method, purchases of spare parts under inventory control are included in an inventory account and then charged to the appropriate capital or expense accounts when the parts are used or consumed. Inventories are carried at cost, cost being determined on the average cost method.

Other Investments - Allegheny accounts for debt and equity securities included in other investments under the provisions of Statement of Financial Accounting Standards ("SFAS") 115, Accounting for Certain Investments in Debt and Equity Securities. Management determines the proper classification of debt and equity securities at the time of purchase. As of December 31, 2001 and 2000, all securities covered by SFAS 115 were designated as available for sale. Accordingly, these securities, which relate solely to the nuclear decommissioning trust funds, are stated at fair value.

Patronage Capital and Other Margins and Equities (Deficiencies) - Allegheny had established an unallocated equity account, Other Margins and Equities (Deficiencies), as a result of charges against income. These charges against income were recorded as deficiencies in an unallocated equity account since the amount is not allocable to Allegheny's members. Subsequent net margins recognized by Allegheny are required by RUS to be used to reduce the deficiencies.

Rates and Regulatory Assets and Liabilities - The Board of Directors of Allegheny, appointed by its owners/members, has full authority to establish electric rates subject to approval by RUS. Rates are established on a cost of service basis.

Allegheny records deferred charges and credits in accordance with SFAS 71, Accounting for the Effects of Certain Types of Regulation, for costs or credits that will be recovered in the future from its members or be held for the future benefit of its members. If Allegheny were to terminate application of SFAS 71, all such amounts deferred would be recognized in the statement of operations at that time.

On December 3, 1996, House Bill No. 1509, Pennsylvania's "Electricity Generation Customer Choice and Competition Act" was signed by the Governor of Pennsylvania, with an effective date of January 1, 1998 as Act No. 138 of 1996. This Act enabled retail electric customers, including consumer-members of Pennsylvania's thirteen rural electric cooperatives, to choose the power supplier, or generator, from which they buy electricity.

Allegheny Electric Cooperative, Inc.

The Financial Accounting Standards Board (FASB) Emerging Issues Task Force (E[TF) has issued EITF Issue No. 97-4, Deregulation of the Pricing of Electricity -Issues Related to the Application of FASB Statement No. 71, AccountingJbr the Effects of Certain Types of Regulation, and No. 101, Regulated Enterprises - Accounting/for the Discontinuation of Application qf FASB Statement No. 71.

EITF No. 97-4 provides guidance for determining when an entity should cease applying SFAS 71 and to what extent stranded costs and regulatory assets and liabilities should continue to be recognized.

Allegheny reviewed the provisions set forth in EITF No. 97-4 and determined that regulatory assets and liabilities should continue to be accounted for under the provisions of SFAS 71 because management believes that it is reasonable to assume that Allegheny will continue to be able to charge and collect its cost of service-based rates.

Revenues - Revenues from the sale of electricity are recorded based on billings to members and on contracts and scheduled power usages, as appropriate.

Income Taxes - Allegheny complies with SEAS No. 109, Accounting for Income Taxes, which requires recognition of deferred tax assets and liabilities resulting from the deferred tax consequences of temporary differences in recognition of assets, liabilities, income and expense for financial reporting and income tax reporting. The resulting deferred tax assets and liabilities are established based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.

Investment tax credits, other than those sold through the safe harbor lease arrangement, are accounted for under the flow-through method whereby credits are recognized as a reduction of income tax expense in the year in which the credit is utilized for tax purposes.

Utilization of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Impairment of Long-Lived Assets - The Company reviews the carrying amount of an asset for possible impairment whenever events or changes in circumstances indicate that such amount may not be recoverable. For the years ended 2001 and 2000, no such circumstances were noted.

Derivatives and Hedge Accounting-Effective January 1, 2001, Allegheny adopted the Financial Accounting Standards Board (FASB) Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. This statement established accounting and reporting standards for derivative instruments, including those embedded in other contracts, and for hedging activities. It requires recognizing derivatives as assets or liabilities at fair value on the balance sheet. While Allegheny has identified financial instruments that qualify as derivatives as of December 31, 2001, the related contracts qualify for the normal purchases and normal sales exception and therefore, the adoption of these pronouncements did not impact the Company's financial position or results of operations.

New Accounting Pronouncements - In June 2001, the FASB issued Statement No. 141, Business Combinations, Statement No. 142, Goodwill and Other hItangible Assets, and Statement No. 143, Accounting for Asset Retirement Obligations. Statement No. 141 applies to all business combinations completed after June 30, 2001. Statement No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. Statement No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. Statement No. 143 establishes accounting and reporting standards for obligations associated with the retirement of tangible long-lived

Allegheny Electric Cooperative, Inc.

assets and the associated asset retirement costs. The Company expects to adopt Statements Nos. 141 and 142 in 2002 and Statement No. 143 in 2003.

In August 2001, the FASB also issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is effective in 2003. This statement prescribes that a single accounting model be used for valuing long-lived assets to be disposed of and broadens the presentation of discontinued operations.

The Company is currently evaluating the effects of these pronouncements; however, they are not expected to materially impact the Company's financial condition or results of operations.

Change in Accounting Period-The Company opted to change its accounting period from an October 31, year-end to a calendar year-end. This change was approved by the Allegheny Board of Directors and the RUS and was effective as of December 31, 2001.

2.

ELECTRIC UTILITY PLANT IN SERVICE Electric utility plant in service consists of the following as of December 31, 2001 and 2000:

Depreciation/

December 31, December 31, Amortization, 2001 2000 Lives/Rates (In Thousands)

Nuclear Utility Plant:

Production 39 years

$543,121

$540,355 Transmission 2.75%

41,570 41,570 General plant 3%o-12.5%

1,301 1,149 Nuclear fuel Heat production 132,722 132,712 718,714 715,786 Non-Nuclear Utility Plant 3%- 33%

9,942 9,919 Total

$728,656

$725,705

3.

SUSQUEHANNA STEAM ELECTRIC STATION Allegheny owns a 10% undivided interest in SSES. PPL owns the remaining 90%. Both participants provide their own financing. Allegheny's portion of SSES' gross assets, which includes electric utility plant in service, construction and nuclear fuel in progress, totaled $729 million and $726 million as of December 31, 2001 and 2000, respectively. Allegheny's share of anticipated costs for ongoing construction and nuclear fuel for SSES is estimated to be approximately $69.4 million over the next five years. Allegheny receives a portion of the total SSES output equal to its percentage ownership. SSES accounted for 67% and 63% of the total kilowatts sold by Allegheny during the years ended December 31, 2001 and 2000, respectively. The balance sheets and statements of operations reflect Allegheny's respective share of assets, liabilities and operations associated with SSES.

Allegheny Electric Cooperative, Inc.

4.

INVESTMENTS IN ASSOCIATED ORGANIZATIONS Investments in associated organizations, at cost, consists of the following as of December 3 1, 2001 and 2000:

2001 2000 (In Thousands)

National Rural Utilities Cooperative Finance Corporation (CFC Subordinated Term Certificates, bearing interest from 0% to 5%, maturing January 1, 2014 through October 1,2080 600 S 600 National Rural Utilities CFC Capital Term Certificates 9

9 Other 348 381 S

957

$ 990 Allegheny is required to maintain these investments pursuant to certain loan and guarantee agreements.

5.

NOTES RECEIVABLE FROM MEMBERS Notes receivable from members arise from the lease of load management equipment to the member cooperatives. Such notes bear interest at a variable rate (3.95% and 8.3% as of December 31, 2001 and 2000, respectively) and mature on March 31, 2009. Notes receivable from members were $134,000 and

$148,000 as of December 31, 2001 and 2000, respectively.

Allegheny Electric Cooperative, Inc.

6.

OTHER INVESTMENTS Other investments consist of the following as of December 31, 2001 and 2000:

December 31, 2001 (In Thousands)

Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value Decommissioning Trust Fund A:

Cash 149 149 U.S. Government securities 8,883

$ 332 9,215 Corporate bonds 5,144 261 5,405 Other Obligations Corporate stocks 2,144

$(213) 1,931 16,320 593 (213) 16,700 NRC mandated Decommissioning Trust Fund B:

Cash 721 721 U.S. Government securities 4,657 41 4,698 Corporate bonds 6,131 246 6,377 Other obligations 931 15 946 Common stocks 3,821 1,427 5,248 16,261 1,729 17,990 Debt Service Reserve Fund U.S. Government securities 1,835 1,835

$34,416

$2,322

$(213)

$ 36,525 Total

Allegheny Electric Cooperative, Inc.

December 31, 2000 (In Thousands)

Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value Decommissioning Trust Fund A:

Cash 79 79 U.S. Government securities 7,760

$ 241 8,001 Corporate bonds 5,067 146 5,213 Other Obligations 263 17 280 Corporate stocks 2,148 48 2,196 15,317 452 15,769 NRC mandated Decommissioning Trust Fund B:

Cash 574 574 U.S. Government securities 2,540 100 2,640 Corporate bonds 6,782 151 6,933 Other obligations 653

$ (10) 643 Common stocks 3,284 2,310 5,594 13,833 2,561 (10) 16,384 Debt Service Reserve Fund U.S. Government securities 1,830 1,830 Total

$30,980

$3,013

$ (10)

$ 33,983

7.

DEFERRED CHARGES Deferred charges consist of the following regulatory assets as of December 31, 2001 and 2000:

2001 2000 (In Thousands)

Capital retirement asset

$201,268

$237,110 Accrued decontamination and decommissioning of nuclear fuel 1,917 2,206 Low level radiation waste facility costs 599 599 Safe harbor lease closing costs 133 145 Preliminary surveys 130 29

$204,047

$240,089 Based on a membership agreement signed by the fourteen member distribution cooperatives on March 29, 1999, with an effective date of January 1, 1999, a portion of the SSES impairment write down, which took place in 1998, has been recognized as a regulatory asset, referred to as the Capital Retirement Asset. Under this new agreement, Allegheny will recover from member rates certain financing costs related primarily to Allegheny's investment in SSES in the amount of $311,000,000 over a nine-year period.

Allegheny Electric Cooperative, Inc.

8.

LONG-TERM DEBT Long-term debt consists principally of advances under mortgage notes payable for electric utility plant to RUS and to the United States of America acting through the Federal Financing Bank (FFB) and guaranteed by RUS. Substantially all of the assets of Allegheny are pledged as collateral. Long-term debt consists of the following as of December 31, 2001 and 2000:

2001 2000 (In Thousands)

Debt settlement note payable to RUS at an interest rate varying from 0.0% to 7.18%, due in varying amounts through 2007

$299,054

$343,794 6.00% replacement notes payable to RUS due in varying amounts through 2007 2,643 3,000 Pollution Control Revenue Bonds, payable semiannually, including interest through 2014. Variable rates ranged from 5% to 1.2% in 2001 and 3.25% to 5% in 2000 21,000 21,800 5.00% mortgage notes payable to RUS due in varying amounts through 2019.

5,821 8,742 328,518 377,336 Less current portion 35,395 46,567

$293,123

$330,769 Pursuant to the provisions set forth in 7 CFR Part 1717, Settlement of Debt Owed by Electric Borrowers, Allegheny entered into a restructuring agreement with RUS on March 29, 1999, with an effective date of January 1, 1999. Under the restructuring, the original advances under the mortgage notes to FFB were replaced with a new note in the amount of $406,000,000. The new note has a final maturity date on January 1, 2008, with an option for early termination on January 1, 2006, and January 1, 2007. Interest on the new note is 7.18%. Allegheny, however, can receive an interest credit up to the amount of total interest expense based on the number of participating members. As of March 29, 1999, all of Allegheny's members became participants.

Long-term Pollution Control Revenue Bonds (Bonds) were issued by an industrial development authority on Allegheny s behalf. The Bonds are subject to purchase on demand of the holder and remarketing on a "best efforts" basis until the Bonds are converted to a fixed interest rate at Allegheny's option. If a fixed interest rate is established for the Bonds, the Bonds will cease to be subject to purchase by the remarketing agent or the trustee. The Bonds were collateralized by irrevocable letters of credit from Rabobank Nederland which are backed by a five-year credit facility in the event the bondholders tender the Bonds prior to the conversion to a fixed interest rate and the Bonds cannot be remarketed. The stated amount of the letters of credit are equal to the amount of outstanding Bonds plus an amount equal to 65 days' interest accrued on the Bonds at 12%. The indenture agreement contains various redemption provisions with redemption prices ranging from 100% to 103%. Included in other investments, at December 31, 2001 and 2000, are $1.8 million of investments which relate to a debt service reserve fund required under the Bond indenture.

Allegheny Electric Cooperative, Inc.

Future maturities of all long-term debt are as follows (in thousands):

2002 2003 2004 2005 2006 Thereafter

$ 35,325 33,546 30,214 38,840 37,030 153,568 Allegheny is required by mortgage covenants to maintain certain levels of interest coverage and annual debt service coverage. Allegheny was in compliance with the applicable mortgage covenants as of December 31, 2001 and 2000.

Certain of Allegheny's long-term debt is at variable interest rates and is therefore subject to various market and interest rate fluctuations.

During 2001 and 2000, Allegheny incurred interest costs of $1.3 million and $1.5 million, respectively.

9.

DEFERRED CREDITS The balance of deferred credits related to the Raystown lease gain were $1.23 million and $1.29 million at December 3 1, 2001 and 2000, respectively.

10.

INCOME TAXES The federal income tax provision consists of the following (in thousands):

2001 2000 (In Thousands) 0 0

0 92 0

92 Allegheny is not subject to state income taxes.

At December 31, 2001, Allegheny had available non-member net operating loss carryforwards of approximately $86 million for tax reporting purposes expiring in 2002 through 2021, capital loss carryforwards of approximately $217,000 expiring 2002 through 2006, and AMT credit carryforwards of approximately $150,000 which carryforward indefinitely.

The effect of the Company's restructuring has been considered in determining the deferred tax balances at December 31, 2001 and 2000. Specifically, the Company's non-member net operating loss carryforwards have been reduced by approximately $111 million as a result of its March 29, 1999 restructuring agreement with RUS.

Temporary differences that give rise to deferred tax balances are principally attributable to fixed asset basis, safe harbor lease treatment, gain on installment sale, and financial statement accruals. Deferred tax assets also include the effect of net operating loss carryforwards. The temporary differences and the carryforward items produce a net deferred tax asset at year-end. Realization of the net deferred tax asset is contingent upon the Company's future earnings. A valuation allowance has been established against Current Deferred Total

Allegheny Electric Cooperative, Inc.

the asset since it has been determined, at present, that it is more likely than not that the net deferred tax asset will not be realized.

11.

PENNSYLVANIA PUBLIC UTILITY REALTY TAXES In December of 1998, the Pennsylvania Department of Revenue issued, pursuant to the Pennsylvania Public Utility Realty Tax Act (PURTA), additional assessments to PURTA taxpayers in order to cover the shortfall between PURTA tax revenues and the distributions. Allegheny's additional assessment was

$1,868,000 which was recorded as of October 1998. Allegheny satisfied the 1997 reassessment by applying 1998 prepaid taxes against the assessment.

In 1999, approximately 20 utilities including Allegheny filed suits against the Commonwealth of Pennsylvania challenging provisions of PURTA. The state later amended the PURTA statute and the way in which the tax is calculated retroactive to 1998. Allegheny subsequently received and paid a 1998 PURTA tax bill of approximately $380,000.

In 2000, the Commonwealth removed electric generation assets from the PURTA tax base and effectively returned those assets to local real estate tax jurisdiction with liability calculations based on assessed values. During 2001, PPL settled the 2000 liability for county, municipality, and school district real estate taxes on the full value of the jointly owned SSES Property. Also during 2001, the Allegheny portion of the settled real estate taxes was billed by and paid to PPL Although the final resolution of 1998 and 1999 PURTA issues remains unknown, Allegheny believes that it has recorded appropriate liabilities for any remaining PURTA taxes.

12. POWER SUPPLY SETTLEMENTS In January of 2001, Allegheny and the Pennsylvania Electric Company (Penelec) agreed to terminate Allegheny's contract for power purchases effective March 31, 2001. The agreement otherwise was scheduled to expire at the end of 2003. Since Allegheny had numerous claims against Penelec for overcharges, the agreement called for Penelec to pay $16 million to Allegheny and for Allegheny to drop all litigation against Penelec. Concurrent with the termination of the Penelec agreement, Allegheny entered into an arrangement with Williams Energy Marketing & Trading, Inc. ("Williams"). The new arrangement provides that Williams manages the output of all power from Allegheny owned and controlled resources and in turn supplies all of Allegheny's load requirements in certain geographic areas. Originally, the agreement with Williams was scheduled to terminate on March 31, 2006; however, subsequent to the balance sheet date, an amendment extended the contract through 2008 and included, starting in December 2002, power supply in all areas of Pennsylvania and New Jersey, including the West Penn Area. As is required, the RUS approved the settlement above, provided that the net proceeds received from Penelec, less credit support required due to the new Williams arrangement, be restricted into an FDIC insured special interest-bearing account to be held in trust for RUS and with RUS as a named beneficiary. The value of the trust account at December 31, 2001 was $7.26 million.

The Williams Agreement provided for credit support in the amount of $9 million to be provided by Allegheny. The funds were paid to Williams during 2001 and recorded as part of restricted investments on the balance sheet as of December 31, 2001. Subsequent to December 31, 2001, however, the funds were returned to Allegheny upon replacement with a $9 million letter of credit.

Allegheny Electric Cooperative, Inc.

Due to the termination of the Penelec agreement, Allegheny executed a Load Serving Entity agreement with PJM LLC (PJM). The terms of the new agreement require Allegheny to provide $2 million of credit support for activities with PJM. Therefore, the total restricted cash at December 31, 2001 is as follows (dollars in thousands):

Williams Initial Credit Support

$ 2,000 Williams Remaining Credit Support 7,000 PJM Credit Support 2,000 Trust Account Balance 7,261

$ 18,261 Additionally, Allegheny reached a Settlement Agreement with PPL, Electric Utilities, Inc. (PPL), with respect to various claims Allegheny had against PPL for "line revenue" associated with Allegheny owned SSES transmission facilities. The agreement resulted in PPL paying $1.9 million to Allegheny in May of 2001, and Allegheny dropping four claims against PPL with the Federal Energy Regulatory Commission.

The combined proceeds from the Penelec and PPL settlements of $17.9 million have been recorded as "other income" on the statement of operations for the year ended December 31, 2001.

13.

RELATED PARTY TRANSACTIONS Allegheny has two agreements with American Cooperative Services, Inc. ("American"), an affiliated organization. The first is a power purchase sale contract that covers American's capacity requirements.

The second is a line of credit to be used by American to fund its day-to-day operations. American currently has no customers so no power sales are being made. Allegheny has established an allowance against the amounts due from American and has recorded the entire impact in the statement of operations for the years ended December 31, 2001 and 2000, under non-operating margins, allowance for doubtful accounts - non-operating.

Allegheny has arrangements with two affiliated organizations, Pennsylvania Rural Electric Association and Continental Cooperative Services, Inc. (CCS). Both organizations have provided Allegheny with certain management, general, and administrative services on a cost reimbursement basis. The costs for the services provided by PREA were $381,623 and $5,257,483 for the years ended December 31, 2001 and 2000, respectively. The costs for services provided by CCS were $7,011,677 and $520,838 for the same two comparative periods, respectively.

Continental Cooperative Services (CCS) was incorporated in March 2000, the result of a strategic alliance between Allegheny, based in Harrisburg, Pennsylvania, and Soyland Power Cooperative, Inc.

(Soyland), formerly based in Decatur, Illinois. CCS is organized as a Non-Profit Electric Cooperative Corporation in the State of Pennsylvania.

CCS is governed by a 26-member board of directors, composed of one representative from each affiliated distribution cooperative in Pennsylvania, New Jersey, and Illinois. Included in Allegheny's investment in associated organizations is a $100,000 membership fee.

14. COMMITMENTS AND CONTINGENCIES Power Supply and Transmission Agreements Allegheny has entered into power supply and transmission agreements with approximately 45 service providers. A significant amount of these agreements are umbrella type agreements and do not bind

Allegheny Electric Cooperative, Inc.

Allegheny to enter into any type of transaction. As of December 31, 2001, there were no ongoing transactions under these agreements.

Allegheny has a number of power supply agreements under which it currently purchases capacity and power. These agreements contain no minimum purchase or take-or-pay provisions. Power supply agreements are as follows:

New York Power Authority - This contract was scheduled to expire on June 30, 2001, however, a one year extension was implemented. Contract extension talks are underway. This contract meets a portion of Allegheny's base load requirements and its delivered cost to Allegheny's members is below market.

Allegheny Power (West Penn Power) - This contract supplies approximately ten percent (10%) of Allegheny's load requirements and will expire November 30, 2002. Subsequently, this load will be served by Williams as discussed below. Transmission service for this load is provided under the Allegheny Power Open Access Transmission Tariff ("OATT") until PJM West becomes effective. Once PJM West is effective (April 1, 2002), transmission service for this load will be provided under PJM OATT.

PPL Utilities - Allegheny's agreement with PPL Utilities expired February 28, 2002. Power requirements for this load will be served by Williams as discussed below. Transmission service for this load is provided under the appropriate PJM OATT.

Williams Energy Marketing & Trading, Inc. - Allegheny began taking power from Williams on April 1, 2001, for load requirements in the GPU Energy transmission zones. On February 1, 2002, two delivery points in the PPL Utilities zone began taking power from Williams.

Under the agreement, Williams takes delivery of power from Allegheny owned and controlled resources, and supplies Allegheny's total requirements in the aforementioned areas at a fixed price. The Williams agreement does have certain hourly and monthly energy caps. Energy provided above these thresholds is purchase at market prices. The Williams agreement also contains thresholds related to output from Allegheny's resources. If Allegheny fails to provide energy sufficient to meet the thresholds, the balance is purchased from Williams at market prices.

Aquila Contingent Call Option - Allegheny has mitigated a portion of the economic risk of an outage by entering into Contingent Call Option agreements with Aquila Energy Marketing Corporation. Under the terms of the agreements, if SSES has a forced outage event, Allegheny has the option to purchase 110 MW/unit; or 220 MW maximum of firm power or the financial equivalent. The option to exercise is on a one-business day-ahead basis or on an hourly look-back basis for no more than 30 On-Peak hours under the Early Coverage Option during the term. The term of the Aquila contract existing at December 31, 2001 expires on May 31, 2002 and has an exercise strike price of $50/MWh. On February 18, 2002, Allegheny amended its agreement with Williams to add its PJM West load requirements to the load served by Williams starting December 1, 2002. The amendment also increases load thresholds for Allegheny's load in the GPU and PPL zones and transfers load imbalance risk due to forecast errors to Williams. During 2001, Allegheny paid Aquila approximately $1.5 million in premiums for the Contingent Call Option and is committed to paying approximately $325,000 for the remainder of the current agreement.

GPU Energy - Allegheny terminated its supplemental generation portion of its Wheeling and Supplemental Power (WASP) agreement with GPU Energy (GPU) on March 31, 2001. However, Allegheny continues to purchase transmission service in the GPU zone from GPU under the WASP agreement and the PJM OATT. Beginning April 1, 2001, Allegheny's loads and resources in the GPU zones were no longer included within GPU's. Consequently, Allegheny executed a Load Serving Entity

("LSE") agreement with PJM, which outlines the responsibilities of each party with respect to the revised transmission and power supply arrangement. As part of its new LSE status, it was also

Allegheny Electric Cooperative, Inc.

necessary to take Network Integration Transmission Services (NITS) under the PJM OATT. GPU will pay for most of the PJM NITS charges to prevent double billing for transmission service.

Insurance PPL Electric Utilities (PPL), as the 90% owner and sole operator of SSES, and Allegheny, as owner of a 10% undivided interest in SSES, are members of certain insurance programs which provide coverage for property damage to members' nuclear generation plants. Under these programs, the plant, as a whole, has property damage coverage for up to $2.75 billion. Additionally, there is coverage for the cost of replacement power during prolonged outages of nuclear units caused by certain specified conditions.

Under the property and replacement power insurance programs, PPL and Allegheny could be assessed retrospective premiums in the event the insurers' losses exceed their reserves. At December 3 1, 2001, the maximum amount PPL and Allegheny could jointly be assessed under these programs was approximately $20 million.

PPL and Allegheny's public liability for claims resulting from a nuclear incident is currently limited to

$9.5 billion under provisions of the Price-Anderson Amendment Acts of 1988 ("Act"), which extended the Price-Anderson Act to August 1, 2002. PPL and Allegheny are protected against this potential liability by a combination of commercial insurance and an industry retrospective assessment program.

In the event of a nuclear incident at any of the reactors covered by the Act, PPL and Allegheny could be assessed up to $176 million per incident, payable at $20 million per year.

Safe Harbor Lease Allegheny previously sold certain investment and energy tax credits and depreciation deductions pursuant to a safe harbor lease. The proceeds from the sale, including interest earned thereon, have been deferred and are being recognized on the statements of operations over the 30-year term lease. The deferred income tax obligations were $3.4 million and $3.7 million as of December 31, 2001 and 2000, respectively. The net proceeds and related interest were required by RUS to be used to retire outstanding FEB debt.

Under the term of the safe harbor lease, Allegheny is contingently liable in varying amounts in the event the lessor's tax benefits are disallowed and in the event of certain other occurrences. The maximum amount for which Allegheny was contingently liable as of December 3 1, 2001 was approximately $10.3 million. Payment of this contingent liability has been guaranteed by CFC.

Litigation In the normal course of business, there are various claims and suits pending against Allegheny. In the opinion of Allegheny's management, the amount of such losses that might result from these claims and suits, if any, would not materially affect the financial position or results of operations of Allegheny.

15.

SALE/LEASEBACK ARRANGEMENT Allegheny previously completed a sale and leaseback of its hydroelectric generation facility at the Raystown Dam (the Facility). The Facility was sold to a trustee bank representing Ford Motor Credit Company (Ford) for $32.0 million in cash. During 1996, Ford transferred its interest in the Facility to a third-party. Under terms of the arrangement, Allegheny is leasing the Facility for an initial term of 30 years. Payments under the lease are due in semi-annual installments which commenced January 10, 1989. At the end of the 30-year term, Allegheny will have the option to purchase the Facility for an amount equal to the Facility's fair market value or for a certain amount fixed by the transaction documents.

Allegheny Electric Cooperative, Inc.

Allegheny also has the option to renew the lease for a five-year fixed rate renewal and three fair market renewal periods, each of which may not be for a term of less than two years. Payments during the fixed rate renewal period are 30% of the average semi-annual installments during the initial lease term.

Allegheny will retain co-licensee status for the Facility throughout the term of the lease. The gain of

$1.9 million related to the sale is being recognized over the lease term. The unrecognized gain is recorded in deferred credits and was $1.23 million and $1.29 million as of December 31, 2001 and 2000, respectively.

The payments by Allegheny under this lease were determined in part on the assumption that Ford, or its successor, will be entitled to certain income tax benefits as a result of the sale and leaseback of the Facility. In the event that Ford, or its successor, were to lose all or any portion of such tax benefits, Allegheny would be required to indemnify Ford, or its successor, for the amount of the additional federal income tax payable by Ford, or its successor, as a result of any such loss.

The leaseback of the Facility is accounted for as an operating lease by Allegheny. As of December 31, 2001, future minimum lease payments under this lease, which can vary based on the interest paid on the debt used to finance the transaction, are estimated as follows (in thousands):

2002

$ 1,990 2003 2,361 2004 2,281 2005 1,932 2006 1,932 Thereafter 27,472 Total minimum lease payments

$37,968 The future minimum lease payments shown above are for the initial lease term and the five-year renewal period. These payments are based on an assumed interest rate of 8.8% and may fluctuate based on differences between the future interest rate and the assumed interest rate. Rental expense for this lease totaled $2.1 million and $2.0 million in years ended December 31, 2001 and 2000.

16.

CONCENTRATIONS OF CREDIT RISK Allegheny is composed of member rural electric cooperatives, whose operations are located in Pennsylvania and New Jersey. The member cooperatives' primary service areas are small communities located throughout much of rural Pennsylvania and New Jersey.

Allegheny's investments are invested in a variety of financial instruments. The related values as presented in the financial statements are subject to various market fluctuations, which include changes in the equity markets, interest rate environment and the general economic conditions. Allegheny's credit losses have historically been minimal and within management's expectations.

17.

GOVERNMENT REGULATIONS The Energy Policy Act of 1992 established, among other things, a fund to pay for the decontamination and decommissioning of three nuclear enrichment facilities operated by DOE. A portion of the fund is to be collected from electric utilities that have purchased enrichment services from DOE and will be in the form of annual special assessments for a period not to exceed more than 15 years. The special assessments are based on a formula that takes into account the amount of enrichment services purchased by the utilities in past periods.

Allegheny has previously recorded its share of the liability in connection with PPL's recognition of the liability in the accounts of SSES. Allegheny's share of the liability is $4.4 million which will be paid

Allegheny Electric Cooperative, Inc.

over a period of 15 years. Allegheny recorded its share of the liability as a deferred charge which is being amortized to expense over 15 years, consistent with the ratemaking treatment. The remaining liability to be amortized was $1.2 million and $1.9 million as of December 31, 2001 and 2000, respectively.

18.

FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Cash and Cash Equivalents - The carrying amount reported approximates fair value because of the short maturity of these financial instruments.

Restricted Investments - The carrying amount reported approximates fair value because of the short maturity of these financial instruments.

Other Investments and Investments in Associated Organizations - The fair value of other investments are estimated based on quoted market prices. Fair values of investments in associated organizations approximate their carrying amount.

Notes Receivable from Members - The carrying amount of Allegheny's notes receivable from members, which primarily relate to sales-type leases, approximates fair value because the notes bear a variable rate of interest which is reset on a frequent basis.

Long-Term Debt - The fair value of Allegheny's fixed rate long-term debt is estimated using discounted cash flows based on current rates offered to Allegheny for similar debt of the same remaining maturities.

Summary of Fair Values - The estimated fair values of Allegheny's financial instruments at December 31, 2001 and 2000, are as follows (in thousands):

2001 2000 Carrying Fair Carrying Fair Value Value Value Value Cash and cash equivalents

$11,422

$11,422

$23,442

$23,442 Restricted cash 18,261 18,261 Other investments 36,525 36,525 33,983 33,983 Investment in associated organizations 957 957 990 990 Notes receivable from members 121 121 148 148 Long-term debt 328,518 216,446 377,336 223,932

19.

SUBSEQUENT EVENTS In February 2002, National Rural Utilities Cooperative Finance Corporation issued an irrevocable Standby Letter of Credit on behalf of Allegheny in the amount of $9 million in favor of Williams. The letter of credit is valid until June 1, 2006. As a result, Williams remitted the cash collateral for $9 million plus interest to FDIC insured special interest-bearing account to be held in trust for RUS and with RUS as a named beneficiary.

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Soyland Power Cooperative, Inc.

Accountants' Report and Financial Statements December 31, 2001 and 2000 TABLE OF CONTENTS 43 INDEPENDENT ACCOUNTANTS' REPORT FINANCIAL STATEMENTS 44 & 45 Balance Sheets 46 Statements of Income 47 Statements of Members' Equities (Deficits) 48 Statements of Cash Flows 49-58 Notes to Financial Statements

225 North Water Street, Suite 400 P.O. Box 1580 Decatur, IL 62525-1580 217 429-2411 Fax 217 429-6109 bkd.com Independent Accountants' Report Board of Directors Soyland Power Cooperative, Inc.

Harrisburg, Pennsylvania We have audited the accompanying balance sheets of Soyland Power Cooperative, Inc. (Cooperative) as of December 31, 2001 and 2000, and the related statements of income, members' equities (deficits), and cash flows for the years then ended. These financial statements are the responsibility of the Cooperative's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Soyland Power Cooperative, Inc. as of December 31, 2001 and 2000, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

February 15, 2002 Solutions for Success A memberof Moores Rowtand Intemabonal (AQtP

- 11 Soyland Power Cooperative, Inc.

Balance Sheets December 31, 2001 and 2000 Assets 2001 2000 Electric Utility Plant, at cost In service Less accumulated depreciation Construction work in progress Plant site held for future use Net electric utility plant Investments Current Assets Cash Temporary investments Accounts receivable, members Other receivables Inventories Prepayments and other assets Excess recoverable energy costs Advance energy payments Total current assets Deferred Charges Deferred loss on asset writedown Deferred opt-out fee Deferred recoverable energy 75,616,898 S

75,211,055 (36,736.731)

(35,802,0391 38,880,167 5,465,068 3,921,195 48,266,430 12,144J715 109,606 1,754,131 8,755,472 346,737 2,486,539 321,344 359M050 14.132.879 24,923,299 43,215,460 12,000,000 80,138.759 S

15466-82,783 39,409,016 4,660,050 31921,195 47,990,261 11,683,875 232,780 1,176,932 8,501,136 1,610,904 2,465,161 156,747 6,015,140 359,050 20,517,850 35,946,197 43,215,460 79,161,657 S -15ý9353ý643 See Notes to Financial Statements.

Soyland Power Cooperative, Inc.

Members' Equities (Deficits) and Liabilities Members' Equities Membership fees Patronage capital Retained earnings (deficit)

Long-Term Debt 1,675 1,638,736 1,996,756 3,637,167 93,580,738 1,675 1,638,736 (4,585,739)

(2,945,328) 98,815,824 Current Liabilities Current installments of long-term debt Line of credit Accounts payable Member prepayments Accrued interest Accrued expenses Total current liabilities 154,682,783 159,3.643 2001 2000 Deferred Revenue 21,117,789 11,350,000 6,396,121 1,964,676 374,818 3,345,784 44,549,188 12,915,690 18,091,082 8,750,000 11,608,868 2,561,766 648,106 3,657,303 45,317,125 18,166,022

Soyland Power Cooperative, Inc.

Statements of Income December 31, 2001 and 2000 Operating Revenues Electric energy sales Distribution revenue Rent of electric property Other operating revenue S

87,200,149 961,099 48,873 2,918.479 91,128,600 85,769,748 916,217 63,098 77,872 86W826,935 Operating Expenses Operations Purchased capacity and energy costs Production-other Transmission Distribution Maintenance Administrative and general Depreciation and amortization Property and other taxes Net Operating Margin Other Revenue -

Interest and Other Patronage Capital Income Gain on sale of land and building Net Margin Before Interest Charges Interest Charges Interest on long-term debt Other Net Income S_

652*-95 800 657 See Notes to Financial Statements.

2001 2000 48,892,011 7,677,980 963,279 366,551 57,899,821 1,233,024 3,166,888 13,976,126 508,008 76,783,867 50,350,660 7,984,885 348,927 323,191 59,007,663 1,307,242 2,798,774 14,225,308 344,284 77,683,271 9,143,664 1,453,948 474,761 11,072,373 9,090,194 1,181,522 10,271,716 14,344,733 1,283,214 15,627,947 7,751,419 1,294,033 9,045,452 2000

Soyland Power Cooperative, Inc.

Statements of Members' Equities (Deficits)

December 31, 2001 and 2000 Membership Fees Patronage Capital Retained Earning (Deficit)

Balance, January 1, 2000 Refund of capital credits due to prior year buyouts Net income Balance, December 31, 2000 Net income Balance, December 31, 2001 1,675 2,779,263

$ (5,386,396)

$ (2,605,458)

(1,140,527)

(1,140,527) 800,657 800,657 1,675 1,638,736 (4,585,739) 6,582,495 1,675 1,638,736 (2,945,328) 6,582,495 1 996.756 3.637,167 See Notes to Financial Statements.

Total Members' (Deficit)

Soyland Power Cooperative, Inc.

Statements of Cash Flows December 31, 2001 and 2000 Operating Activities Net income Items not requiring (providing) cash Gain on sale of land and building Depreciation of electric utility plant Amortization of deferred loss on asset writedown Patronage capital allocations not received in cash Deferred recoverable energy charge Change in Accounts and other receivables Inventories Prepayments and other assets Excess recoverable energy costs Accounts payable and accrued liabilities Deferred revenue Net cash provided by operating activities Investing Activities Additions to electric utility plant, net Proceeds from sale of land and building Additions to investments Proceeds from investments Net cash used in investing activities Financing Activities Net proceeds (payments) from line of credit Principal payments on long-term debt Proceeds from long-term debt Refund of capital credits Change in member prepayments Net cash used in financing activities Net Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents, Beginning of Year Cash and Cash Equivalents, End of Year Supplemental Cash Flows Information Cash paid for interest 2,953,228 11,022,898 (66,661)

(12,000,000) 1,009,831 (21,378)

(164,597) 6,015,140 (5,797,554)

(5,250 332 4,283,070 (3,229,397)

(752,186) 358,007 (3,623,576) 2,600,000 (14,208,379) 12,000,000 (597,090)

(205,469) 454,025 1,409,712 S

1,8636737 9,318,740 10,300,869 See Notes to Financial Statements.

2001 2000 S

6,582,495 S

800,657 (474,761) 2,193,641 11,397,896 (94,589) 4,504,196 (7,567)

(90,397) 5,706,450 7,045,788 (14,499,634) 16,481,680 (5,529,773) 993,511 (476,737) 295,217 (4,717,782)

(3,313,902)

(8,358,275)

(1,140,527) 650,207 (12,162,4971 (398,599) 1,808,311 j 409 712 I I

Soyland Power Cooperative, Inc.

Notes to Financial Statements December 31, 2001 and 2000 Note 1:

Nature of Operations and Significant Accounting Policies Nature of Operations The financial statements reflect the accounts of Soyland Power Cooperative, Inc. and its wholly owned subsidiary, Alert Security and Energy Services, Inc. (ASESI) (Cooperative), for the periods described below.

ASESI was created in 1998 for the purpose of selling and installing security systems under an agreement with Interactive Technology, Inc. Through July 31, 2000, ASESI had sales of $77,872.

ASESI assets were sold to a member cooperative effective August 1, 2000. All significant intercompany transactions have been eliminated.

The Cooperative is a not-for-profit organization engaged in the generation and transmission of wholesale electric service to its twelve members located throughout Illinois. The Cooperative extends unsecured credit to its members. The Cooperative has entered into wholesale power agreements with each of its members which require the members to buy and receive from the Cooperative all of their power and energy requirements and require the Cooperative to sell and deliver power and energy in satisfaction of such requirements. The wholesale power agreements with the members extend to various dates from years 2015 to 2017.

The Cooperative has a formal buyout policy under which a member who seeks to buyout of the wholesale power agreement is required to reimburse the Cooperative for all liabilities, including any related to Soyland's power supply and transmission agreements, incurred in connection with such buyout. The policy allows any member to buyout of the wholesale power agreement if a payment is made to the Cooperative based on a predetermined formula.

The Cooperative's wholesale power rate charged to members is established by the Board of Directors. Such wholesale power rate charged to members is determined based on annual cash requirements, including debt service requirements. The formula on which the rate is determined is subject to the approval of the Federal Energy Regulatory Commission (FERC). Such approval for the formulary rate was received. The Cooperative is not subject to the regulatory authority of the Illinois Commerce Commission.

AIL Soyland Power Cooperative, Inc.

Notes to Financial Statements December 31, 2001 and 2000 Deregulation In 1997, the State of Illinois passed Public Act 90-56 1, Electric Service Customer Choice and Rate Relief Law of 1997 (Act). The Act is intended to bring competition to the electric industry in the State of Illinois and ultimately lead to market based pricing of electric generation services. The Act provides the framework for future deregulation and open market competition among electric power suppliers. The Act is structured to allow groups of electric consumers to choose their power supplier over a period of time beginning with certain commercial customers on October 1, 1999 and concluding with residential customers by May 1, 2002. Transitional rules included in the Act provide for the recovery of certain "stranded" costs by electric power suppliers whose customers choose another supplier. Cooperatives, while specifically exempted from the provisions of the Act, may voluntarily choose to participate in open market competition and comply with [he Act.

Cooperative management believes the Act will not significantly impact the Cooperative's operations or its ability to recover its costs through the future rates charged to members.

Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial report and the reported amounts of revenues and expenses during the years then ended. Actual results could differ from those estimates.

Basis of Accounting The accounting records of the Cooperative are maintained in accordance with the Uniform System of Accounts prescribed by FERC. In accordance with FERC guidelines, the Cooperative also maintains its accounts in accordance with Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation.

Electric Utility Plant Electric utility plant is carried at cost. Depreciation of electric utility plant in service is provided over the estimated useful lives of the respective assets on the straight-line basis at rates as follows:

Production Plant Steam 3.1% -4.0%

Gas turbine and diesel 6.7%

Transmission Plant 2.8%

Distribution Plant 3.0%

General Plant 2.5% - 20.0%

Soyland Power Cooperative, Inc.

Notes to Financial Statements December 31, 2001 and 2000 Maintenance and repairs of property and replacements and renewals of items determined to be less than units of property are charged to expense. Replacement and renewals of items considered to be units of property are charged to the property accounts. At the time properties are disposed of, the original cost, plus cost of removal less salvage of such property, is charged to accumulated depreciation.

Cash and Cash Equivalents Cash and cash equivalents consist of bank deposits in federally insured accounts and temporary investments. The Cooperative has one banking arrangement which requires the maintenance of a compensating balance.

For purposes of the statement of cash flows, the Cooperative considers all highly liquid debt instruments, if any, purchased with an original maturity of three months or less to be cash equivalents.

Temporary Investments Temporary investments consist of an interest bearing sweep account and are stated at market.

Inventories Inventories consist of fuel, materials and supplies and are stated at moving average cost.

Deferred Charges Deferred charges consist of amounts that are expected to be recovered through the future rate charged to members.

Member Prepayments Member prepayments represent cash advances from members. The Cooperative uses these advances to reduce borrowings. The Cooperative pays interest on member advances at a rate lower than that on outstanding debt. Such interest payments on member advances totaled $169,078 and

$267,007 for the years ended December 31, 2001 and 2000, respectively.

Power Supply Payments Payments made under power supply agreements are classified as purchased capacity and energy costs in the statement of income.

11-Soyland Power Cooperative, Inc.

Notes to Financial Statements December 31, 2001 and 2000 Deferred Revenue Deferred revenue consists of payments received from members that have bought out of the wholesale power agreement and regulatory asset prepayments. Deferred revenue is being amortized over the period during which it would have been earned (through 2007).

Member buyout payments Regulatory asset prepayments Total Note 2:

Electric Utility Plant in Service Steam and other production plant Transmission plant Distribution plant General plant Total Note 3:

Investments 2001 2000 11,140,157 14,932,695 1,775,533 3,233,327 12915690 8,16681022 2001 2000 38,070,550 37,245,996 23,572,834 22,724,819 9,689,050 9,585,394 4,284,464 5,654,846 75 6168ý98 75211 055 2001 2000 National Rural Utilities Cooperative Finance Corporation (CFC)

Membership fees Patronage capital Subscription capital term certificates Loan capital term certificates 1,000 4,184,145 2,252,049 4,800,439 Total 11,237,633 1,000 4,117,484 2,252,049 4,809,446 11,179,979 Other associated organizations Investments in economic development organizations Other investments 228,966 175,930 502,186 Ta12-144,715 228,966 274,930 Total H11683,875

Soyland Power Cooperative, Inc.

Notes to Financial Statements December 31, 2001 and 2000 The Cooperative considers CFC capital term certificates to be a condition of borrowing and patronage capital to be directly related to borrowing.

Loan capital term certificates mature at various intervals in the years 2006 through 2022 and do not bear interest.

Subscription capital term certificates at December 31, 2001 bear interest at 5% and mature at various dates from years 2070 to 2080.

Note 4:

Deferred Charges The amount of the deferred loss on asset writedown relates to an interest in the Clinton Nuclear Generating facility. The regulatory asset will be amortized to operations as the amounts are collected in the rate charged to members. Such amortization totaled $11,022,898 and $11,397,896 in 2001 and 2000, respectively.

The amount of the Opt-Out Fee under an amended agreement with Illinois Power and Recoverable Energy is expected to be recovered in the future rate charged to members beginning in 2002 and has, therefore, been recorded as a regulatory asset at December 31, 2001 and 2000.

Soyland Power Cooperative, Inc.

Notes to Financial Statements December 31, 2001 and 2000 Note 5:

Long-Term Debt CFC -

variable rate (4.70% at December 3 1, 2001) promissory notes payable, due in quarterly installments through 2022 CFC -

variable rate (4.70% at December 31, 2001) mortgage note payable, due in various quarterly installments through 2006 CFC variable rate (4.70% at December 31, 2001) capital addition loan note payable, due in quarterly installments through 2014 CFC -

fixed rate (7.05%) promissory notes payable, due in quarterly installments through 2007 "'

CFC -

variable rate (4.70% at December 31, 2001) promissory note payable, due in quarterly installments through 2011 ()

Total long-term debt Less current installments Long-term debt, excluding current installments 27,598,841 28,226,030 24,027,076 21,900,000 29,172,610 12,000,000 114,698,527 21,117,789 S

93,580238 29,132,818 23,100,000 36,448,058 116,906,906 18,091,082

$8 815824 (1) Certain Promissory Notes (Notes) to CFC are partially guaranteed by the members of the Cooperative. All Notes are secured by a mortgage on the assets of the Cooperative.

2001 2000 2000

Soyland Power Cooperative, Inc.

Notes to Financial Statements December 31, 2001 and 2000 Annual maturities of long-term debt for each of the five years subsequent to December 31, 2001 are as follows: 2002, $21,117,789; 2003, $14,092,414; 2004, $12,172,101; 2005, $13,010,342; 2006, $6,882,958 and thereafter, $47,422,923.

The Cooperative had no unadvanced funds available at December 31, 2001 from long-term loans approved by CFC for capital additions and a $30,000,000 operating line of credit that expires December 15, 2003 approved by CFC, of which $11,350,000 had been borrowed at December 31, 2001. The interest rate on the CFC line of credit fluctuates monthly based on CFC's cost of funds (5.10% at December 31, 2001).

All assets of the Cooperative are pledged to secure the CFC debt.

Note 6:

Pension Plans The Cooperative participates through CCS in a multi-employer defined-benefit pension plan and a 401 (k) defined-contribution plan covering substantially all of its employees. The Cooperative makes annual contributions to the plans equal to the amount accrued for pension expense. Total pension expense for both plans amounted to approximately $384,749 and $362,000 for the years ended December 31, 2001 and 2000, respectively.

Note 7:

Income Tax Status The Cooperative is a not-for-profit corporation organized under the Statutes of the State of Illinois and is exempt from Federal and State income taxes under applicable tax regulations. No income taxes were due or paid in 2001 and 2000.

Note 8:

Commitments The Cooperative owns generating capacity of 178 MW. The current and long-term additional energy requirements will be furnished through power supply agreements with various power suppliers.

In January 2000, the Cooperative contracted with Ameren Energy Marketing Company to purchase energy at varying monthly minimum and maximum quantities of energy through December 2002.

The contract commits to purchase an annual minimum of $44,872,213.

Soyland Power Cooperative, Inc.

Notes to Financial Statements December 31, 2001 and 2000 Note 9:

Disclosures About Fair Value of Financial Instruments The estimated fair value amounts have been determined by the Cooperative, using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value.

Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Cooperative could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Assets 0

Investments-- The investment balances comprise the following:

2001 2000 CFC capital term certificates (1)

Subscription certificates Loan certificates 2,252,049 4,800,439 7,052,488 2,252,049 4,809,446 7,061,495 Patronage capital certificates (1)

Other patronage Memberships and miscellaneous patronage (2)

Other associated organizations (3)

Other investments (4)

$ T1a2j

, 715 l11683,875 4,184,145 229,966 175,930 502,186 4,117,484 229,966 274,930 Total

Soyland Power Cooperative, Inc.

Notes to Financial Statements December 31, 2001 and 2000 Fair value for investments is estimated as follows:

1) The Cooperative considers CFC capital term certificates to be a condition of borrowing and patronage capital to be directly related to borrowing. As such, Cooperative management believes the fair value of these is not determinable.

2)

The carrying amount of memberships and miscellaneous patronage is a reasonable estimate of fair value.

3)

Management was not able to estimate the fair value of instruments which represent the Cooperative's investment in economic development instruments.

4)

Quoted market value.

Cash and Temporary Investments -

The carrying amounts of these items are a reasonable estimate of their fair value due to the short-term nature of the instruments.

Liabilities Long-Term Debt -

Due to the current market interest rates and/or short-term maturities of the Cooperative's debt, carrying amount approximates fair value.

2001 2000 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value Assets Investments Cash and temporary investments Liabilities Long-term debt (including current maturities)

S 12,144,715 1,863,737 (see above) 11,683,875 1,863,737 1,409,712 (see above) 1,409,712 114,698,527 114,698,527 116,906,906 116,906,906

Soyland Power Cooperative, Inc.

Notes to Financial Statements December 31, 2001 and 2000 Note 10: Contingencies The Cooperative is a defendant in various claims and lawsuits arising in the ordinary course of business. The Cooperative is a defendant in a contractual disagreement with a former member and based upon FERC's final order Soyland was awarded approximately $2.6 million. Soyland has not recorded this award on the accompanying financial statements as this award is under appeal.

The Cooperative has been informed by one of their members of their intent to withdraw from the Cooperative in 2002. The Cooperative has not yet determined the financial impact from this member withdrawal. However, management believes that the final settlement will not have an adverse effect on the Cooperative's financial position or results of operations.

Note 11: Related Parties Continental Cooperative Services (CCS) was incorporated in March 2000, the result of a strategic alliance between Allegheny Electric Cooperative, Inc. (Allegheny), based in Harrisburg, Pennsylvania, and the Cooperative now based in Harrisburg, Pennsylvania. CCS is organized as a Non-Profit Electric Cooperative Corporation in the state of Pennsylvania.

CCS is governed by a 26 member board of directors, composed of one representative from each affiliated distribution cooperative in Pennsylvania, New Jersey, and Illinois. Included in the Cooperative's investment in associated organizations is a $100,000 membership fee for CCS.

212 Locust Street - P.O. Box 1266 ° Harrisburg, PA 17108 717/920-1111

• FAX 717/234-1309

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PPLICORPORATION 2001 ANNUAL REPORT pp I/I 1"

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Contents Overview 1

Financial Highlights 10 Chairman's Letter 11 A Solid Strategy 14 Corporate Responsibility 20 At a Glance 22 Selected Financial and Operating Data 24 Management's Discussion and Analysis 25 Reports of Independent Accountants and Management 38 Consolidated Financial Statements and Notes 40 Glossary of Terms and Abbreviations 70 Directors and Officers 72 Shareowner Information Inside Back Cover 4v Vf

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has grown from a regional utility company into a worldwide energy corporation. Today, we are satisfying customers on three continents and our integrated strategy is growing value for shareowners.

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is electricity generation from Maine to Montana.

At more than 30 locations in Pennsylvania, Montana, Arizona, Connecticut and Maine, PPL people are generating the electricity that America needs to continue growing. PPL has increased its generating capacity by 25 percent over the last three years, and it now controls more than 10,000 megawatts of electricity generation in two of the most rapidly growing parts of the United States: the Northeast and the West.

2 ) PPL CORPORATION 2001 ANNUAL REPORT

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Focusing on promising opportunities in selected regions, PPL is building new generating facilities in Arizona, Illinois, New York and Pennsylvania. These new power plants will add another 2,000 megawatts to the company's capability to sell electricity in key U.S. wholesale and retail markets.

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servic,is award-winning service on three continents.

From Pennsylvania to Latin America to the United Kingdom, PPL people provide the kind of electricity delivery services that attracts rave reviews. In fact, three of our companies one on each of the continents we serve - have been named the best in customer service. PPL companies provide the highest-quality electricity delivery services to more than 5.5 million customers.

6 ) PPL CORPORATION 2001 ANNUAL REPORT

4, k'N NJ PPL CORPORATION 2001 ANNUAL REPORT (

7

PPL's balanced strategy is built upon a wealth of operational experience, innovative thinking and an unmatched understanding of customers.

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For the years ended December 31 9

2000 Financial Operating revenues (millions)

$ 5,683 Net income (millions)(,

498 Net income - excluding unusual items (millions) 474 Basic earnings per shareM" 3.45 Diluted earnings per share"'

3.44 Basic earnings per share - excluding unusual items 3.29 Diluted earnings per share - excluding unusual items 3.28 Dividends declared per share 1.06 Total assets (millions) 12,360 Book value per share"

13.87 Market price per share(b)

$45.188 Dividend yield"

2.35%

Dividend payout ratio(,'

31%

Dividend payout ratio - excluding unusual items(c) 32%

Market/book value ratio'(b) 326%

Price/earnings ratioW 13.14 Price/earnings ratio - excluding unusual items"1) f 13.78 Ratio of earnings to fixed charges 2.8 Return on average common equity LIV-r 27.49%

Return on average common equity - excluding unusual items e

27.14%

Operating Total retail electricity delivered (millions of kwh) 37,642 Total retail electricity supplied (millions of kwh)

Y 41,493 Total wholesale electricity supplied (millions of kwh) 40,925 Net system capacity (megawatts)"(b) 9,678 Number of customers (millions) m"'

5.7 Construction expenditures (millions) i4 @M 433 (a) Earnings for 2001 and 2000 were affected by unusual items See 'Earnings" on page 25 for additional information (b) End of period (c) Based on diluted earnings per share

10) PPL CORPORATION 2001 ANNUAL REPORT

Dear shareowners:

Leadership is not always about blazing a new trail. Wisdom is not always about a ground-breaking thought. There are occasions when leadership and wisdom are best exemplified by a consistency of purpose in times of crisis.

The year 2001 was one of those times for the United States. It also was one of those times for your company, as the U.S. electricity business was buffeted by an energy crisis on the West Coast and an unprecedented bankruptcy in Texas. The energy industry events of 2001, if true leadership and wisdom do not prevail, could have a significant detrimental impact on the future of your company - and on America's energy future.

There are some who say the events of 2001 mean that electricity deregulation has failed, that we should turn our back on the competitive markets in our business.

In fact, the energy supply crisis in California was caused largely by pre-existing energy shortages and flawed public policy in that state - not by the competitive marketplace. And, reports indicate that the collapse of the nation's largest energy company was caused by mismanagement and failure to disclose important information to the investment community - not by the competitive marketplace. Indeed, in the case of Enron, the competitive market successfully accommodated both the entrance and exit of a major market player, proving its efficacy.

PPL CORPORATION 2001 ANNUAL REPORT (11.

A regulated electricity industry served this country well for several generations, but a decade ago America recognized that modern technology and a modern economy made a competitive wholesale market a better way to encourage the cost-effective development of new electricity supplies. A similar commitment to competitive markets has led many states to deregulate electricity sales in their jurisdictions.

The competitive wholesale electricity market, if allowed to function efficiently, will outperform regulation in providing America with the electricity it needs to power a new era of growth and prosperityý At PPL Corporation, we invested a significant amount of time in 2001 and the early part of this year communicating this important message to policymakers in Washington and in the states where we do business. It is crucial that America continue to employ genuine wisdom in leading us through this perceived energy crisis, much as the President has done in his prosecution of the war against terrorism.

I pledge to you that your leadership at PPL Corporation will continue to advocate a commitment to a competitive market as the only legitimate course to a robust U.S. energy policy.

Good public policy, of course, is always about balance. So is good corporate strategy.

The year 2001 was an extremely volatile one for your company. Early in the year, U.S. energy prices were at historic highs. By year-end, prices had dropped to four-year lows. Early in the year, companies were announcing new power plant projects by the dozens and earnings records were being shattered.

By year-end, power plant cancellations were easily outpacing new project announcements and earnings were dropping below forecasts.

A year like 2001 provides a further confirmation that PPL's balanced approach - a strategy incorpo rating both generation and delivery businesses - is the wise choice to grow shareowner value in this time of turbulence.

In 2001, our integrated strategy provided excellent results from our core operations. From those operations, we earned $4.22 per share, an increase of nearly 29 percent over our record results from those operations in 2000.

Our 2001 earnings, however, were diminished by charges associated with the bankruptcy of Enron, impairment charges in our Brazilian and United Kingdom electricity delivery businesses and our market driven decision to cancel a number of power plant projects here in the United States.

As a result, our reported earnings for 2001 were $1.22 per share, compared with the $3.44 per share that we reported last year.

While we are disappointed that these charges were necessary, we believe that they reflect appropriate business decisions that will strengthen your company for the long term.

With the tumult of 2001 behind us, PPL's balanced approach to the electricity business holds the promise of steady growth.

12) PPL CORPORATION 2001 ANNUAL REPORT

Today, PPL is generating electricity at 30 locations in two of the United States' most vibrant energy markets. And, we are building facilities that will increase our capacity in those markets by 20 percent, maintaining a diverse fuel mix that balances our risks.

Today, PPL is marketing energy in key U.S. markets. Most of these sales are at the wholesale level, but we are increasing our retail marketing activities, with medium-to large-sized businesses as the most likely customers. Also, our expanding energy services business is exploring new electricity generation technologies and is offering a complete portfolio of energy management services to business customers.

Today, PPL is delivering electricity to more than 5.5 million customers in the United States, England, Wales, Chile, Bolivia, El Salvador and Brazil. Many of these customers name their electricity delivery company as their nation's superlative example of customer service.

This balance of businesses has resulted in a steady increase in earnings per share from core operations, which have more than doubled in just three years.

This balance of businesses has one important foundation: PPL employees. It is their ingenuity and dedication that lead to such steady growth.

It is our balanced strategy, along with our confidence in the ability of our employees, that gives us the optimism that PPL will be one of the companies that thrives in the current energy business.

We are forecasting a solid earnings performance from core operations. That performance, combined with our excellent cash position, has allowed us to increase our dividend by 36 percent. About 70 percent of our forecast earnings from core operations are from our Pennsylvania delivery businesses and from energy sales that we already have under contract.

PPL's future is not without challenge. We are convinced, however, that our consistency of purpose will allow you to benefit from the growth opportunities in this business while being confident about the stability of your investment.

We thank you for your continued investment in PPL.

Sincerely, William F Hecht Chairman, President and Chief Executive Officer March 21, 2002 PPL CORPORATION 2001 ANNUAL REPORT (13

PPL people: Fulfilling the promise In an energy business in which change is the only constant, PPL's true competitive advantage is its 12,000 employees on three continents.Whether building a power plant in the Arizona desert, delivering electricity in the mountains of Bolivia or producing electricity in Pennsylvania, Montana or Maine, t[he dedication and inventiveness of PPL people are evident.

Our electricity delivery businesses in PPL's electricity delivery employees, like these in Latin America, share best practices and innovative ideas with their counterparts across three continents.

14\\ PPL CORPORATION 200. ANNUAL REPORT

Pennsylvania, the United Kingdom and Chile all have received presti gious customer service awards that place PPL at the forefront not only of the electricity business but of all service businesses. Our generating facilities More than 3,000 power plant workers, such as this plant control operator in Pennsylvania, are helping PPL operate its power plants more in the United States - 10,000 efficiently than ever before.

megawatts strong - are among the most efficient in the world. And, we are building another 2,000 megawatts of capacity in key U.S. markets.

PPL CORPORATION 2001 ANNUAL REPORT (15

Growth strategy:

The right move at the right time The people of PPL know that building value for shareowners is a marathon, not a sprint. Our growth strategy relies on a world-class knowledge of the energy business and a commitment to looking beneath the surface of potential opportunities. Before embarking on an acquisition or a new power plant PPL's Sundance project in Arizona, shown under construction during 2001, will serve the growing energy demands of the development, people from disciplines Phoenix metropolitan area starting in 2002.

16) PPL CORPORATION 2001 ANNUAL REPORT

across the PPL companies bring decades of experience to an exhaustive evaluation process.

Our commitment to innovation and attention to detail resulted in the "securitization" of our Pennsylvania electricity delivery business, a complex, award-winning financial transaction Highly trained professionals provide financial, legal, human resource and communications services to the company's that unlocked significant value for shareown business lines.

ers while providing electricity price stability for customers. PPL's growth strategy is not based on what others have done. It is based on doing the thing that will result in long-term value for shareowners - and doing it right at the right time.

PPL CORPORATION 2001 ANNUAL REPORT (17

Risk? The answer is balance PPL's disciplined approach to the developing energy business has positioned the company to succeed in a variety of market conditions. Our integrated strategy incorporating our U.S. generation business and delivery businesses in the United States, the United Kingdom and Latin America -- provides us with a base of solid earnings. And our energy marketing and trading PPL professionals, working near Scranton, Pa., perform maintenance on electricity distribution lines.

18) PPL CORPORATION 2001 ANNUAL REPORT

operation (shown above) has successfully used a combination of long-term contracts and short-term sales to provide strong returns from core operations, both when electricity prices were very high and when they plummeted in 2001.

Kerr Dam, on Montana's Flathead River, is one of 11 hydroelectric This balanced approach positions facilities owned and operated by PPL Montana.

us to grow long-term value for shareowners - even in a less vibrant economy.

PPL CORPORATION 2001 ANNUAL REPORT (19

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Corporate responsibility:

What good neighbors do From the rocky coast of Maine, to Montana's Big Sky, to the fertile valleys of Chile, our company is growing.With that growth comes responsibility to the environment and to the communities where we do business. PPL Project Earth'" is the umbrella for all of our environmental, educational, social and recre ational programs serving students, families, businesses and communities. Our employee volunteers are cleaning streams and teaching inner-city kids to read. Our environ mental professionals are revitalizing old industrial sites and helping to protect rare birds. Our engineers are making our power plants cleaner. In addition, our economic development specialists are creating jobs and improving the quality of life locally.

We don't do these things because we have to. And we don't do them just because it's good business.We do them because that's what good neighbors do.

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~PPL PROJECT EARTH

~~ ~Helping Build a Smaller, Wiser World" D C To view or request a copy of the 2002 PPL Project Earth Community and Environmental Report, please visit www.pplprojectearth.com, call 610.774.4745 or write PPL Project Earth Community and Environmental Report, Two North Ninth Street, GENTW8, Allentown, PA 18101.

PPL CORPORATION 2001 ANNUAL REPORT (21

2001 Core Earnings by Major BUilnesa Segment N Supply (Generation and Marketing) ed Delivery (Pennsydvania}

International Operations PPL Generation Electricity generation Allentown, Pa.

2001 Diversifled Fuel MIx G0a/0.1 Hydro and Other PPL Global International Operation of international electricity delivery and generation businesses Fairfax, Va.

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d on, oL opeiao.n, PPL's businesses fit into a balanced, integrated port folio.We're not everywhere, but we're everywhere we need to be. Our highly profitable energy market ing operations are backed by well-run generation facilities. Our development projects for kigh-quality energy supply are in select, key U.S. markets. We continually evaluate the financial soundness of these projects. We also complement and strengthen our domestic energy supply and delivery businesses with a full range of energy services through our mechanical contracting companies in the Northeast.

22) PPL CORPORATION 2001 ANNUAL REPORT CC)

PPL EnergyPlus 4.4 million electricity delivery customers 2,500 2,750 James Miller Roger Peterson More than eight decades of power plant operating experience Ability to deliver awar-winning customer service while minimizing costs c02-PPL CORPORATION 2001 ANNUAL REPORT (23 Pennsylvania Montana Maine Connecticut Arizona Spain Portugal Chile Bolivia El Salvador Brazil England Wales

PPL Corporation (a) 2001 2000 1999 1998 1997 Income Items - millions Operating revenues

$ 5,725

$ 5,683

$ 4,590

$ 3,786

$ 3,077 Operating income Ib) 855 1,202 821 827 800 Net income (loss) 179 498 432 (569) 296 Balance Sheet Items - millions (c)

Property, plant and equipment, net 6,135 5,948 5,624 4,480 6,820 Recoverable transition costs 2,174 2,425 2,647 2,819 Total assets 12,574 12,360 11,174 9,607 9,485 Long-term debt 5,579 4,784 4,157 2,984 2,735 Company-obligated mandatonly redeemable preferred securities of subsidiary trusts holding solely company debentures 825 250 250 250 250 Preferred stock:

With sinking fund requirements 31 46 46 46 46 Without sinking fund requirements 51 51 51 51 51 Common equity 1,857 2,012 1,613 1,790 2,809 Short-term debt 118 1,037 857 636 135 Total capital provided by investors 8,461 8,180 6,974 5,757 6,026 Capital lease obligatons (d) 125 168 171 Financial Ratios Return on average common equity - %

8.41 27.49 24.70 (24.60) 10.60 Embedded cost rates b):

Long-term debt - %

6.84 6.98 6.95 7.40 7.88 Preferred stock - %

5.81 5.87 5.87 5.87 5.85 Preferred securities - %

8.13 8.44 8.44 8.44 843 Times interest earned before income taxes (e) 2.15 3.05 3.48 3.69 3 39 Ratio of earnings to fixed charges - total enterpnse basis (e) 2.0 2.8 3 0 3.5 3.3 Ratio of earnings to fixed charges and dividends on preferred stock-total enterpnse basis(e) 1.8 2.6 2.8 3.1 2.9 Common Stock Data Number of shares outstanding - thousands:

Year-end 146,580 145,041 143,697 157,412 166,248 Average 145,974 144,350 152,287 164,651 164,550 Number of record shareowners (c) 87,796 91,777 91,553 100,458 117,293 Basic EPS (loss) 1.23 3.45 2.84

$ (346) 180 Diluted EPS (loss) 1.22 344 2.84

$ (346) 1.80 Dividends declared per share 1.06 1.06 100

$ 1.335 167 Book value per share (c)

$ 12.67

$ 13.87

$ 11.23

$ 11.37

$ 16.90 Market price per share (c)

$ 34.85

$45.188

$22.875

$27.875

$23.938 Dividend payout rate - % in 87 31 35 (39) 93 Dividend yield - % W 3.04 2.35 4.37 4.79 6.98 Pnce earnings ratio i(Oh) 28.57 13.14 8.05 (8.06) 13.30 Sales Data - Millions of kWh Electric energy supplied - retail 43,470 41,493 36,637 31,651 31,964 Electric energy supplied - wholesale 27,683 40,925 32,045 36,708 21,454 Electric energy delivered - retail 40,529 37,642 35,987 32,144 31,964 (a) The earnings for each year were affected by unusual Items These adjustments affected net income. See "Earnings" in Management's Discussion and Analysis for a description of unusual items in 2001, 2000 and 1999 (b) Operating income of certain years restated to conform to the current presentation (c) At year-end (d) PPL Electric terminated its capital lease In 2000. See Note 12 for additional information Me)

Computed using earnings and fixed charges of PPL and its subsidiaries. Fixed charges consist of interest on short-and long-term debt, other interest charges, interest on capital lease obligations and the estimated interest component of other rentals i) Based on diluted EPS i( Based on year-end market pnces (h) Based on diluted EPS excluding unusual items, the pnce earnings ratios are: 2001, 8 26, 2000, 13 78, 1999, 9 73, 1998, 14.91, 1997, 11 97.

24) PPL CORPORATION 2001 ANNUAL REPORT

Certain statements contained in this report concerning expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements which are other than statements of histoncal facts are "forward-looking statements" within the meaning of the federal securities laws. Although PPL believes that the expectations and assumptions reflected in these statements are reason able, there can be no assurance that these expectations will prove to have been correct. These forward-looking statements involve a number of risks and uncertainties, and actual results may differ matenally from the results discussed in the forward-looking statements. In addition to the specific factors discussed in the Review of the Financial Condition and Results of Operations sections herein, the following are among the important factors that could cause actual results to differ matenally from the forward-looking statements: market demand and pnces for energy, capacity and fuel, weather variations affecting customer energy usage; competition in retail and wholesale power markets; the effect of any business or industry restructuring, the profitability and liquidity of PPL and its subsidiaries; new accounting requirements or new interpretations or applications of existing requirements; operating performance of plants and other facilities; environmental conditions and requirements; system conditions and operating costs; development of new projects, markets The following discussion explains significant changes in principal items on the Statement of Income, companng 2001 to 2000, and 2000 to 1999.

Certain items on the Statement of Income have been impacted by PPL Global's investment in CEMAR. The results of CEMAR are included for the entire year in 2001, but were included for only the last three months of 2000 Certain items on the Statement of Income have also been impacted by the acquisition of the Montana generating assets by PPL Montana in December 1999. As such, the results of PPL Montana are included for all of 2000 and 2001, but only for the last two weeks of 1999.

Earnings Net income, and the related EPS, were as follows:

2001 2000 1999 Net Income (millions of dollars)

$179

$ 498

$ 432 EPS - basic

$1.23

$3 45

$2.84 The changes in net income from year to year are, in part, attributable to several unusual items with significant earnings impacts that are shown below. Refer to specific Notes to the Financial Statements for dis-and technologies; performance of new ventures; political, regulatory or economic conditions in states or countries where PPL or its subsidiaries conduct business; receipt of necessary governmental approvals; capital market conditions and decisions regarding capital structure; stock pnce performance; credit ratings, foreign exchange rates; state and federal regulatory developments; new state or federal legislation; national or regional economic conditions, including any potential effects arising from the September 11, 2001 terrorist attacks in New York, Washington, D C and Pennsylvania and consequential hostilities; and the commitments and liabilities of PPL and its subsidiaries. Any such forward-looking state ments should be considered in light of such important factors and in conjunction with other documents of PPL on file with the SEC New factors that could cause actual results to differ materially from those described in forward-looking statements emerge from time to time, and it is not possible for PPL to predict all of such factors, or the extent to which any such factor or combination of factors may cause actual results to differ from those contained in any forward-looking state ment. Any forward-looking statement speaks only as of the date on which such statement is made, and PPL undertakes no obligations to update the information contained in such statement to reflect subsequent developments or information.

cussion of certain of these items. The items without note references are discussed in "Other Charges," "Other Operation Expenses" and "Other Income and (Deductions)."

(Millions of dollars)

Net income - actual Unusual items (net of tax)

Write-down of WPD 1953 investment in Teesside (Note 22)

Write-down investment in WPD 1953 and WPDL (Note 22)

Write-down investment in CEMAR (Note 22)

Accounting method change pensions (Note 14)

Enron impact on trading (Note 21)

Cancellation of generation projects (Note 11)

Environmental insurance recovenes Sale of Sunbury plant and related assets Sale of SWEB supply business Secuntization (Note 5)

Wnte-down of carrying value of Investments 2001 2000 1999

$179

$498

$432 (21)

(117)

(217) 10 (8)

(88) 24 42 64 19 (51)

Net income from core operations

$ 620

$474

$358 PPL CORPORATION 2001 ANNUAL REPORT (25 Ir w

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Excluding the effects of unusual items, net income from core opera tions increased from $474 million in 2000 to $620 million in 2001, or 31%. The earnings improvement was primarily due to:

"* higher margins on eastern and western U.S. wholesale energy transactions;

"* lower operating costs, partially due to lower pension expense;

"* favorable tax credits from synfuel operations; and

"* higher eamings from mechanical contracting subsidiaries.

These eamings improvements in 2001 were partially offset by higher levels of interest expense and increased dividends resulting from the issuance of the PEPS Units.

PPL expects that lower wholesale pnces will adversely impact core earnings in 2002. Additionally, PPL anticipates wnting off the remaining balance of its investment in CEMAR, approximately $100 million, in 2002. See Note 22 for additional information.

Excluding the effects of unusual items, net income from core opera tions increased from $358 million in 1999 to $474 million in 2000, or 32%. The earnings improvement was primarily due to:

"* higher margins on wholesale energy transactions, including PPL Montana;

"* the end of a one-year 4% rate reduction for delivery customers in Pennsylvania;

"* gains on sales of emission allowances;

"* lower depreciation on certain fossil generating assets; and

"* fewer common shares outstanding.

These eamings improvements in 2000 were partially offset by higher levels of interest expense, higher costs of wages and employee benefits, and the write-off of a regulatory asset related to the loss incurred in the Pennsylvania Retail Access Pilot Program.

Operating Revenues Retail Electric and Gas The increase (decrease) in retail revenues from electric and gas opera tions was attributable to the following:

(Millions of dollars) 2001 vs. 2000 2000 vs. 1999 Retail Electnc Revenue PPL Electric Electnc delivery

$ 12

$ 28 PLR electric generation supply 283 32 PPL EnergyPlus Electnc generation supply (228) 88 PPL Global Electric delivery 88 75 Other (8) 3 147 226 Retail Gas Revenue PPL Gas Utlirties 21 25 PPL EnergyPlus 22 43 43 68 Retail Revenues - total

$190

$294 Operating revenues from retail electric operations increased in 2001 compared to 2000 primarily due to:

"* higher net supply revenues (increases in PPL Electric revenues as a PLR, offset by decreased emphasis of PPL EnergyPlus as a retail supplier);

"* increase in PPL Global intemational electric delivery revenues, primarily due to the acquisition of CEMAR; and

"* higher delivery revenues, reflecting a 2% increase in deliveries of electricity.

Operating revenues from retail electnc operations increased in 2000 compared to 1999 primanly due to:

"* higher supply revenues (increases in PPL EnergyPlus revenues as a retail supplier and PPL Electric revenues as a PLR);

"* increased PPL Global international electric delivery revenues, pnmanly due to the acquisition of CEMAR; and

"* higher delivery revenues, reflecting an end of a one-year 4% rate reduction for delivery customers.

Pursuant to the Customer Choice Act and a restructunng settlement with the PUC, PPL Electric is required, through 2009, to provide electncity at pre-determined prices to its delivery customers who do not select an alternate supplier. While these supply rates vary by customer class, the settlement provides for average rates ranging from 4.16 cents per kWh in 2001, increasing to 5.02 cents per kWh in 2009. As part of this set tlement agreement, PPL Electric also agreed to a cap on its average transmission and distnbution rates of 1.74 cents per kWh through 2004.

Both PPL Gas Utilities and PPL EnergyPlus expenenced higher retail gas revenues in both periods. PPL Gas Utilities' increase in 2001 com pared to 2000 was primanly due to a base rate increase effective January 1, 2001, and higher gas commodity prices. PPL Gas Utilities' increase in 2000 compared to 1999 was pnmarily due to greater demand and higher gas commodity pnces. PPL EnergyPlus' increase in both pen ods was pnmarily due to intensified gas marketing efforts, and increased retail pncing attributed to higher wholesale gas commodity costs.

Wholesale Energy Marketing and Trading The increase (decrease) in revenues from wholesale energy marketing and trading activities was attnbutable to the following:

(Millions of dollars) 2001 vs. 2000 2000 vs. 1999 Eastern U.S. markets Bilateral/Spot market

$(203)

$315 Cost-based (58)

(38)

Gas & oil (140)

(39)

Other 11 (3)

(390) 235 Western U.S. markets 71 438 Intercompany eliminations (49)

(33)

$(368)

$640 The decrease in revenues in eastern U.S. markets in 2001 compared to 2000 was primarily due to lower bilateral/spot market sales, caused by unplanned outages, which created fewer opportunities to sell forward and less trading activity, as well as lower spot market prices. The decrease in revenues also reflected the expiration of capacity and energy agreements

26) PPL CORPORATION 2001 ANNUAL REPORT alwir-affMce El ac-com,011, ME Ix"'VeM,

with JCP&L and BG&E, and lower gas and oil trading activity (Energy pur chases also decreased in 2001 compared with 2000 Refer to "Energy Purchases' for more information.) The increase in western U.S markets was due to higher wholesale energy prices related to the energy supply shortage in the western U.S in the first quarter of 2001.

In June 2001, the FERC instituted a series of pnce controls designed to mitigate (or cap) prices In the entire western U.S. as a result of the California energy crisis These price controls have contnbuted to the lowering of spot and forward energy pnces in the western U.S.

The increase in revenues in eastern U S. markets in 2000 compared to 1999 was pnmarily due to higher bilateral market pricing and increased sales volumes to other counterparties. The increase in rev enues in western U.S. markets was due to the acquisition of the Montana generating assets by PPL Montana in December 1999.

Energy Related Businesses Energy related businesses (see Note I to the Financial Statements) contributed $84 million to the 2001 operating income of PPL, an increase of $38 million from 2000. The increase pnmanly reflects PPL Global's higher equity earnings from its U.K. investments and higher operating income from the mechanical contracting and engineering subsidianes.

These gains were partially offset by an increase in PPL Global's project development expenses and pre-tax operating losses from synfuel projects.

(However, after the recording of tax credits associated with synfuel opera tions, the synfuel projects contnbuted approximately $19 million to net income for 2001.)

Energy related businesses contributed $46 million to the 2000 oper ating income of PPL, which was a decrease of $14 million from 1999. This decrease was pnmanly due to operating losses incurred by PPL's synfuel projects. These and other losses were partially offset by increased oper ating income of the mechanical contracting and engineenng subsidianes, and higher equity earnings from PPL Global's international investments.

Fuel Fuel costs increased by $63 million in 2001 compared with 2000, and by $47 million in 2000 compared with 1999.

Electric fuel costs increased by $32 million in 2001 compared with 2000. The increase was pnmanly attributable to increased generation output of PPL Generation's oil/gas-fired units, and higher per-unit costs for this generation, to support an unplanned outage. The increase also reflects higher interchange transmission requirements and higher coal costs. The increase was partially offset by a decrease In coal-fired gener ation due to the unplanned outage.

Electric fuel costs increased by $23 million in 2000 compared with 1999. Excluding PPL Montana, electric fuel costs decreased by $8 million dunng 2000 compared with 1999 The decrease was attributable to lower unit costs for nuclear generation, in part due to a $5 million accrual in 1999 for dry cask canisters for on-site spent fuel storage. The decrease from lower unit costs was partially offset by higher generation at the Susquehanna station.

The cost of natural gas and propane increased by $31 million in 2001 compared with 2000. The increase reflects higher gas pnces as well as greater off-system sales volume by PPL Gas Utilities.

The cost of natural gas and propane increased by $24 million in 2000 compared with 1999 This increase was pnmanly due to higher sales by PPL Gas Utilities and intensified gas marketing efforts by PPL EnergyPlus.

Energy Purchases The increase (decrease) in energy purchases was attnbuted to the following:

(Millions of dollars) 2001 vs. 2000 2000 vs 1999 Domestic Eastern markets

$(506)

$216 Western markets 63 121 International 47 46

$(396)

$383 Excluding energy purchases of CEMAR, energy purchases decreased by $443 million in 2001 compared with 2000. This decrease was pri manly due to lower purchases of electricity and gas in the eastern U.S.

markets, attributable to a reduction in volumes due to fewer wholesale load obligations and less trading. Partially offsetting these reductions in volumes were higher average purchased power costs in the first half of 2001, and recognized losses on certain long-term transactions by PPL Montana.

Excluding the impact of PPL Montana, energy purchases increased by $262 million during 2000, compared with 1999. This increase was primarily due to higher wholesale pnces for energy purchases needed to supply retail load obligations.

Other Operation Expenses Other operation expenses increased by $54 million in 2001 compared to 2000. This increase was primranly due to a gain on the sale of emission allowances and an insurance settlement for environmental liability cover age in 2000 (both recorded as reductions of expense). The increase also reflects additional operating expenses of CEMAR in 2001. These increases were partially offset by lower pension costs in 2001 primarily due to pension investment performance.

Other operation expenses increased by $40 million in 2000 com pared to 1999. Excluding the expenses of PPL Montana, other operation expenses decreased by $37 million in 2000 when compared with 1999.

This decrease was pnmanly the result of environmental insurance recov enes, gains on the sale of emission allowances and reduced pension costs. These reductions were partially offset by increased expenses due to the CEMAR acquisition, an environmental loss accrual and increased costs of wages and other benefits.

Amortization of Recoverable Transition Costs Amortization of recoverable transition costs increased by $24 million in 2001 compared to 2000 This increase was primarily due to the collection of CTC revenues related to prior year CTC deferrals of amounts in excess of the Pennsylvania rate cap The increase also reflects higher amortiza tion of intangible transition property due to lower interest expense on the transition bonds issued under the Customer Choice Act.

PPL CORPORATION 2001 ANNUAL REPORT (27

Amortization of recoverable transition costs increased by $33 million in 2000 compared to 1999. This increase was the result of recording twelve months of amortization in 2000 as compared to five months of amortiza tion in 1999. This increase was partially offset by a decrease in CTC rev enues related to a deferral of CTC amounts in excess of the rate cap.

Maintenance Expenses Maintenance expenses increased by $44 million in 2000 compared with 1999. Excluding the expenses of PPL Montana, maintenance expenses increased by $31 million in 2000 compared with 1999. This increase was primarily due to higher maintenance costs at the Susquehanna gen erating station, higher transmission and distnbution line maintenance expenses and higher costs of wages.

Other Charges Other charges of $486 million in 2001 consisted of the wnte-down of international energy projects (see Note 22) and the cancellation of generation development projects (see Note 11).

Other charges of $51 million in 1999 consisted of the write-downs of PPL Global's investments in WPD and two smaller projects.

Other Income and (Deductions)

Other income increased by $27 million in 2001 compared with 2000.

This increase was due to charges in 2000 resulting from a PUC ruling requinng the wnte-off of the regulatory asset for the loss incurred in Pennsylvania's Retail Access Pilot Program, an adverse FERC decision regarding investments in PJM, and an environmental loss contingency.

Other income decreased by $163 million in 2000 compared with 1999 This decrease was due to the charges recorded in 2000, as descnbed above, and to gains in 1999 on the sale of SWEB's electric supply business ($78 million pre-U.S. tax) and the Sunbury plant and related assets ($66 million pre-tax).

Taxes, Other Than Income Taxes, other than income, decreased by $21 million in 2001 compared with 2000 This decrease was pnmanly the result of lower gross receipts tax accruals due to a reduction in the Pennsylvania gross receipts tax rate. Changes in gross receipts tax do not significantly affect earnings as they are substantially recovered in rate-based revenues.

Taxes, other than income, increased by $39 million in 2000 compared with 1999. This increase was primanly due to a higher Pennsylvania gross receipts tax rate, and increased PURTA, real estate and capital stock taxes.

Financing Costs Interest expense increased by $11 million in 2001 compared with 2000.

This increase was the net effect of higher interest on long-term debt, off set by lower interest on short-term debt. The increase in interest on long term debt reflects the issuance of $800 million of senior secured bonds by PPL Electric, $500 million of senior unsecured notes by PPL Energy Supply and debt issued by PPL Global's consolidated affiliates. A portion of these proceeds were used to pay down commercial paper balances, which decreased such interest expense.

Interest expense increased by $99 million in 2000 compared with 1999. This increase was pnmarily due to the issuance of transition bonds in August 1999, and interest on PPL Montana's bndge financing.

Dividends on preferred securities increased by $26 million in 2001 compared with 2000 due to the issuance of the PEPS Units in the second quarter of 2001.

Income Taxes Income tax expense decreased by $33 million in 2001 compared with 2000. This decrease was primanly due to a change in pre-tax domestic book income and additional federal synfuel tax credits recog nized. These decreases were offset by deferred income tax valuation allowances recorded on the company's investments in Brazil and the U K. (see Note 22).

Income tax expense increased by $120 million in 2000 compared with 1999. This increase was pnmanly due to an increase in pre-tax book income and a release of deferred income taxes no longer required due to securitization, recognized in the third quarter of 1999.

Liquidity At December 31, 2001, PPL's net cash position was $832 million, which reflects $950 million in cash and cash equivalents less $118 million of short-term debt. PPL expects this cash and anticipated cash flows from operations to be sufficient to meet PPL's cash requirements for 2002.

If PPLs cash requirements exceed its available cash, PPL would attempt to obtain the necessary funds from the issuance of commercial paper, drawing on credit lines, or capital market financings subject to market conditions. PPL cannot provide assurances that any of these funding sources will be available to PPL on acceptable terms.

Cash and cash equivalents are derived from cash from operations, cash from financing activities and cash from investing activities. Cash from operations in 2001 was $908 million, compared to $871 million in 2000. As an asset-backed provider of electncity, the stability of PPLs cash from operations as it relates to the supply of electricrty is influ enced by the market pnces of electricity, the cost of fuel used in the pro duction of electricity and the operational availability of generating units, among other factors.

An important element supporting the stability of PPL's cash from operations is its continuing effort to secure long-term commitments from wholesale and retail customers and long-term fuel supply contracts. In 2001, PPL EnergyPlus signed a full requirements, eight-year contract to supply PPL Electric with estimated peak demand between 6,700 and 7,000 MW for PPL Electric's PLR load. PPL EnergyPlus also signed a five-year contract with Montana Power for 300 MW of around-the-clock electricity supply and 150 MW of on-peak supply. Commitments under these contracts represent between 75%-85% of total anticipated margins from wholesale and retail activity over the next five years (2002-2006).

Also, PPL has contracted for over 90% of its anticipated fuel require ments for 2002 and for a lesser amount in future years. PPL will con tinue to evaluate long-term contracts as market conditions warrant.

In 2002, PPL also finalized multi-year tolling agreements with the Long Island Power Authonty for about 160 MW of generation that the company is building at two Long Island sites. Under these tolling

28)

PPL CORPORATION 2001 ANNUAL REPORT M-IffmWE Etcloma-C-Gl MM ulftivelIc-,

agreements, PPL will convert fuel supplied by the Long Island Power Authonty to electricity and will receive payments for use of its facilities.

PPL is also providing up to 135 MW of supply, for vanous terms, to large industnal customers in Montana.

PPL EnergyPlus enters into contracts under which it agrees to sell and purchase electricity, natural gas, oil and coal. PPL also enters into contracts designed to lock-in interest rates for future financings or effect changes in PPL's exposure to fixed or floating interest rates These contracts often provide for cash collateral or other credit enhancement, or reductions or terminations of a portion or all of the contract through cash settlement in the event of a downgrade of PPL or the respective subsidiary's credit ratings or adverse changes in market prices. For example, in addition to limiting its trading ability, if PPL or its respective subsidiary's ratings were lowered to below "investment grade" and energy prices increased by more than 100%, PPL estimates that, based on its December 31, 2001 position, it would have to post collateral of approximately $150 million.

PPL has in place risk management programs that, among other things, are designed to monitor and manage its exposure to volatility of cash flows related to changes in energy pnces, interest rates, foreign currency exchange rates, counterparty credit quality and the operational perfor mance of its generating units.

Net cash provided by financing activities was $267 million in 2001, compared to $233 million in 2000. Commercial paper programs at PPL Energy Supply and PPL Electric, providing for the issuance of up to

$1.1 billion and $400 million, respectively, are maintained to meet short term cash needs. If the existing credit ratings on these commercial paper programs of each company were lowered, it is unlikely that there would be sufficient investor demand for the commercial paper. In addition, the amount of commercial paper that could be outstanding under either PPL Energy Supply or PPL Electric's program is generally limited to the amount of their respective unused credit lines.

PPL Energy Supply and PPL Electric maintain unsecured credit lines of $1.1 billion and $400 million that are available as backstops for their respective commercial paper programs or for direct borrowings. PPL Energy Supply's and PPL Electric's credit lines are also available to issue up to

$700 million and $200 million, respectively, in letters of credit that may be needed for general corporate purposes, including margin requirements resulting from energy contracts. There was no commercial paper out standing or borrowings under its credit line by PPL Electric at December 31, 2001 or 2000. There was no commercial paper outstanding or borrowings under its credit line by PPL Energy Supply at December 31, 2001, and PPL Energy Supply did not have a commercial paper program or credit line in 2000 In addition, the lenders in the credit line had issued $26 million of letters of credit on PPL Energy Supply's behalf at December 31, 2001.

PPL Montana also maintains a $250 million unsecured credit line that is available for borrowings and letters of credit. PPL Montana can directly borrow up to $100 million or request that lenders issue up to $225 million in letters of credit provided that combined borrowings and outstanding letters of credit do not exceed $250 million. PPL Montana had borrowed

$44 million under its credit line at December 31, 2001, as compared to no borrowings at December 31, 2000. The lenders in the credit line had issued $25 million of letters of credit on PPL Montana's behalf at December 31, 2001, as compared to $70 million at December 31, 2000.

These credit lines contain borrowing conditions, including the absence of certain material adverse changes, financial and other covenants, that if not met, would limit or restrict the ability to borrow or issue letters of credit or cause early payment of outstanding borrowings In addition, the interest rates applicable to borrowings under the credit lines are based on a scale indexed to the respective companies' credit ratings Under its credit lines, PPL Energy Supply must maintain a consolidated debt to capitalization percentage not greater than 65%, and an interest coverage ratio of not less than 2.0 times consolidated earnings before income taxes, depreciation and amortization, in each case as calculated in accordance with the credit lines At December 31, 2001, PPL Energy Supply's consolidated debt to capitalization percentage, as developed in accordance with its credit lines, was 29% At December 31, 2001, PPL Energy Supply's interest coverage ratio, as developed in accordance with its credit line, was 12.6. PPL Energy Supply did not have credit lines in 2000 Under its credit line, PPL Electric must maintain a consolidated debt to capitalization percentage not greater than 70% At December 31, 2001 and December 31, 2000, PPL Electnc's consolidated debt to capi talization percentage, as developed in accordance with its credit line, was 57% and 43%, respectively Under its credit lines, PPL Montana must maintain a consolidated debt to capitalization percentage not greater than 60% At December 31, 2001 and December 31, 2000, PPL Montana's consolidated debt to capitalization percentage, as developed in accor dance with its credit lines, was 51% and 44%, respectively. At this time, PPL believes that these covenants and other borrowing conditions will not limit access to these funding sources.

PPL and its subsidiaries also have available funding sources that are provided through operating leases that are not recorded on the balance sheet. These operating leases provide funds for developing, constructing and operating generation facilities and equipment. Failure to meet the financial and other covenants contained in these operating leases could limit or restrict access to these funds or require early payment of obligations. At this time, PPL believes that these covenants will not limit access to these funding sources.

Under the operating leases entered into to manufacture and construct the natural gas-fired simple-cycle generation facilities, PPL Energy Supply's subsidiaries act as a construction agent for the lessor to manufacture the equipment and for construction of the facility Upon commercial oper ation, PPL Energy Supply subsidianes will operate the facilities, be respon sible for all of the costs associated with the operation and maintenance of the facilities and will make rental payments to the lessor trusts.

In November 2005, under the terms of the $555 million operating lease for the turbine generators, which terminates in November 2007, one of PPL Global's subsidianes is required to deposit in a cash collat eral account an amount equal in cash to approximately 82% of all funded equipment costs. Also, PPL guarantees the payment obligations under this lease financing Accordingly, as guarantor, PPL must maintain a con solidated debt to capitalization percentage not greater than 70%. At December 31, 2001 and December 31, 2000, PPL's consolidated debt to capitalization percentage, as developed in accordance with the guaran tee, was 62% and 63%, respectively At December 31, 2001, the out standing lease balance was $271 million.

PPL CORPORATION 2001 ANNUAL REPORT (29

In May 2006, under the terms of the $1.06 billion operating lease which terminates in April 2008, one of PPL Global's subsidiaries is required to deposit in a cash collateral account an amount equal in cash to approximately 83% of all funded asset costs. Also, PPL Energy Supply guarantees the payment obligations under this operating lease. Accord ingly, as guarantor, PPL Energy Supply must meet the same covenant tests as applied to its credit lines. At December 31, 2001, the outstand ing lease balance was $454 million. In February 2002, the PPL Global subsidiary reduced the available commitment under the lease to approxi mately $700 million.

Under the terms of the $455 million Lower Mt. Bethel combined-cycle operating lease which terminates no later than September 30, 2014, the PPL Global subsidiary is not required to make any cash payments to the lessor until the facility is completed. However, the PPL Global subsidiary could be called upon to repay approximately 90% of the then-outstanding facility costs. In addition, during the lease term, the PPL Global sub sidiary could, subject to certain conditions, purchase the facility from the lessor, offer to assume 100% of the outstanding debt, and pay a reduced Contractual Cash Obligations make-whole premium to any debt holder that does not accept such offer.

Also, PPL Energy Supply guarantees the payment obligations under this operating lease. Accordingly, as guarantor, PPL Energy Supply must meet the same covenant tests as applied to its credit lines. At December 31, 2001 the outstanding lease balance was $116 million.

The PPL Montana Colstrip leases provide two renewal options based on the economic useful life of the generation assets at the end of the 36-year lease term that terminates in 2036. In addition, the lease places certain restriction on PPL Montana's ability to incur additional debt, sell assets and declare dividends. At December 31, 2001 the outstanding debt balance within the lease was $334 million.

In addition to the leasing arrangements discussed above, PPL and its subsidiaries lease vehicles, office space, land, buildings, personal computers and other equipment under separate lease arrangements.

See Note 12 to the Financial Statements for a further discussion of the operating leases.

At December 31, 2001, the estimated contractual cash obligations of PPL were as follows:

Less than (Millions of dollars)

Total 1 year 1-3 years 4-5 years After 5 years Long-term Debt 1a)

$ 5,591

$ 498

$1,668

$1,628

$1,797 Capital Lease Obligations Operating Leases (b) 2,616 368 255 791 1,202 Unconditional Purchase Obligations 447 65 219 163 Other Long-term Obligations 1,380 171 522 347 340 Total Contractual Cash Obligations

$10,034

$1,102

$2,664

$2,929

$3,339 (a) Includes principal maturities only.

(b) Includes current amounts for operating leases in effect, projected amounts for projects under construction and residual value guarantees.

PPL, PPL Energy Supply and PPL Electric provide guarantees for certain arrangements, require early maturity of such arrangements or limit PPL's affiliate financing arrangements and enable certain transactions. Some ability to enter into certain transactions. At this time, PPL believes that of the guarantees contain financial and other covenants that, if not met, these covenants will not limit access to the relevant funding sources.

would limit or restrict the affiliates' access to funds under these financing At December 31, 2001, the estimated commercial commitments of PPL were as follows:

Other Commercial Commitments Amount of Commitment Expiration per Period Total Amounts Less than (Millions of dollars)

Committed I year 1-3 years 4-5 years Over 5 years Lines of Credit (a)

Standby Letters of Credit 52

$ 26

$ 26 Draws Under Lines of Credit 44 44 Guarantees Debt (b) 776 1

$775 Performance 117 117 Standby Repurchase Obligations Other Commercial Commitments 114 109 5

Total Commercial Commitments

$1,103

$180

$ 31

$892 (a) Available credit facilities of $1,762 million.

iMi Includes guarantees on certain operating lease obligations already included in the table of Contractual Cash Obligations

30) PPL CORPORATION 2001 ANNUAL REPORT I __a at"C'MUIP(b fsxjc.) Klytv-OU

The terms goveming the securities, guarantees, lease obligations and other commitments issued by PPL and its subsidiaries contain financial and other covenants that require compliance in order to avoid defaults and accelerations of payments Further, a change in control under certain of these arrangements would constitute a default and could result in early maturity of such arrangements. In addition, certain of these arrangements restnct the ability of PPL's subsidiaries to pay or declare dividends, issue additional debt, sell assets, or take other actions if certain conditions are not met. At this time, PPL believes that it and its subsidiaries will be able to meet these covenant requirements. In order to meet its maturing obligations in future years, PPL expects that it and its subsidiaries will have to continue to access both the bank and capital markets. The long term debt and similar securities of PPL and its subsidianes and their maturities are set forth in the table of Contractual Cash Obligations on the previous page.

Net cash used in investing activities In 2001 was $702 million, com pared to $757 million in 2000 Capital expenditures have histoncally been for acquisitions and to support both existing and construction of new gen eration, transmission and distribution facilities. PPL's capital investment needs are expected to Increase in 2002. A significant portion of PPL's 2002 capital requirements will be funded through the lessor trusts estab lished in 2001 with the remainder funded from cash and cash equivalents on hand at December 31, 2001, and cash from operations in 2002.

(See "Capital Expenditure Requirements" for additional information.)

Energy Marketing and Trading Activities PPL, through PPL EnergyPlus, sells and purchases physical energy at the wholesale level under FERC market-based tariffs throughout the U S Because of the generating assets PPL owns or controls, the majority of PPL's energy transactions qualify for accrual or hedge accounting. In addition, PPL enters into financial contracts to hedge the price risk asso ciated with its electricity, gas and oil positions At December 31, 2001, PPL had net assets of $50 million related to its energy hedging activities.

Certain transactions, however, meet the definition of trading activities as defined by EITF 98-10, 'Accounting for Contracts Involved in Energy Trading and Risk Management Activities." These trading activities include physical and financial energy contracts, such as forwards, futures, options, and swaps that do not qualify for hedge accounting or were entered into to profit from market fluctuations. Trading activities also include certain transactions for capacity and ancillary products, such as transmission congestion credits (TCCs) and fixed transmission rights (FTRs).

TCC and FTR contracts are financial instruments that enable the holder to receive compensation for certain congestion-related transmis sion charges incurred to relieve that congestion. PJM grants FTRs to PPL based upon load being served and owned generation and these FTRs are utilized during the normal course of business These transactions are accounted for under accrual accounting. In addition to FTRs granted, PPL can purchase and sell TCCs and FTRs at auctions. Only these auction related TCCs and FTRs, as well as capacity transactions that are not related to PPL's generating assets, are included in trading activities. Net unrealized gains from trading transactions made up approximately 1% of PPLs gross margins from the sale of energy for the year ending December 31, 2001.

PPL's trading contracts mature at various times through 2006. The following chart sets forth PPL's net fair market value of trading contracts as of December 31, 2001.

(Millions of dollars)

Gains/(Losses)

Fair value of contracts outstanding at the beginning of the year

$22 Contracts realized or otherwise settled during the year (16)

Fair value of new contracts when entered Into during the year (4)

Other changes in fair values (2)

Fair value of contracts outstanding at the end of the year

$ 0 Dunng 2001, PPL reversed net gains of approximately $16 million related to contracts entered into prior to January 1, 2001. This amount does not reflect intra-year contracts that were entered into and settled dunng the penod.

The fair value of new contracts when entered into during the year is usually zero, because they are entered into at current market prices.

However, PPL sometimes enters into certain contracts at a value other than zero. These contracts consist of options, TCCs and FTRs. When PPL enters into an option contract, a premium is paid or received TCCs and FTRs purchased or sold at public auctions are entered Into at an agreed upon auction price. PPL paid $4 million net-of-tax during 2001 to enter into these contracts Other changes in fair value, a loss of approximately $2 million, represent changes in the market value of contracts outstanding at the end of 2001.

PPL's short-term trading contracts, other than exchange-traded futures contracts, are recorded as 'Price risk management assets" and "Price risk management liabilities" on the Balance Sheet. Long-term trading contracts are included in "Regulatory and Other Noncurrent Assets Other" and "Deferred Credits and Other Noncurrent Liabilities - Other" Exchange-traded futures contracts are recorded as "Other investments" and "Other current liabilities" on the Balance Sheet. All unrealized gains and losses on trading activities are recognized currently in earnings as "Wholesale energy marketing and trading" revenues and "Energy pur chases" on the Statement of Income.

As of December 31, 2001, the net loss on PPL's trading activities expected to be recognized in earnings during the next three months is approximately $1 million.

Modeling Methodologies PPL uses vanous methodologies to simulate forward pnce curves in the energy markets to estimate the size and probability of changes in market value resulting from commodity pnce movements. The methodologies require several key assumptions, including selection of confidence levels, the holding period of the commodity positions, and the depth and appl cability to future periods of histoncal commodity price information.

PPL CORPORATION 2001 ANNUAL REPORT (31

The following chart segregates estimated fair values of PPLs trading portfolio at December 31, 2001 based on whether the fair values are determined by quoted market prices or other more subjective means.

Fair Value of Contracts at Period-End Gains/(Losses)

Matunty Less Matunty Matunty in Maturity Excess of Total (Mihons of dollars)

Than 1 year 1-3 years 4-5 years 5 years Fair Value Source of Fair Value Pnces actively quoted Pnces provided by other external sources

$(1)

$1 Pnces based on models and other valuation methods (1) 1 Fair value of contracts outstanding at the end of the period

$(2)

$2 The fair value of contracts using prices actively quoted represents the fair value of exchange-traded futures contracts quoted on the New York Mercantile Exchange. The fair value of contracts provided by other exter nal sources represents the midpoint of the bid/ask spreads obtained through third-party brokers. To be conservative, the open position is then adjusted so that it is marked at the ask price (for open purchase positions) or the bid price (for open sales positions). PPL utilizes internal valuation models to determine the fair value of certain non-exchange traded con tracts, including TCCs, FTRs and capacity contracts, because they cannot be quoted through an organized exchange or brokers. The fair value of these contracts on PPL's financial statements reflects a valuation adjust ment for the change in market value as determined by the internal model.

Commodity Price Risk If PPL were unable to deliver firm capacrty and energy under its agree ments, under certain circumstances it would be required to pay damages.

These damages would be based on the difference between the market pnce to acquire replacement capacity or energy and the contract price of the undelivered capacity or energy. Depending on price volatility in the wholesale energy markets, such damages could be significant. Extreme weather conditions, unplanned power plant outages, transmission disrup tions, non-performance by counterparties (or their counterparties) with which it has power contracts and other factors could affect PPL's ability to meet its firm capacity or energy obligations, or cause significant increases in the market price of replacement capacity and energy.

Although PPL attempts to mitigate these risks, there can be no assur ance that it will be able to fully meet its firm obligations, that it will not be required to pay damages for failure to perform, or that it will not expe rience counterparty non-performance in the future. PPL attempts to miti gate risks associated with open contract positions by reserving generation capacity to deliver electricity to satisfy its net firm sales con tracts and, when necessary, by purchasing firm transmission service. PPL adheres to a comprehensive risk management policy and programs, including established credit policies to evaluate counterparty credit risk.

Credit Risk Credit nsk relates to the risk of loss that PPL would incur as a result of non-performance by counterparties of their contractual obligations. PPL maintains credit policies and procedures with respect to counterparties (including requirements that counterparties maintain certain credit rat ings cnteria) and requires other assurances in the form of credit support or collateral in certain circumstances in order to limit counterparty credit nsk. However, PPL has concentrations of suppliers and customers among electric utilities, natural gas distribution companies and other energy marketing and trading companies. These concentrations of counterpar ties may impact PPL's overall exposure to credit risk, either positively or negatively, in that counterparties may be similarly affected by changes in economic, regulatory or other conditions. PPL records certain non-per formance reserves to reflect the probability that a counterparty with contracts that are out of the money (from the counterparty's standpoint) will default in its performance, in which case PPL would have to sell into a lower-priced market or purchase from a higher-priced market. These reserves are reflected in the fair value of assets recorded in "Pnce risk management assets" on the financial statements. PPL has also estab lished a reserve with respect to certain sales to the California ISO for which PPL has not yet been paid, as well as a reserve related to PPL's exposure as a result of the Enron bankruptcy, which is reflected in "Accounts receivable." See Notes 20 and 21 to the Financial Statements.

Related Party Transactions PPL is not aware of any matenal ownership interests or operating respon sibility by senior management of PPL or its subsidianes in outside part nerships or other entities doing business with PPL.

For additional information on related party transactions, see Note 17 to the Financial Statements.

32)

PPL CORPORATION 2001 ANNUAL REPORT a

Capital Expenditure Requirements The schedule below shows PPL's current capital expenditure projections for the years 2002-2006 and actual spending for the year 2001:

Actual Projected (Millions of dollars) 2001 2002 2003 2004 2005 2006 Construction expenditures (1) (3) (4)

Generating facilities (2) (5)

$ 672

$1,173

$385

$181

$217

$ 895 Transmission and distribution facilities 292 261 232 205 179 199 Environmental 58 16 19 53 52 7

Other 86 106 89 84 65 66 Total construction expenditures 1,108 1,556 725 523 513 1,167 Nuclear fuel 60 54 56 57 61 63 Total capital expenditures (4)

$1,168

$1,610

$781

$580

$574

$1,230 (1) Construction expenditures include AFUDC and capitalized interest, which are expected to be less than $20 million in each of the years 2002-2006 (2) Includes the projected development costs for PPL Global's turbine generator projects. Some of these projects are being financed by parties who lease such projects back to PPL pursuant to leases that are not capitalized on PPUs financial statements.

(3) This information excludes lease payments by PPL Montana under its sales/leaseback transaction.

(4) This information excludes any equity Investments by PPL Global for new projects.

(5) Generating facdities include assets financed through off-balance sheet synthetic leases as follows, 2001, $498 million; 2002, $523 million; and 2003, $77 million.

PPL's capital expenditure projections for the years 2002-2006 total about $4.8 billion Capital expenditure plans are revised from time to time to reflect changes in conditions.

Acquisitions and Development From time to time, PPL and Its subsidiaries are involved in negotiations with third parties regarding acquisitions, joint ventures and other arrange ments which may or may not result in definitive agreements. See Note 11 to the Financial Statements for information regarding recent acquisi tions and development activities At December 31, 2001, PPL Global had investments in foreign facili ties, including consolidated investments in Emel, EC, CEMAR and others.

See Note 3 to the Financial Statements for information on PPL's uncon solidated investments accounted for under the equity method.

At December 31, 2001, PPL Global had domestic generation pro jects, either announced or under development, which would provide 2,440 MW of additional generation. In January 2002, construction activi ties were completed on the Gnffith project, located near Kingman, Anzona, and the facility began commercial operations Griffith is currently in the process of applying for membership in the Southwest Reserve Sharing Group. Acceptance into the Southwest Reserve Sharing Group would allow Griffith to sell significantly more of the plant's generation at firm prices and require fewer reserves for the firm sales.

PPL Global is continuously reexamining development projects based on market conditions and other factors to determine whether to proceed with these projects, sell them, cancel them, expand them, execute tolling agreements or pursue other opportunities.

Cash Flow Cash and cash equivalents increased by $123 million more dunng 2001 compared with 2000. The reasons for this change were

"* A $37 million increase in cash provided by operating activities, pnrmanly due to an increase in operating income when adjusted for non-cash charges, partially offset by changes in current assets and liabilities.

"* A $55 million decrease in cash used in investing activities, pnmanly due to lower investments in generating assets and electnc energy projects

"* A $34 million increase in cash provided by financing activities, primanly due to higher net issuances of securities offset by a decrease in short-term debt.

Environmental Matters See Note 16 to the Financial Statements for a discussion of environ mental matters Competition The electnc industry has expenenced, and may continue to experience, an increase in the level of competition in the energy supply market at both the state and federal levels. PPL and its subsidiaries believe that, assuming deregulation of the energy industry continues and markets are opened to new participants and new services, competition will continue to be intense. Additionally, competitive pressures have resulted from technological advances in power generation and electronic communica tions, and the energy markets have become more efficient.

PPL CORPORATION 2001 ANNUAL REPORT (33

PPL's financial condition and results of operations are necessarily impacted by the methods, assumptions and estimates used in the application of critical accounting policies. The following accounting policies are particu lady important to the financial condition or results of operations of PPL, and require estimates or other judgments of matters inherently uncer tain. Changes in the estimates or other judgments included within these accounting policies could result in a significant change to the information presented in the financial statements. (These accounting policies are also discussed in Note I to the Financial Statements.)

1) Price Risk Management PPL follows the provisions of SFAS 133, "Accounting for Derivative Instrument and Hedging Activities," as amended by SFAS 138, 'Account ing for Certain Derivative Instrument and Certain Hedging Activities,"

and interpreted by DIG issues (together, "SFAS 133") and EITF 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Manage ment Activities," for its activities in the area of price nsk management.

PPL utilizes forward contracts, futures contracts, options and swaps as part of its nsk management strategy to minimize unanticipated fluctua tions in earnings caused by price, interest rate and foreign currency volatility. SFAS 133 requires that all denvative instruments be recorded at fair value on the balance sheet as an asset or liability (unless they meet SFAS 133's criteria for exclusion) and that changes in the denva tive's fair value be recognized currently in earnings unless specific hedge accounting critena are met. EITF 98-10 requires that derivative and non derivative contracts that are designated as trading activities be marked to market through earnings.

PPL markets and/or purchases electncity, gas, oil, capacity, and ancillary products such as transmission congestion contracts. PPL uses exchange pnces and external broker quotes to value electncity, gas, and oil contracts. Since there are no market quotes available for capacity and ancillary products, PPL values these products using internal models to forecast future cash flows. PPL then recognizes a modeling reserve for values calculated using intemal models to recognize the lack of inde pendence in the valuation of the contracts. Therefore, the net value of the capacity and ancillary products on the financial statements is their amortized cost.

The circumstances and intent existing at the time that energy trans actions are entered into determine their accounting designation. These designations are venfied by PPL's trading controls group on a daily basis.

The following is a summary of the guidelines that have been provided to the traders who are responsible for contract designation:

• Any wholesale and retail contracts to sell electricity that are expected to be delivered from PPL generation are considered "normal." These transactions are not recorded in the financial statements and have no earnings impact until delivery. Most wholesale electricity sales contracts in the eastern and western U S. markets receive "normal" treatment.

The methodology utilized in determining the amount of sales that can be delivered from PPL generation is based on a calculation approved by the RMC. This calculation uses market prices compared to dispatch rates as well as planned and forced outage rates by plant by month.

"* "Trading around the assets" means that PPL EnergyPlus matches a contract to sell electricity, previously to be delivered from PPL genera tion, with a physical or financial contract to purchase electricity. These contracts can qualify for fair value hedge treatment. When the con tracts' terms are identical, there is no earnings impact until delivery.

"* Physical electncity purchases needed to meet obligations due to a change in the physical load or generation forecasts are considered "normal."

"* Physical electricity purchases that increase PPL's long position and any energy sale or purchase considered a "market call" are speculative with unrealized gains or losses recorded immediately through eamings.

"* Financial electncity transactions, which can be settled in cash, cannot be considered "normal" because they need not result in physical deliv ery. These transactions receive cash flow hedge treatment if they lock in the price PPL will receive or pay for energy in the spot market. Any unrealized gains or losses on transactions receiving cash flow hedge treatment are recorded in other comprehensive income.

"* Physical and financial transactions for gas and oil to meet fuel and retail requirements can receive cash flow hedge treatment if they lock in the price PPL will pay in the spot market. Any unrealized gains or losses on transactions receiving cash flow hedge treatment are recorded in other comprehensive income.

"* Option contracts that do not meet the requirements of DIG Issue C15, "Scope Exceptions: Interpreting the Normal Purchases and Normal Sales Exception as an Election," do not receive hedge accounting treatment and are marked to market through earnings.

In addition to energy-related transactions, PPL enters into financial interest rate and foreign currency swap contracts to hedge interest expense associated with both existing and anticipated debt issuances, as well as to hedge the fair value of firm commitments. As with energy transactions, the circumstances and intent existing at the time of the transaction determine its accounting designation, which is subsequently verified by PPL's trading controls group on a daily basis. The following is a summary of certain guidelines that have been provided to the treasury department which is responsible for contract designation:

"* Transactions entered into to lock in an interest rate pnor to a debt issuance are considered cash flow hedges. Any unrealized gains or losses on transactions receiving cash flow hedge treatment are recorded in other comprehensive income and are amortized as a com ponent of interest expense over the life of the debt.

"* Transactions entered into to hedge fluctuations in the value of existing debt are considered fair value hedges with no earnings impact until the debt is terminated because the hedged debt is also marked to market.

"* Transactions which do not qualify for hedge accounting treatment are marked to market through earnings.

To record derivative assets at fair value, PPL reduces the assets' car rying value to recognize differences in counterparty credit quality and potential illiquidity in the market.

• The credit adjustment takes into account the bond ratings (and the implied default rates) of the counterparties that have an out-of-the money position with PPL. The more counterparties that have, for exam ple, a BBB rating instead of an A rating, the larger the adjustment.

34) PPL CORPORATION 2001 ANNUAL REPORT CAMUMEXI 6-fic. kfim*m

• The liquidity adjustment takes into account the fact that it may not be appropriate to value contracts at the midpoint of the bid/ask spread PPL might have to accept the "bid" price if PPL wanted to close an open sales position or PPL might have to accept the "ask" price if PPL wanted to close an open purchase position.

At December 31, 2001, PPL had assets of $210 million and liabilities of $168 million that were accounted for under SFAS 133 and EITF 98-10.

Shareowners' Common Equity included $23 million of net unrealized derivative gains, after-tax, in "Accumulated other comprehensive income."

During the year ended December 31, 2001, PPL recorded $7 million in pre-tax income for net unrealized mark-to-market gains, primanly on denva tive instruments used for speculative (non-hedge) purposes. During this penod, PPL also reclassified into eamings an after-tax loss of $7 million for derivatives that no longer qualified as hedges.

See "Quantitative and Qualitative Disclosures about Market Risk" in Management's Discussion and Analysis for further discussion regarding price risk management, and sensitivities of hedged portfolios to changes in prices and interest rates.

2) Pension and Other PostretIrement Benefits PPL follows the guidance of SIAS 87, "Employers' Accounting for Pensions,"

and SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," for these benefits. Under these accounting standards, assumptions are made regarding the valuation of benefit obligations and performance of plan assets. Delayed recognition of differences between actual results and those assumed is a guiding pnnciple of these standards.

This approach allows for a smoothed recognition of changes in benefit obligations and plan performance over the working lives of the employees who benefit under the plans. The pnmary assumptions are as follows:

"* Discount Rate - The discount rate Is used to record the value of bene fits, which are based on future projections, in terms of today's dollars

"* Expected Return on Plan Assets - Management projects the future return on plan assets based pnncipally on prior performance. The pro jected future value of assets reduces the benefit obligation a company will record.

"* Rate of Compensation Increase - Management projects employees' annual pay increases, which are used to project employees' pension benefits at retirement.

"* Health Care Cost Trend - Management projects the expected increases in the cost of health care.

"* Amortization of Gains/(Losses) - Management can select the method by which gains or losses are recognized in financial results. These gains or losses are created when actual results differ from estimated results based on the above assumptions At December 31, 2001, PPL had recognized accrued pension and postretirement liabilities of $181 million, included in "Deferred Credits and Other Noncurrent Liabilities - Other" on the Balance Sheet. PPL's total obligations for these benefits was approximately $1.6 billion, but was offset by $1.8 billion of assets held in various trusts. PPL has not yet recognized this over-funding due to the delayed recognition provisions of SIAS 87 and SFAS 106.

During 2001, PPL made changes to its assumptions related to the discount rate, the rate of compensation increase and the method of amortization of gains/(losses).

A variance in the discount rate, expected return on plan assets, rate of compensation increase or amortization method could have a signifi cant impact on the pension costs recorded under SFAS 87.

A variance in the health care cost trend assumption could have a significant impact on costs recorded under SFAS 106 for postretirement medical expense. The impact of a one-percentage-point vanance in that assumption Is calculated by PPL's actuaries and is detailed in Note 14 to the Financial Statements

3) Asset Impairment PPL and its subsidiaries review long-lived assets for impairment when events or circumstances indicate carrying amounts may not be recover able. Assets subject to this review, and for which impairments have been recorded in 2001 or prior years, include international equity investments, generation plant and consolidated international energy projects.

Reviews were performed for equity investments in accordance with APB Opinion No 18, "The Equity Method of Accounting for Investments in Common Stock." APB Opinion No. 18 provides that "a loss in value of an investment which is other than a temporary decline should be recog nized." PPL identifies and measures loss in value of equity investments based upon a comparison of fair value to carrying value.

Through December 31, 2001, such reviews were also performed for generation plant and consolidated international energy projects in accor dance with SFAS 121, "Accounting for the Impairment of Long-lived Assets and for Long-Lived Assets to be Disposed Of." On January 1, 2002, PPL adopted SFAS 144, "Accounting for the Impairment or Disposal of Long Lived Assets," which replaces SFAS 121. For long-lived assets to be held and used, SFAS 144 retains the requirements of SFAS 121 to (a) recog nize an impairment loss only if the carrying amount is not recoverable from undiscounted cash flows and (b) measure an impairment loss as the difference between the carrying amount and fair value of the asset.

Refer to Note 18 for additional information on SFAS 144 At December 31, 2001, PPL Global evaluated its international invest ments for impairment, as events and circumstances indicated that the carrying value of its investments in Brazil (CEMAR) and the U.K (WPD 1953 and WPDL) may not be recoverable. The events that led to these impairment reviews were:

"* CEMAR: A prolonged drought that caused electncity rationing, an unfa vorable regulatory environment and disruption of Brazil's electricity mar kets, all of which indicated that the future cash flow stream would be adversely impacted

"* WPD 1953 and WPDL: The Enron bankruptcy led to an impairment review of WPD 1953's equity investment in the Teesside generating station, in which Enron was a part owner, operator and purchaser of the station's output. PPL Global's investments in WPD 1953 and WPDL were then tested for impairment, based on the loss of cash flow from the Teesside impairment and the forecasted reduction in operating cash flows at WPD 1953 and WPDL.

PPL CORPORATION 2001 ANNUAL REPORT (35

In 2001, PPL Global recorded pre-tax impairment charges of $336 million. Impairments included $179 million for its investment in CEMAR,

$134 million for its investment in WPD 1953 and WPDL, $21 million for its share of the Teesside impairment recorded by WPD 1953, and approxi mately $2 million for another international investment.

In determining asset impairments, management must make significant judgments and estimates to calculate the fair value of an investment Fair value is developed through consideration of several valuation methods including companson to market multiples, companson of similar recent sales transactions and discounted cash flow Discounted cash flow is calculated by estimating future cash flow streams, applying appropnate discount rates to determine the present values of the cash flow streams, and then assessing the probability of the vanous cash flow scenarios. The impairment is then recorded based on the excess of the carrying value of the investment over fair value.

Changes in assumptions and estimates included within the impairment reviews could result in significantly different results than those identified above and recorded in the Financial Statements.

In June 2001, the FASB issued SFAS 142, "Goodwill and Other Intan gible Assets," which eliminates the amortization of goodwill and other acquired intangible assets with indefinite economic useful lives. SIAS 142 requires an annual impairment test of goodwill and other intangible assets that are not subject to amortization. PPL adopted SFAS 142 on January 1, 2002. Refer to Note 18 for additional information on SFAS 142.

4) Leasing PPL applies the provisions of SFAS 13, "Accounting for Leases," to all leasing transactions. In addition, PPL applies the provisions of numerous other accounting pronouncements that provide specific guidance and additional requirements related to accounting for leases. In general, there are two types of leases from a lessee's perspective: operating leases - leases accounted for off-balance sheet; and capital leases leases capitalized on the balance sheet.

In accounting for leases, management makes significant assump tions, including the discount rate, the fair market value of the leased assets and the estimated useful life. Changes in these assumptions could result in a significant change to the amounts recognized in the financial statements.

In addition to uncertainty inherent in management's assumptions, leasing transactions become increasingly complex when they involve sale/leaseback accounting (leasing transactions where the lessee previ ously owned the leased assets), synthetic leases (leases that qualify for operating lease treatment for book accounting purposes and financing treatment for tax accounting purposes), or unconsolidated special pur pose entities (SPEs) (entities that retain ownership of the property, plant and equipment and the related financing). GAAP requires that SPEs be consolidated if several conditions exist, including if the owners of the SPEs have not made an initial substantive residual equity capital invest ment that is at nsk during the entire lease term.

At December 31, 2001, PPL participated in four major leasing trans actions involving unconsolidated SPEs. In accordance with GAAIthese SPEs were not consolidated because the equity owners (entities unrelated to PPL) were required to contribute and maintain a minimum of 3% equity interest throughout the life of the SPE.

See Note 12 for additional information related to operating lease payments.

5) Contingencies PPL periodically records the estimated impacts of various conditions, situations or circumstances involving uncertain outcomes. These events are called "contingencies," and PPL's accounting for such events is pre scribed by SFAS 5, "Accounting for Contingencies." SFAS 5 defines a contingency as "an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.*

SFAS 5 does not permit the accrual of gain contingencies under any circumstances. For loss contingencies, the loss must be accrued if (1) information is available that indicates it is probable that the loss has been incurred, given the likelihood of the uncertain future events; and (2) that the amount of the loss can be reasonably estimated.

The accrual of a contingency involves considerable judgment on the part of management. PPL uses its internal expertise, and outside experts (such as lawyers, tax specialists and engineers), as necessary, to help estimate the probability that a loss has been incurred and the amount (or range) of the loss. The largest contingency on PPL's balance sheet is the loss accrual for above market NUG purchase commitments, being the difference between the above market contract terms and the fair value of the energy. This loss accrual of $854 million was recorded in 1998, when PPL Electric's generation business was deregulated. Under regulatory accounting, PPL Electric recorded the above market cost of the purchases from NUGs as part of its purchased power costs on an as-incurred basis, since these costs were recovered in regulated rates When the generation business was deregulated, the loss contingency associated with the commitment to make above market NUG purchases was recorded. This loss accrual for the above market portion of NUG purchase commitments was recorded because it was probable that the loss had been incurred and the estimate of future energy prices could be reasonably determined, using forward pncing information. This loss accrual was transferred to PPL EnergyPlus in the July 1, 2000 corporate realignment. PPL EnergyPlus periodically reviews the reasonableness of the remaining accrual, which was $580 million at December 31, 2001.

PPL has also recorded contingencies for uncollectible accounts, envi ronmental remediation, taxes and litigation in situations where manage ment determined that it was probable a loss had been incurred and it could be reasonably estimated.

36) PPL CORPORATION 2001 ANNUAL REPORT i

WX-ewk"040 DMIEDC-131 ME "IMSUE-1

Market Risk-Sensitive Instruments PPL actively manages the market risk inherent in its commodity, debt, and foreign currency and equity positions, as detailed in Notes 9 and 19 to the Financial Statements. PPL has a comprehensive nsk manage ment policy to manage the risk exposures related to counterparty credit, energy prices, interest rates and foreign currency exchange rates An RMC comprised of senior officers oversees the risk management func tion. Nonetheless, adverse changes in commodity prices, interest rates, foreign currency exchange rates and equity prices may result in losses in earnings, cash flows and/or fair values The forward-looking information presented below provides estimates of what may occur in the future, assuming certain adverse market conditions, due to reliance on model assumptions. Actual future results may differ materially from those pre sented. These disclosures are not precise indicators of expected future losses, but only indicators of reasonably possible losses.

Commodity Price Risk PPL uses various methodologies to simulate forward pnce curves in the energy markets to estimate the size and probability of changes in market value resulting from commodity price movements The methodologies require several key assumptions, including selection of confidence levels, the holding penod of the commodity positions and the depth and applica bility to future penods of histoncal commodity pnce information.

As of December 31, 2001, PPL estimated that a 10% adverse move ment in market prices across all geographic areas and time penods would have decreased the value of its non-hedge portfolio by an insignificant amount, as compared to a $6 million decrease at December 31, 2000.

A similar adverse movement in market prices would have decreased the value of its hedge portfolio by approximately $8 million at December 31, 2001, as compared to a $292 million decrease at December 31, 2000 However, the change in the value of the hedge portfolio would have been offset by an increase in the value of the underlying commodity, the elec tricity generated. The decline in forward prices from 2000 to 2001 is the pnmary reason for the differences between 2001 and 2000's sensitivity analyses. In addition to commodity price nsk, PPL's commodity positions are also subject to operational and event risks including, among others, increases in load demand and forced outages at power plants.

PPL's nsk management program is designed to manage the risks associated with market fluctuations In the price of electricity, natural gas, oil and emission allowances. PPL's risk management policy and programs include risk identification and risk limits management, with measurement and controls for real-time monitonng. PPL has entered into forward, option and tolling contracts that require physical delivery of the commodity, as well as futures, exchange-for-physical transactions and other financial contracts (such as swap agreements where settlement is generally based on the difference between a fixed price and an index-based pnce for the underlying commodity) PPL expects to continue to use these contracts PPL enters into contracts to hedge the impact of market fluctuations on PPL's energy-related assets, liabilities and other contractual arrange ments. PPL also executes these contracts to take advantage of market opportunities As a result, PPL may at times create a net open position in its portfolio that could result in significant losses if pnces do not move in the manner or direction anticipated Interest Rate Risk PPL and its subsidiaries have issued debt to finance their operations.

PPL utilizes various financial derivative products to adjust the mix of fixed and floating-rate interest rates in its debt portfolios, adjusting the duration of its debt portfolios and locking in U.S. Treasury rates (and interest rate spreads over treasunes) in anticipation of future financing, when appro pnate. Risk limits under the nsk management program are designed to balance risk exposure to volatility in interest expense and losses in the fair value of PPL's debt portfolio due to changes in the absolute level of interest rates.

At December 31, 2001, PPL's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was estimated at $6 million, as compared to a $7 million increase at December 31, 2000.

PPL is also exposed to changes in the fair value of its debt portfolio At December 31, 2001, PPL estimated that its potential exposure to a change in the fair value of its debt portfolio, through a 10% adverse movement in interest rates, was $111 million, as compared to $66 mil lion at December 31, 2000.

PPL utilizes vanous risk management instruments to reduce its expo sure to adverse interest rate movements for future anticipated financings.

While PPL is exposed to changes in the fair value of these instruments, they are designed such that an economic loss in value should generally be offset by interest rate savings at the time the future anticipated financing is completed. At December 31, 2001, PPL estimated that its potential exposure to a change in the fair value of these instruments, through a 10% adverse movement in interest rates, was approximately

$13 million, as compared to an $18 million exposure at December 31, 2000 See Notes 9 and 19 to the Financial Statements for a discussion of financial derivative instruments outstanding at December 31, 2001.

Foreign Currency Risk PPL is exposed to foreign currency risk primanly through investments in affiliates in Latin Amenca and Europe. In addition, PPL may make purchases of equipment in currencies other than U.S dollars.

PPL has adopted a foreign currency nsk management program designed to hedge certain foreign currency exposures, including firm commitments, recognized assets or liabilities and net investments During the first quarter of 2001, PPL entered into contracts for the forward purchase of 51 million euros to pay for certain equipment in 2002 and 2003. The estimated value of these forward purchases as of December 31, 2001, being the amount PPL would have to pay to terminate them, was $3 million At December 31,2000, PPL had a forward purchase contract for 37 million euros The estimated amount that PPL would have had to pay to terminate the forward purchases was insignificant PPL CORPORATION 2001 ANNUAL REPORT (37

Nuclear Decommissioning Fund - Secunties Price Risk In order to meet NRC requirements, PPL Susquehanna maintains trust funds to fund certain costs of decommissioning the Susquehanna sta tion. As of December 31, 2001, these funds were invested primanly in domestic equity secunties and fixed-rate, fixed-income secunties and are reflected at fair value on PPL's balance sheet. The mix of securities is designed to provide returns to be used to fund Susquehanna's decom missioning and to compensate for inflationary increases in decommis sioning costs. However, the equity securities included in the trusts are exposed to price fluctuation in equity markets, and the values of fixed rate, fixed-income securities are exposed to changes in interest rates.

PPL Susquehanna actively monitors the investment performance and penodically reviews asset allocation in accordance with its nuclear To the Board of Directors and Shareowners of PPL Corporation:

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of cash flows, and of shareowners' equity present fairly, in all material respects, the financial position of PPL Corporation and its subsidianes at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting pnnciples used and significant estimates made by manage ment, and evaluating the overall financial statement presentation.

We believe that our audits provide a reasonable basis for our opinion.

decommissioning trust policy statement. At December 31, 2001, a hypo thetical 10% increase in interest rates and a 10% decrease in equity pnces would have resulted in an estimated $17 million reduction in the fair value of the trust assets, as compared to an $18 million reduction at December 31, 2000.

PPL Electnc's 1998 restructunng settlement agreement provides for the collection of authonzed nuclear decommissioning costs through the CTC. Additionally, PPL Electric is permitted to seek recovery from cus tomers of up to 96% of any increases in these costs. Under the power supply agreement between PPL Electric and PPL EnergyPlus, these revenues are passed on to PPL EnergyPlus. Similarly, these revenues are passed on to PPL Susquehanna under a power supply agreement between PPL EnergyPlus and PPL Susquehanna. Therefore, PPL's securities price risk is expected to remain insignificant.

As discussed in Note 19 to the consolidated financial statements, PPL changed its method of accounting for derivative and hedging activi ties pursuant to Statement of Financial Accounting Standards No. 133, Accounting for Denvative Instruments and Hedging Activities, as amended by Statement of Financial Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities (an amend ment of FASB Statement 133). PPL also changed its method of accounting for amortizing unrecognized gains or losses in the annual pension expense/income determined under Statement of Financial Accounting Standards No. 87, Employers' Accounting for Pensions, as discussed in Note 14 to the consolidated financial statements.

PricewaterhouseCoopers LLP Philadelphia, Pennsylvania February 4, 2002

38) PPL CORPORATION 2001 ANNUAL REPORT (TUM

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The management of PPL is responsible for the preparation, integrity and objectivity of the consolidated financial statements and all other sections of this annual report. The financial statements were prepared in accor dance with accounting pnnciples generally accepted in the United States of Amenca, and the Uniform System of Accounts prescnbed by the Federal Energy Regulatory Commission for regulated domestic businesses. In preparing the financial statements, management makes informed esti mates and judgments of the expected effects of events and transactions based upon currently available facts and circumstances Management believes that the financial statements are free of material misstatements and present fairly tile financial position, results of operations and cash flows of PPL.

PPL's consolidated financial statements have been audited by PncewaterhouseCoopers LLP (PWC), independent certified public accoun tants. PWC's appointment as auditors was previously ratified by the shareowners. Management has made available to PWC all PPL's financial records and related data, as well as the minutes of shareowners' and directors' meetings. Management believes that all representations made to PWC dunng its audit were valid and appropnate.

PPL maintains a system of internal control designed to provide reason able, but not absolute, assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition and the prevention and detection of fraudulent financial reporting The concept of reasonable assurance recognizes that the cost of a system of internal control should not exceed the benefits derived and that there are inherent limitations in the effectiveness of any system of internal control.

Fundamental to the control system is the selection and training of qualified personnel, an organizational structure that provides appropriate segregation of duties, the utilization of wntten policies and procedures and the continual monitoring of the system for compliance. In addition, PPL maintains an internal auditing program to evaluate PPLs system of intemal control for adequacy, application and compliance Management considers the internal auditors' and PWC's recommendations concerning its system of internal control and has taken actions which are believed to be cost-effective in the circumstances to respond appropnately to these recommendations. Management believes that PPL's system of internal control is adequate to accomplish the objectives discussed in this report.

The Board of Directors, acting through its Audit Committee, oversees management's responsibilities in the preparation of the financial state ments In performing this function, the Audit Committee, which is composed of four independent directors, meets periodically with management, the internal auditors and PWC to review the work of each PWC and the inter nal auditors have free access to the Audit Committee and to the Board of Directors, without management present, to discuss internal accounting control, auditing and financial reporting matters.

Management also recognizes its responsibility for fostenng a strong ethical climate so that PPL's affairs are conducted according to the high est standards of personal and corporate conduct. This responsibility is characterized and reflected in the business policies and guidelines of PPL's operating subsidianes. These policies and guidelines address, the necessity of ensuring open communication within PPL; potential conflicts of interest; proper procurement activities; compliance with all applicable laws, including those relating to financial disclosure; and the confidential ity of proprietary information.

William F Hecht Chairman, President and Chief Executive Officer John R. Biggar Executive Vice President and Chief Financial Officer PPL CORPORATION 2001 ANNUAL REPORT (39

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(Millions of dollars, except per share data)

For the years ended December 31, 2001 2000 1999 Operating Revenues Retail electnc and gas

$3,357

$3,167

$2,873 Wholesale energy marketing and trading 1,712 2,080 1,440 Energy related businesses 656 436 277 Total 5,725 5,683 4,590 Operating Expenses Operation Fuel 602 539 492 Energy purchases 1,526 1,922 1,539 Other 755 701 661 Amortization of recoverable transition costs 251 227 194 Maintenance 269 265 221 Depreciation (Note 1) 254 261 257 Taxes, other than income (Note 7) 155 176 137 Energy related businesses 572 390 217 Other Charges Wnte-down of international energy projects 336 51 Cancellation of generation projects I50 Total 4,870 4,481 3,769 Operating Income 855 1,202 821 Other Income and (Deductions) 12 (15) 148 Income Before Interest Expense 867 1,187 969 Interest expense 387 376 277 Income Before Income Taxes and Minority Interest 480 811 692 Income taxes (Note 7) 261 294 174 Minority interest (Note 1)

(2) 4 14 Income Before Extraordinary Items 221 513 504 Extraordinary items (net of income taxes) (Note 5) 11 (46)

Income Before Cumulative Effect of a Change In Accounting Principle 221 524 458 Cumulative effect of a change in accounting principle (net of income taxes) (Note 14) 10 Income Before Dividends on Preferred Securities 231 524 458 Dividends - preferred securities 52 26 26 Net Income

$ 179

$ 498

$ 432 Basic Earnings per Share of Common Stock (Note 4)

$ 1.23

$ 3.45

$ 284 Diluted Earnings per Share of Common Stock (Note 4)

$ 1.22

$ 3.44

$ 284 Dividends Declared per Share of Common Stock

$ 1.06

$ 1.06

$ 100 The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.

40) PPL CORPORATION 2001 ANNUAL REPORT

(Millions of dollars)

For the years ended December 31, 2001 2000 1999 Cash Flows From Operating Activities Net income

$179

$ 498 432 Extraordinary items (net of income taxes) 11 (46)

Net income before extraordinary items 179 487 478 Adjustments to reconcile net income before extraordinary items to net cash provided by operating activities Depreciation 254 261 257 Amortizations - recoverable transition costs and other 166 129 156 Cancellation of generation projects 150 Gain on sale of generating assets (146)

Dividends received from unconsolidated affiliates 103 6

62 Pension expense (income)

(47)

(6) 9 Cumulative effect of change in accounting pnnciple (10)

Nuclear fuel amortization 58 59 59 Write-down of international energy projects 336 51 Dividend requirement - preferred securities 52 26 26 Equity in earnings of unconsolidated affiliates (125)

(80)

(59)

Deferred income taxes and investment tax credits (47)

(59)

(43)

Change in current assets and current liabilities Accounts receivable 44 120 168 Accounts payable (101)

(82)

(170)

Other - net (45) 40 (80)

Other operating activities - net (59)

(30)

(62)

Net cash provided by operating activities 908 871 706 Cash Flows From Investing Activities Expenditures for property, plant and equipment (565)

(460)

(318)

Proceeds from the sale of generating assets and electric energy projects 221 Proceeds from PPL Montana sale/leaseback 410 Investment in generating assets and electric energy projects (312)

(570)

(1,095)

Proceeds from (loans to) affiliated companies 210 (114)

Other investing activities - net (35)

(23)

(49)

Net cash used in investing activities (702)

(757)

(1,241)

Cash Flows From Financing Activities Issuance of PEPS Units 575 Issuance of long-term debt 1,529 1,000 2,620 Retirement of long-term debt (616)

(532)

(1,644)

Issuance of common stock 56 35 8

Purchase of treasury stock (417)

Payments on capital lease obligations (11)

(59)

Payment of common and preferred dividends (201)

(177)

(180)

Termination of nuclear fuel lease (154)

Net increase (decrease) in short-term debt (981) 45 215 Other financing activities - net (95) 27 (70)

Net cash provided by financing activities 267 233 473 Effect of Exchange Rates on Cash and Cash Equivalents (3)

Net Increase (Decrease) In Cash and Cash Equivalents 470 347 (62)

Cash and cash equivalents at beginning of period 480 133 195 Cash and cash equivalents at end of penod

$ 950

$ 480 133 Supplemental Disclosures of Cash Flow Information Cash paid during the penod for:

Interest (net of amount capitalized)

$ 373

$ 363 267 Income taxes

$ 328

$ 266 184 The accomparnying Notes to Consolidated Financial Statements are an integral part of the financial statements PPL CORPORATION 2001 ANNUAL REPORT (41

(Milions of dollars)

At December 31, 2001 2000 Current Assets Cash and cash equivalents (Note 1) 950 480 Accounts receivable (less reserve: 2001, $121; 2000, $70) 574 588 Notes receivable from affiliated companies (Note 17) 114 Unbilled revenues 248 279 Fuel, matenals and supplies - at average cost 251 197 Prepayments 51 40 Deferred income taxes (Note 7) 77 75 Pnce nsk management assets (Notes I and 19) 124 73 Other 63 85 2,338 1,931 Investments Investment in unconsolidated affiliates - at equity (Note 3) 586 800 Investment in unconsolidated affiliates - at cost 114 46 Nuclear plant decommissioning trust fund (Note 8) 276 268 Other 61 47 1,037 1,161 Property, Plant and Equipment - net Electric plant in service (Note 1):

Transmission and distribution 2,692 2,841 Generation 2,518 2,177 General 317 293 5,527 5,311 Construction work in progress 209 261 Nuclear fuel 127 123 Electnc plant 5,863 5,695 Gas and oil plant 197 178 Other property 75 75 6,135 5,948 Regulatory and Other Noncurrent Assets (Note 1)

Recoverable transition costs 2,174 2,425 Other 890 895 3,064 3,320

$12,574

$12,360 The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.

42) PPL CORPORATION 200i ANNUAL REPORT E U-Alal MW EM"LEU OlUff,

(Millions of dollars)

At December 31, 2001 2000 Current Uabilities Short-term debt (Note 10) 118 902 Notes payable to affiliated companies (Note 17) 135 Long-term debt 498 317 Above market NUG contracts (Notes 1 and 16) 87 93 Accounts payable 558 506 Taxes 146 223 Interest 61 42 Dividends 51 45 Price nsk management liabilities (Notes 1 and 19) 106 77 Other 213 164 1,838 2,504 Long-term Debt 5,081 4,467 Deferred Credits and Other Noncurrent Liabilities Deferred income taxes and investment tax credits (Note 7) 1,449 1,412 Above market NUG contracts (Notes 1 and 16) 493 581 Other (Notes I and 8) 911 983 2,853 2,976 Commitments and Contingent Uabilitles (Note 16)

Minority Interest (Note 1) 38 54 Company-obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Company Debentures 825 250 Preferred Stock With sinking fund requirements 31 46 Without sinking fund requirements 51 51 82 97 Shareowners' Common Equity Common stock 2

2 Capital in excess of par value 1,956 1,895 Treasury stock (Note 1)

(836)

(836)

Earnings reinvested 1,023 999 Accumulated other comprehensive income (Note 1)

(251)

(36)

Capital stock expense and other (37)

(12) 1,857 2,012

$12,574

$12,360 The accompanying Notes to Consolidated Financial Statements are an Integral part of the financial statements PPL CORPORATION 2001 ANNUAL REPORT (43

(Millions of dollars)

For the years ended December 31, 2001 2000 1999 Common stock at beginning of year 2

2 2

Common stock at end of year 2

2 2

Capital in excess of par value at beginning of year 1,895 1,860 1,866 Common stock issued (a) 56 35 8

Other 5

(14)

Capital in excess of par value at end of year 1,956 1,895 1,860 Treasury stock at beginning of year (836)

(836)

(419)

Treasury stock purchased (417)

Treasury stock at end of year (836)

(836)

(836)

Earnings reinvested at beginning of year 999 654 372 Net income0'M 179 498 432 Cash dividends declared on common stock (155)

(153)

(150)

Earnings reinvested at end of year 1,023 999 654 Accumulated other comprehensive loss at beginning of year(c)

(36)

(55)

(4)

Foreign currency translation adjustments (Ni (234) 15 (51)

Unrealized gain (loss) on available-for-sale securities (b)

(4) 3 Minimum pension liability adjustments Mb) 1 Unrealized gain on qualifying derivatives (b) 23 Accumulated other comprehensive loss at end of year (251)

(36)

(55)

Capital stock expense and other at beginning of year (12)

(12)

(27)

Issuance costs and other charges to issue PEPS Units (25)

Other 15 Capital stock expense and other at end of year (37)

(12)

(12)

Total Shareowners' Common Equrty

$1,857

$2,012

$1,613 Common stock shares at beginning of year (a) 145,041 143,697 157,412 Common stock issued through the ESOP, DRIP, ICP, ICPKE and structured equity program 1,539 1,344 282 Treasury stock purchased (13,997)

Common stock shares at end of year 146,580 145,041 143,697 (a) In thousands $ 01 par value, 390 million shares authorized. Each share entitles the holder to one vote on any question presented to any shareowners' meeting (hi Statement of Comprehensive Income (Note 1),

Net income

$179

$498

$432 Other comprehensive income, net of tax:

Foreign currency translation adjustments, net of tax of $15, $6, $6 (234) 15 (51)

Unrealized gain (loss) on available-for-sale securities, net of tax (benefit) of $(3), $2 (4) 3 Minimum pension liability adjustments 1

Unrealized gain on qualifying denvatives, net of tax of $12 23 Total other comprehensive income (loss)

(215) 19 (51)

Comprehensive income (loss)

$ (36)

$517

$381 (C) See Note I for disclosure of balances for each component of Accumulated Other Comprehensive Income The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.

44) PPL CORPORATION 2001 ANNUAL REPORT W- &GOUSCE 056SOWSr WIF, co, UWXMI C<WljkW,

Outstanding Shares Outstanding Shares (Millions of dollars)

At December 31, 2001 2000 2001 Authonzed Preferred Stock - $100 par, cumulative 41/%

$25

$25 247,524 629,936 Series 57 72 568,665 10,000,000

$82

$97 Sinking Fund Provisions Outstanding Shares Optional Shares to be Outstanding Redemption Redeemed Redemption (Millions of dollars) 2001 2000 2001 Pnce per Share Annually Period With Sinking Fund Requirements Senes Preferred 595%

$ 1 6.125%

$17 31 167,500 (c)

(d) 2003-2005 6.15%

10 10 97,500 (C) 97,500 Apnil 2003 6 33%

4 4

46,000 (Mi 46,000 July 2003

$31

$46 Without Sinking Fund Requirements 41/2% Preferred

$25

$25 247,524

$11000 Senes Preferred 3.35%

2 2

20,605 10350 440%

12 12 117,676 10200 460%

3 3

28,614 103.00 6.75%

9 9

90,770 (c)

$51

$51 Decreases In Preferred Stock 2001 2000 1999 Shares Amount Shares Amount Shares Amount 4V2% Preferred (134)

Senes Preferred 595%

(10,000)

$ (1) 6 125%

(148,000)

(14)

Decreases in Preferred Stock represent (i) the redemption of stock pursuant to sinking fund requirements, or (ii) shares redeemed pursuant to optional provisions There were no issuances or redemptions of preferred stock in 2000 or 1999 through these provisions (a) Each share of PPL Electnc's preferred stock entitles the holder to one vote on any question presented to PPL Electnc's shareowners' meetings There were also 10 million shares of PPL's preferred stock and 5 million shares of PPL Electnc's preference stock authorized, none were outstanding at December 31, 2001 and 2000, respectively (b) The involuntary liquidation price of the preferred stock is $100 per share The optional voluntary liquidation pace is the optional redemption pnce per share in effect, except for the 41/ % Preferred Stock for which such price Is $100 per share (plus in each case any unpaid dividends)

(CW These senes of preferred stock are not redeemable pnor to 2003 6 125%, 6 15%, 6 33% and 6.75%

(d) Shares to be redeemed annually on October 1 as follows* 2003-2004, 57,500, 2005, 52,500.

The accompanying Notes to Consolidated Financial Statements are an Integral part of the financial statements.

PPL CORPORATION 2001 ANNUAL REPORT (45 SX(D. -40A-M- -Yfm3mw W I;Wmz M, -50.

W

Outstanding Outstanding (Millions of dollars)

At December 31, 2001 2000 2001 Authonzed Maturity Company-obligated Mandatonly Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Company Debentures - $25 per secunty 8.10% (a)

$150

$150 6,000,000 6,000,000 July 2027-)

8.20% (a) 100 100 4,000,000 4,000,000 Apnl 2027(b) 7.75% (cM 575 23,000,000 23,000,000 May 2006

$825

$250 (a) PPL Capital Trust and PPL Capital Trust II issued to the public a total of $250 million of preferred secunties through two Delaware statutory business trusts holding solely PPL Electnc debentures. PPL Electric owns all of the common securities of the subsidiary trusts, representing the remaining undivided beneficial ownership interest in the assets of the trusts. The proceeds denved from the issuance of the preferred securities and the common secunties were used by PPL Capital Trust and PPL Capital Trust 11 to acquire $103 million and $155 million principal amount of PPL Electnc Junior Subordinated Deferrable Interest Debentures ("Subordinated Debentures"). Thus, the preferred secunties are supported by a corresponding amount of Subordinated Debentures issued by PPL Electnc to the trusts. In addition, PPL Electnc has guaranteed all of the trusts' obligations under the preferred secunties, to the extent the trusts have funds available for payment (b) The preferred secunties are subject to mandatory redemption, in whole or in part, upon the repayment of the Subordinated Debentures at maturty or their earlier redemption At the option of PPL Electric, the Subordinated Debentures are redeemable on and after Apnl 1, 2002 (for the 8 20% secunties) and July 1, 2002 (for the 8 10% securities) in whole at any time or in part from time to time. The amount of preferred secunties subject to such mandatory redemption will be equal to the amount of related Subordinated Debentures matunng or being redeemed. The redemption price is $25 per preferred security plus an amount equal to accumulated and unpaid distributions to the date of redemption.

(cW In May 2001, PPL and PPL Capital Funding Trust I issued $575 million of 7.75% PEPS Units. Each PEPS Unit consists of (i) a contract to purchase shares of PPL com mon stock on or pnor to May 18, 2004 and (n) a trust preferred secunty of PPL Capital Funding Trust I with a stated liquidation amount of $25. Each purchase contract requires PPL to make contract adjustment payments of.46% per year, paid quarterly, on the $25 stated amount of the PEPS Unit and requires the holders of the con tracts to purchase a number of shares of PPL common stock on or pnor to May 18, 2004. The number of shares required to be purchased will depend on the average market price of PPL's common stock pnor to the purchase date, subject to certain limitations. The holders' obligations to purchase shares under the purchase contracts may be settled with the proceeds of a remarketing of the preferred secunties, which have been pledged to secure these obligations. The distribution rate on each preferred secunty is 7 29% per year, paid quarterly, until May 18, 2004. The Trust's sole source of funds for distributions are from payments of Interest on the 7.29%

subordinated notes of PPL Capital Funding, due May 18, 2006, issued to the Trust. The preferred securities are expected to be remarketed in the first half of 2004 Upon a remarketing, the interest rate on the subordinated notes and the distribution rate on the preferred secunties will be reset at a rate that will be equal to or greater than 7.29%. PPL has guaranteed the payment of pnncipal and interest on the subordinated notes issued to the Trust by PPL Capital Funding. PPL has also guaranteed the distributions on the preferred securities to the extent the Trust has funds available for payment.

The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements

46) PPL CORPORATION 2001 ANNUAL REPORT

(Millions of dollars)

At December 31, Outstanding 2001 2000 Maturntyioi First Mortgage Bonds"')

73A%

67/s%

61/2a%

61/2%

6 55%

61/s%

63/4% to 8Y2%

First Mortgage Pollution Control Bonds l 6 40% Senes H 5.50% Senes I 6 40% Senes J 6 15% Senes K Senior Secured Bonds (b) 57/s%

61/4%

28 19 25 110 (C) 146 (d)

(e) 10 (M

83 90 53 116 55 300 (g 500 (g 28 19 25 125 150 200 10 5

83 90 53 116 55 May 1, 2002 February 1, 2003 March 1, 2004 April 1, 2005 March 1, 2006 May 1, 2006 2012-2016 2017-2021 2022-2026 November 1, 2021 February 15, 2027 September 1, 2029 August 1, 2029 August 15, 2007 August 15, 2009 1,535 959 Series 1999-1 Transition Bonds 6 08% to 7.15%

1,923 N 2,164 2001-2008 Medium-Term Notes 5.75% to 8.375%

1,3470) 1,487 2001-2007 6.40% Senior Unsecured Notes 5000)

November 1, 2011 1.54% Pollution Control Revenue Bonds 9

9 June 1, 2027 8.70% to 9.64% - Unsecured Promissory Notes 13""k 16 2005-2022 Other long-term debt 264 0) 155 2001-2024 5,591 4,790 Fair value swaps 3

Unamortlized discount (15)

(6) 5,579 4,784 Less amount due within one year (498)

(317)

Total long-term debt

$5,081

$4,467 (a) Aggregate long-term debt matunties through 2006 are (millions of dollars), 2002, $498, 2003, $400, 2004, $413; 2005, $855, 2006, $513 There are no bonds or notes outstanding that have sinking fund requirements (b) The First Mortgage Bonds and the First Mortgage Pollution Control Bonds were Issued under, and are secured by, the lien of the 1945 First Mortgage Bond Indenture The lien of the 1945 First Mortgage Bond Indenture covers substantially all electnc transmission and distnbution plant owned by PPL Electric The Senior Secured Bonds were Issued under the 2001 Senior Secured Bond Indenture. The Senior Secured Bonds are secured by (i) an equal pnncipal amount of First Mortgage Bonds issued under the 1945 First Mortgage Bond Indenture, and (n) the lien of the 2001 Senior Secured Bond Indenture, which covers substantially all electric transmission and distribution plant owned by PPL Electric and which Is junior to the lien of the 1945 First Mortgage Bond Indenture.

(c) In September 2001, PPL Electnc redeemed and retired $15 million of its First Mortgage Bonds, 61/2% Senes due 2005.

(d) In December 2001, PPL Electric redeemed and retired $4 million of Its First Mortgage Bonds, 6 55% Senes due 2006 (e) In May 1998, PPL Electrc Issued $200 million First Mortgage Bonds, 6/8% Reset Put Securities Senes due 2006. In connection with this issuance, PPL Electnc assigned to a third party the option to call the bonds from the holders on May 1, 2001. PPL Electric purchased the call option in March 2001, and did not exercise the call option These bonds would have matured on May 1, 2006, but were required to be surrendered by the existing holders on May 1, 2001, through the automatic exercise of a mandatory put by the trustee on behalf of the bondholders.

)* In July 2001, PPL Electnc redeemed and retired all of its outstanding First Mortgage Bonds, 93/s% Series due 2021, at an aggregate par value of $5 million through the maintenance and replacement fund provisions of its Mortgage.

iIn August 2001, PPL Electric Issued $300 million of 57/a% Senior Secured Bonds due 2007 and $500 million of 6V4% Senior Secured Bonds due 2009 (h) In August 1999, PPL Transition Bond Company Issued $2 4 billion of transition bonds to secuntize a portion of PPL Electric's stranded costs The bonds were issued in eight different classes, with expected average lives of I to 8.7 years. Bond principal payments of $241 million were made in 2001 (0 Dunng 2001, PPL Capital Funding retired the following senes of medium-term notes in September 2001, $25 million of 6.20% Senes due 2001 and $25 million of 5 81% Series due 2001; in October 2001, $20 million of 5.75% Senes due 2001; in November 2001, $50 million of 7.75% Senes due 2005, in December 2001,

$20 million of 7.75% Senes due 2005.

0) In October 2001, PPL Energy Supply Issued $500 million of 6 40% of Senior Unsecured Notes due 2011 (ki In September 2001, PPL Gas Utilities redeemed and retired $2 million of 9 59% Notes due 2005 and also made a $750,000 pnncipal payment on its 9 64% Notes due 2010.

(i In 2001, PPL Global subsidiaries Emel and CEMAR Issued long-term debt Emel Issued $127 million of inflaton-linked bonds and CEMAR Issued $99 million of long-term debt A portion of CEMAR's debt was reclassified to short-term debt In conjunction with CEMAR's impairment (See Note 22.)

The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.

PPL CORPORATION 2001 ANNUAL REPORT (47 aE10% O-.N-#3 D. @11513TUBW w ý I'M D ID-SOR

Business and Consolidation PPL is an energy and utility holding company based in Allentown, Pennsylvania. PPL is the parent of PPL Energy Funding, PPL Electric, PPL Gas Utilities, PPL Services and PPL Capital Funding PPL Energy Funding is the parent of PPL Energy Supply, which serves as the holding company for PPL's pnncipal unregulated subsidiaries: PPL Generation, PPL EnergyPlus and PPL Global. The principal business of PPL Generation is owning and operating U.S. generating facilities through vari ous subsidiaries. The principal business of PPL EnergyPlus is unregulated wholesale and retail energy marketing. PPIL Global's principal businesses are the acquisition and development of both U.S. and international energy projects, and the ownership and operation of international energy projects.

PPL Electric is the principal regulated subsidiary of PPL PPL Electric's pnncipal businesses are the transmission and distnbution of electncity to serve retail customers in its franchised terntory in eastern and central Pennsylvania, and the supply of electricity to retail customers in that ter ntory as a PLR.

PPL consolidates the financial statements of its affiliates when it has control. All significant intercompany transactions have been eliminated.

Minority interests in operating results and equity ownership are reflected in the consolidated financial statements.

The consolidated financial statements reflect the accounts of all controlled affiliates on a current basis, with the exception of certain PPL Global investments. It is the policy of PPL Global to consolidate foreign affiliates and record equity in earnings of foreign affiliates on a lag, based on the availability of financial data on a U.S. GAAP basis:

"* Equity earnings from WPD 1953, the parent of WPD (South West) and WPD (South Wales), and WPDL are recorded on a one-month lag. PPL Global has 51% equity ownership interests in these entities but has joint control of these investments with Mirant. Earnings from all other foreign equity method investments are recorded on a three-month lag.

"* PPL Global consolidates the results of controlled subsidianes, Emel, EC, the Bolivian subsidianes and other investments, on a one-month lag. The results of CEMAR are consolidated on a three-month lag. The portion of the subsidianes' earnings owned by outside shareowners is included in "Minonty Interest" in the consolidated financial statements.

PPL Global's 8.5% investment in CGE is accounted for using the cost method. Dividends from CGE are recorded as income when received.

Use of Estimates/Contingencies The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contin gent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses dunng the reporting period. Actual results could differ from those estimates.

PPL records loss contingencies in accordance with SFAS 5, "Accounting for Contingencies."

Accounting Records The accounting records for PPL Electric and PPL Gas Utilities are main tained in accordance with the Uniform System of Accounts prescribed by the FERC and adopted by the PUC.

Regulation Historically, PPL Electric accounted for its regulated operations in accor dance with the provisions of SFAS 71, "Accounting for the Effects of Certain Types of Regulation," which requires rate-regulated entities to reflect the effects of regulatory decisions in their financial statements.

PPL Electnc discontinued application of SFAS 71 for the generation por tion of its business, effective June 30, 1998. In connection with the corporate realignment, effective July 1, 2000, PPL Electric's generating and certain other related assets, along with associated liabilities, were transferred to new unregulated subsidianes of PPL Generation. PPL Electnc's remaining regulated business, PPL Gas Utilities and certain PPL Global affiliates continue to be subject to SFAS 71.

Property, Plant and Equipment Following are the classes of electnc plant in service, with the associated accumulated depreciation, at December 31:

(Millions of dollars) 2001 2000 Generation

$ 7,208

$ 6,801 Transmission and distribution 4,170 3,521 General 491 459 11,869 10,781 Less: Accumulated depreciation 6,342 5,470

$ 5,527

$ 5,311 Property, plant and equipment is recorded at onginal cost, unless impaired under the provisions of SFAS 121, "Accounting for the Impairment of Long-UIved Assets and for Long-Lived Assets to be Disposed of." Onginal cost includes material, labor, contractor costs, construction overheads and financing costs, where applicable. The cost of repairs and minor replacements are charged to expense as incurred. When a component of property, plant or equipment is retired that was depreciated under the composite or group method, the onginal cost is charged to accumulated depreciation. When all or a significant portion of an operating unit is retired or sold that was depreciated under the composite or group method, the property and the related accumulated depreciation account is reduced and any gain or loss is included in income, unless otherwise required by regulators.

AFUDC is capitalized as part of the construction costs for regulated projects. Interest is capitalized as part of construction costs for non regulated projects.

Depreciation is computed over the estimated useful lives of property using various methods including the straight-line, composite and group methods. The annual provisions for depreciation have been computed pnncipally in accordance with the following ranges of asset lives: genera tion, 5-50 years; transmission and distnbution, 15-80 years; and general, 5-80 years. PPL periodically reviews and adjusts the depreciable lives of its fixed assets.

48) PPL CORPORATION 2001 ANNUAL REPORT I

0-4 ( *- i FC., E C. RM4 (W, f a.) 41 ý f. I Z C.

V-t Cfýc I Wi -CC,

Asset Impairment Long-ived assets and identifiable intangibles held and used by PPL and its subsidianes are reviewed for impairment when events or circum stances indicate carrying amounts may not be recoverable. Such reviews are performed in accordance with SFAS 121. Impairment losses on such long-lived assets are recognized when book values exceed expected undiscounted future cash flow with the impairment measured on a dis counted future cash flows basis. Equrty investments are reviewed for impairment in accordance with APB Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock." APB Opinion No. 18 provides that "a loss in value of an investment which is other than a temporary decline should be recognized." PPL identifies and measures loss in value of equity investments based upon a companson of fair value to carrying value. See Note 18 for the impact of SFAS 144 on accounting for asset impairments.

Amortization of Goodwill Goodwill, which is included in 'Regulatory and Other Noncurrent Assets Other" on the Balance Sheet, is amortized on a straight-line basis over a period not to exceed 40 years The excess cost over fair value of PPL Global's investments in unconsolidated affiliates is amortized on a straight line basis over a period not in excess of 40 years. See Note 18 for the impact of SFAS 142 on accounting for goodwill.

Recoverable Transition Costs Based on the PUC Final Order, PPL Electnc was amortizing its competitive transition (or stranded) costs over an 11-year transition penod effective January 1, 1999. In August 1999, competitive transition costs of $2.4 bil lion were converted to intangible transition costs when secuntized by the issuance of transition bonds. The intangible transition costs are being amortized over the life of the transition bonds, August 1999 through December 2008, in accordance with an amortization schedule filed with the PUC. The assets of PPL Transition Bond Company, including the intangible transition property, are not available to creditors of PPL or PPL Electnc. The transition bonds are obligations of PPL Transition Bond Company and are non-recourse to PPL and PPL Electric. The remaining competitive transition costs are also being amortized based on an amor tization schedule previously filed with the PUC, adjusted for those compet itive transition costs that were converted to Intangible transition costs As a result of the conversion of a significant portion of the competitive transition costs into intangible transition costs, amortization of substan tially all of the remaining competitive transition costs will occur in 2009.

Accounting for Price Risk Management PPL enters into commodity contracts for the physical purchase and sale of energy as well as energy contracts that can be settled financially. PPL enters into interest rate derivative contracts to hedge its exposure to changes in the fair value of its debt instruments, as well as its exposure to vanability In expected cash flows associated with existing debt instru ments or forecasted transactions. PPL also enters into foreign currency derivative contracts to hedge foreign currency exposures, including firm commitments, recognized assets or liabilities, forecasted transactions or net investments As of January 1, 2001, contracts that meet the definition of a derivative were accounted for under SFAS 133, "Accounting for Denvative Instruments and Hedging Activities." Certain energy contracts have been excluded from SFAS 133's requirements because they meet the definition of a "normal sale or purchase" under DIG Issue C15, "Scope Exceptions: Normal Purchases and Normal Sales Exception for Certain Option-Type Contracts and Forward Contracts in Electncity" These con tracts are reflected in the financial statements using the accrual method of accounting. See Note 19 for additional information on SFAS 133.

Under SFAS 133, all derivatives are recognized on the balance sheet at their fair value. On the date the denvative contract is executed, PPL designates the derivative as a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment ("fair value" hedge), a hedge of a forecasted transaction or of the vanabilrty of cash flows to be received or paid related to a recognized asset or liability

("cash flow" hedge), a foreign currency fair value or cash flow hedge

("foreign currency" hedge), a hedge of a net investment in a foreign oper ation, or a non-hedge derivative. Changes in the fair value of a denvative that is highly effective as, and is designated and qualifies as, a fair value hedge, along with the loss or gain on the hedged asset or liability that is attributable to the hedged nsk, are recorded in current-period earnigs.

Changes in the fair value of a derivative that is highly effective as, and is designated as and qualifies as, a cash flow hedge are recorded in other comprehensive income, until earnings are affected by the variability of cash flows being hedged. Changes in the fair value of derivatives that are designated as and qualify as, foreign currency hedges are recorded in either current-period earnings or other comprehensive income, depend ing on whether the hedge transaction is a fair value hedge or a cash flow hedge. If, however, a denvative is used as a hedge of a net investment in a foreign operation, its changes in fair value, to the extent effective as a hedge, are recorded in the cumulative translation adjustments account within equity. Changes in the fair value of denvatives that are not desig nated as hedging instruments are reported in current-penod earnings.

In addition, PPL has entered into non-denvative contracts that meet the definition of energy trading activities as defined by EITF 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Manage ment Activities." In accordance with EITF 98-10, energy trading contract gains and losses from changes in market pnces are marked to market through earnings For 1999 and 2000, PPL used EITF 98-10 to account for its commod ity forward and financial contracts As such, contracts that did not meet the definition of energy trading contracts, as defined by EITF 98-10, were reflected in the financial statements using the accrual method of accounting. The gains or losses on interest rate denvative contracts that settled pnor to the adoption of SFAS 133 were deferred and are being recognized over the life of the debt Market gains and losses on foreign currency derivative contracts that settled pnor to the adoption of SEAS 133 were recognized in accordance with SFAS 52, "Foreign Currency Translation," and are included in "Foreign currency translation adjustments," a component of "Accumulated other comprehensive income" on the Balance Sheet.

PPL CORPORATION 2001 ANNUAL REPORT (49'

Gains and losses from changes in market prices of energy sales contracts are accounted for in "Wholesale energy marketing and trading" revenues; gains and losses from changes in market pnces of energy purchase contracts are accounted for in "Energy purchases" on the Statement of Income. The amortized gains and losses from interest rate derivative contracts are accounted for in "Interest Expense."

Revenue Recognition "Retail electnc and gas" and "Wholesale energy marketing and trading" revenues are recorded based on delivenes through the end of the calen dar month. Unbilled retail revenues result because customers meters are read and bills are rendered throughout the month, rather than all being read at the end of the month. Unbilled revenues for a month are calculated by multiplying an estimate of unbilled kWh by the estimated average cents per kWh.

"Energy related businesses' revenue includes revenues from PPL Global and the mechanical contracting and engineering subsidianes.

PPL Global's revenue reflects its proportionate share of affiliate earnings under the equity method of accounting, as described in the "Business and Consolidation" section of Note 1, and dividends received from its investments are accounted for using the cost method. The mechanical contracting and engineenng subsidiaries record profits from construction contracts on the percentage-of-completion method of accounting. Income from time and material contracts is recognized currently as the work is performed. Costs include all direct material and labor costs and job-related overhead. Provisions for estimated loss on uncompleted contacts, if any, are made in the penod in which such losses are determined.

Income Taxes The income tax provision for PPL is calculated in accordance with SFAS 109, "Accounting for Income Taxes."

The provision for PPL Electric's deferred income taxes for regulated assets is based upon the ratemaking pnnciples reflected in rates estab lished by the PUC and FERC. The difference in the provision for deferred income taxes for regulated assets and the amount that otherwise would be recorded under U.S. GAAP is deferred and included in taxes recover able through future rates in "Regulatory and Other Noncurrent Assets Other" on the Balance Sheet. See Note 7 for additional information.

PPL Electric deferred investment tax credits when they were utilized, and is amortizing the deferrals over the average lives of the related assets.

PPL and its subsidiaries file a consolidated federal income tax return.

Leases See Note 12 for a discussion on accounting for leases Pension and Other Postretlrement Benefits See Note 14 for a discussion on accounting for pension and other postretirement benefits.

Cash Equivalents All highly liquid debt instruments purchased with onginal maturities of three months or less are considered to be cash equivalents.

Comprehensive Income Comprehensive income consists of net income and other comprehensive income, defined as changes in common equity from transactions not related to shareowners. Other comprehensive income consists of unreal ized gains or losses on available-for-sale securities and qualifying denva tives, the excess of additional pension liabilrty over unamortized prior service costs, and foreign currency translation adjustments recorded by PPL Global. Comprehensive income is reflected on the Statement of Share owners' Common Equity and Comprehensive Income, and "Accumulated other comprehensive income" is presented on the Balance Sheet.

The accumulated other comprehensive income of PPL consisted of:

(In millions) December 31, 2001 2000 Foreign currency translation adjustments

$(268)

$(34)

Unrealized gains on qualifying denvatives 23 Minimum pension habilrty (5)

(5)

Unrealized gains (losses) on available-for-sale securities (1) 3

$(251)

$(36)

Treasury Stock Treasury shares are reflected on the balance sheet as an offset to com mon equity under the cost method of accounting. Management has no definitive plans for the future use of these shares. Treasury shares are not considered outstanding in calculating EPS.

Foreign Currency Translation Assets and liabilities of international operations, where the local currency is the functional currency, are translated at year-end exchange rates, and related revenues and expenses are translated at average exchange rates prevailing dunng the year. Adjustments resulting from translation are recorded in "Accumulated other comprehensive income." The effect of translation adjustments on other comprehensive income, net of income taxes, is disclosed in the Statement of Shareowners' Common Equity and Comprehensive Income. Gains or losses relating to foreign currency transactions are recognized in income currently. The aggregate transac tion gain was $8 million in 2001, and was not significant in 2000.

Project Development Costs PPL Global expenses the costs of evaluating potential acquisition and development opportunities as incurred. Acquisition and development costs are capitalized upon approval of the investment by the PPL Global Board of Managers and the Finance Committee of PPL's Board of Directors or, if later, the achievement of sufficient project milestones such that the economic viability of the project is reasonably assured. The level of assurance needed for capitalization of such costs requires that all major uncertainties be resolved and that there be a high probability that the project will proceed as planned, or that such costs will be recoverable through long-term operations, a financing or a sale.

The continued capitalization of project development and acquisition costs is subject to on-going risks related to successful completion. In the event that PPL Global determines that a particular project is no longer viable, previously capitalized costs are charged to expense in the period that such determination is made.

Reclassification Certain amounts in the 2000 and 1999 financial statements have been reclassified to conform to the current presentation.

50) PPL CORPORATION 2001 ANNUAL REPORT GEME, CC.) W. AbWM4-,-G-CAYU&C-14t orcfOrkmire

PPL's reportable segments are Supply, Delivery and International. The Supply group primarily consists of the domestic energy marketing, gener ation and domestic development operations of PPL Energy Supply. The Delivery group Includes the regulated electnc and gas delivery operations of PPL Electric and PPL Gas Utilities. The Intemational group includes PPL Global's responsibility for the acquisition, development, ownership and operation of intemational energy projects. The majority of PPL Global's international investments are located in the U.K., Chile, El Salvador and Brazil. Segments include direct charges, as well as an allocation of indirect corporate costs, for services provided by PPL Services. These service costs include functions such as financial, legal, human resources and information services See Note 23 for a discussion of the contract between PPL Electric and PPL EnergyPlus.

Previously, there was a 'Development" group that included the activi ties now reflected in the "Intemational' group and the domestic develop ment operations, currently part of the "Supply" group. Previously reported information has been restated to conform to the current presentation.

Financial data for PPL's business segments are as follows:

(Millions of dollars) 2001 2000 1999 Income Statement Data Revenues from external customers Supply

$2,283

$2,815

$1,731 Delivery 2,867 2,413 2,441 International 575 455 418 5,725 5,683 4,590 Equity in earnings of unconsolidated affiliates Supply 12 2

2 International 113 78 57 125 80 59 Depreciation Supply 126 136 138 Delivery 97 104 102 International 31 21 17 254 261 257 Amortizations - recoverable transition costs, nuclear fuel and other Supply (35)

(48) 14 Delivery 259 236 201 224 188 215 Interest and dividend income Supply 3

(28) 3 Delivery 10 27 6

International 2

14 15 13 9

Interest expense Supply 58 109 90 Delivery 234 230 168 International 95 37 19 387 (Millions of dollars) 2001 2000 1999 Income taxes Supply 153 221 103 Delivery 71 59 28 International 37 14 43 261 294 174 Extraordinary items Delivery 11 (46) 11 (46)

Net Income Supply 368 325 199 Delivery 126 113 177 International (315) 60 56 179

$ 498

$ 432 Cash Flow Data Expenditures for property, plant and equipment Supply 290 278

$ 173 Delivery 149 148 141 International 126 34 4

565 460 318 Investment in generating assets and electric energy projects Supply 176 97 870 International 136 473 225 312 570

$1,095 As of December 31, 2001 2000 Balance Sheet Data Net investment in unconsolidated affiliates - at equity Supply 211 165 International 375 635 586 800 Total assets Supply 5,038 4,420 Delivery 6,097 6,062 International 1,439 1,878

$12,574

$12,360 2001 2000 1999 Geographic Data Revenues from external customers Domestic

$ 5,150

$ 5,228

$4,172 Foreign 575 455 418

$ 5,725

$ 5,683

$4,590 As of December 31, 2001 2000 Property, plant and equipment Domestic

$ 5,548

$ 5,210 Foreign 587 738

$ 6,135

$ 5,948 376 277 PPL CORPORATION 2001 ANNUAL REPORT (51

PPL2s investment in unconsolidated affiliates accounted for under the equity method was $586 million and $800 million at December 31, 2001 and 2000. The most significant investment was PPL Global's investment in WPD 1953, which was $328 million at December 31, 2001 and $479 million at December 31, 2000. WPD 1953 owns WPD (South West) and WPD (South Wales). See Note 22 for a discussion on the wnte-lown of international energy projects. At December 31, 2001, PPL Global had a 51% equity ownership interest in WPD 1953, but shared joint control with Mirant. Accordingly, PPL Global accounts for its investment in WPD 1953 (and other investments where it has majonty ownership but lacks control) under the equity method of accounting.

Investment in unconsolidated affiliates accounted for under the equity method at December 31, 2001, and the effective equity owner ship percentages, were as follows:

PPL Global:

Aguaytia Energy, LLC 11.4%

Bolivian Generating Group, LLC 29.3%

Hidrocentrais Reunidas, LDA 50.0%

Hidro Ibenca, B V.

50.0%

Latin American Energy & Electricity Fund I, LP 16.6%

WPD 1953 51.0%

WPDL 51.0%

PPL Generation:

Safe Harbor Water Power Corporation 33.3%

Bangor Pacific Hydro Associates 50.0%

Southwest Power Partners, LLC 50 0%

Summarized below is financial information from the financial state ments of these affiliates, accounted for by the equity method:

(Millions of dollars) As of December 31, 2001 2000 Balance Sheet Data Current Assets 612

$ 396 Noncurrent Assets 5,517 4,904 Current Liabilities 502 409 Noncurrent Liabilities 3,955 3,365 2001 2000 1999 Income Statement Data Revenues1(a)

$ 647

$ 505

$1,130 Operating Income 328 254 212 Net Income (a) 248 131 427 (a) The decrease in revenues and net income in 2001 and 2000 from 1999 were in part due to the sale of the supply business of WPD (South West),

formerly SWEB, in the fourth quarter of 1999.

Basic EPS is calculated by dividing "Net Income" on the Statement of Income by the weighted average number of common shares outstanding dunng the penod. In the calculation of diluted EPS, weighted average shares outstanding are increased for additional shares that would be out standing if potentially dilutive securities were converted to common stock.

Potentially dilutive secunties consist of stock options granted under the incentive compensation plans (See Note 13), stock units represent ing common stock granted under directors compensation programs and PEPS Units.

Preferred dividends are included in net income in the computation of basic and diluted EPS.

The basic and diluted EPS calculations, and the reconciliation of the shares used in the calculations, are shown below:

(Millions of dollars or thousands of shares) 2001 2000 1999 Income (Numerator)

Net Income - before extraordinary items and cumulative effect of change in accounting pnnciple

$169

$ 487

$ 478

- Extraordinary items (net of tax) 11 (46)

- Cumulative effect of change in accounting pnnciple (net of tax) 10 Net Income

$ 179

$498

$ 432 Shares (Denominator)

Shares for Basic EPS 145,974 144,350 152,287 Add: Incremental Shares Stock options 569 364 10 Stock units 71 67 59 Shares for Diluted EPS 146,614 144,781 152,356 Basic Earnlngs Per Share Net Income - before extraordinary items and cumulative effect of change in accounting pnnciple

$1L16

$3 38

$ 3 14

- Extraordinary items (net of tax) 0 07 (0 30)

- Cumulative effect of change in accounting pnnciple 0.07 Net Income

$1.23

$3 45

$ 2 84 Diluted Earnings Per Share Net Income - before extraordinary

(

items and cumulative effect of change in accounting pnnciple

$1.15

$3.37

$ 3.14

- Extraordinary items (net of tax) 0 07 (0 30)

- Cumulative effect of change in accounting pnnciple (net of tax) 0.07 Net Income

$1.22

$3.44

$ 284

52) PPL CORPORATION 2001 ANNUAL REPORT IMM, f--C-I E UWUM U f Q) NRCRAWx Cfjt%ýW,%

See Note 14 for a description of the cumulative effect of a change in accounting for pension gains and losses. The pro-forma effect of retroactive application of this change in accounting, from reported results, is as follows:

1998 and pnor 2001 2000 1999 years Increase (Decrease)

Net income ($ millions)

$ (10)

$ 7

$ 3 EPS

$(.07)

$ 05

$ 02 In May 2001, PPL issued 23 million PEPS Units that contain a pur chase contract component for PPL's common stock. The purchase con tract would settle between 8 8 million and 10 8 million of PPL's common shares, depending on a conversion ratio tied to the price of PPL's common stock. The PEPS Units will only be dilutive if the average price of PPL's common stock exceeds $65.03 for any penod. Therefore, they were excluded from the diluted EPS calculations.

Stock options to purchase approximately 896,000 PPL common shares for 2001 were not included in that penod's computation of diluted EPS because the exercise pnce of the options was greater than the average market price of the common shares. Therefore, the effect would have been antidilutive.

In August 1999, PPL Transition Bond Company issued $2.4 billion of transition bonds to securitize a portion of PPL Electnc's stranded costs. PPL Electric used a portion of the securitization proceeds to repurchase $1.5 billion of its first mortgage bonds The premiums and related expenses to reacquire these bonds were $59 million, net of tax.

In August 1999, PPL Electric released approximately $78 million of deferred income taxes associated with the CTC that was no longer required because of secuntization. The net secuntization impact of the bond repurchase and the deferred tax change was a gain of $19 million SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt,"

requires that a material aggregate gain or loss from the extinguishment of debt be classified as an extraordinary item, net of the related income tax effect. The $59 million loss associated with the bond repurchase was treated as an extraordinary item. Details were as follows:

(Millions of dollars)

Reacquisition cost of debt

$1,554 Net carrying amount of debt (1,454)

Extraordinary charge pre-tax 100 Tax effects (41)

Extraordinary charge 59 This extraordinary charge was partially offset in December 1999 with a credit relating to wholesale power activity. In December 2000, there was an additional extraordinary credit relating to wholesale power activity Under FERC-approved interconnection and power supply agreements, PPL EnergyPlus supplied capacity and energy to UGI These agreements were terminated in February 2001.

PPL EnergyPlus had a contract to provide BG&E with 129,000 kilowatts, or 6.6%, of PPL Susquehanna's share of capacity and related energy from the Susquehanna station. PPL EnergyPlus provided 407 million kWh to BG&E through May 2001, at which point the contract ended.

PPL Montana provided power to Montana Power under two whole sale transition sales agreements One agreement expired in December 2001 and the second agreement expires in June 2002. See Note 16 for more information regarding a new power supply agreement beginning in July 2002.

For 2001, 2000 and 1999, the corporate federal income tax rate was 35% The statutory corporate net income tax rates for Pennsylvania and Montana were 9.99% and 6.75%.

The tax effects of significant temporary differences comprising PPL's net deferred Income tax liability were as follows:

(Millions of dollars) 2001 2000 Deferred Tax Assets Deferred investment tax credits 60 66 NUG contracts & buybacks 272 326 Accrued pension costs 74 106 Deferred foreign income taxes 109 86 Cancellation of generation projects 60 Impairment write-down 61 Contribution in aid of construction 42 33 Other 200 162 Valuation allowance (172)

(8) 706 771 Deferred Tax Uabilitles Electric plant - net 852 845 Restructunng - CTC 861 949 Taxes recoverable through future rates 104 102 Reacquired debt costs 12 13 Foreign investments 14 15 Deferred foreign income taxes 42 52 Other 49 (27) 1,934 1,949 Net Deferred Tax Uablllty

$1,228

$1,178 PPL CORPORATION 2001 ANNUAL REPORT (53

Details of the components of income tax expense, a reconciliation of federal income taxes derived from statutory tax rates applied to income from continuing operations for accounting purposes, and details of taxes other than income are as follows:

(Millions of dollars) 2001 2000 1999 Income Tax Expense Current - Federal

$270

$285

$178 Current - State 36 57 36 Current - Foreign 8

11 10 314 353 224 Deferred - Federal (86)

(52) 76 Deferred - State 4

12 (109)

Deferred - Foreign 44 (4)

(38)

(44)

(33)

Investment tax credit, net - Federal (15)

(15)

(17)

Total

$261

$294

$174 Total income tax expense - Federal

$169

$218

$ 237 Total income tax expense - State 40 69 (73)

Total income tax expense - Foreign 52 7

10 Total (Millions of dollars)

Reconciliation of Income Tax Expense Indicated federal income tax on pre-tax income before extraordinary item and a cumulative effect of a change in accounting pnnciple at statutory tax - 35%

Increase/(decrease) due to:

State income taxes Flow through of depreciation differences not previously normalized Amortization of investment tax credit Write-down of international energy projects Difference related to income recognition of foreign affiliates Foreign income taxes Federal income tax credits Other Total Income Tax Expense Effective Income Tax Rate (a) In August 1999, PPL Electnc released appre income taxes associated wth the CTC that of securrtization.

(Millions of dollars) 2001 2000 1999 Taxes, Other Than Income State gross receipts

$112

$128

$108 State utilrty realty 4

6 13 State capital stock 20 23 13 Property and other 19 19 3

$155

$176

$137 PPL Global does not pay or record U.S. income taxes on the undis tributed earnings of its foreign subsidiaries and its 20% to 50% owned corporate joint ventures where management has determined that the earnings are permanently reinvested in the companies that produced them. The cumulative undistributed earnings are included in "Earnings reinvested" on the Balance Sheet. The amounts considered permanently reinvested at December 31, 2001 and 2000 were $38 million and $27 million. It is not practical to estimate the amount of taxes that might be payable on these foreign earnings if they were remitted to PPL Global.

$261

$294

$174 The cost to decommission the Susquehanna station is based on a site specific study to dismantle and decommission each unit immediately 2001 2000 1999(a) following final shutdown. PPL Susquehanna's 90% share of the total estimated cost of decommissioning the Susquehanna station was approximately $724 million in 1993 dollars. This estimate includes decommissioning the radiological portions of the station and the cost of removal of non-radiological structures and matenals.

Decommissioning costs are recorded as a component of depreciation

$168

$284

$ 242 expense. Beginning in January 1999, in accordance with the PUC Final Order, $130 million of decommissioning costs are being recovered from 25 45 (50) customers through the CTC over the 11-year life of the CTC rather than 2

3 the remaining life of Susquehanna. The recovery will include a return on (11)

(11)

(12) unamortized decommissioning costs. Decommissioning charges were

$24 million in 2001, $26 million in 2000 and $27 million in 1999.

100 18 Amounts collected from PPL Electnc's customers for decommissioning, less applicable taxes, are deposited in external trust funds for invest (17)

(14)

(22) ment and can be used only for future decommissioning costs. Accrued 52 7

10 nuclear decommissioning costs were $294 million and $280 million at (40)

(6)

(16)

()

(

15 December 31, 2001 and 2000, and are included in "Deferred Credits and Other Noncurrent Liabilities - Other" on the Balance Sheet.

93 10 (68)

In November 2001, PPL Susquehanna notified the NRC that it

$261

$294

$1.74 intends to file for 20-year license renewals for each of the Susquehanna 54.4%

36 3%

25.1%

units. If approved, the operating licenses would be extended from 2022 to 2042 for Unit I and from 2024 to 2044 for Unit 2.

oximately $78 million of deferred See Note 18 for additional information on SFAS 143, which could were no longer required because have a material impact on the accounting for the decommissioning of the Susquehanna station.

54) PPL CORPORATION 2001 ANNUAL REPORT ccme,60 owm4afumiý antmEW-t wiwc:,M)-m

The carrying amount on the Balance Sheet and the estimated fair value of PPL's financial instruments were as follows:

(Millions of dollars)

December 31, 2001 December 31, 2000 Carrying Fair Carrying Fair Amount Value Amount Value Assets Cash and cash equivalents (a)

$ 950

$ 950

$ 480

$ 480 Nuclear plant decommissioning trust fund (a) 276 276 268 268 Price nsk management assets - current (cM Energy 22 22 7

7 Price nsk management assets - noncurrent. (c)

Energy 44 44 1

1 Interest 6

6 Other investments (a) 61 61 47 47 Other financial instruments included in other current assets (a) 3 3

13 13 Uabllltles Long-term debt ibi Company-obligated mandatorily redeemable preferred secunties of subsidiary trusts holding solely company debentures (b)

Short-term debt (a)

Pnce nsk management liabilities - current Wd Energy Interest Foreign exchange Pnce nsk management liabilities - noncurrent: ic)

Energy Interest Foreign exchange Preferred stock witlh sinking requirements (bi Other financial instruments included in other current liabilities (a) 5,579 825 118 12 4

2 7

3 1

31 12 5,724 705 118 12 4

2 7

3 1

31 12 4,784 4,804 250 902 250 902 201(d) 61(d) 46 46 (a) The carrying value of these financial instruments generally Is based on established market prices and approximates fair value.

(b) The fair value generally is based on quoted market prices for the secunties where available and estimates based on current rates offered to PPL where quoted market prices are not available.

iMi Valued using either exchange-traded market quotes or prices obtained through third-party brokers See Note 19 about the various uses of denvative financial instruments at PPL.

(d) These contracts were classified as non-trading under EITF 98-10 and were not required to be marked to fair value on the Balance Sheet in 2000.

This table excludes denvative and non-denvative energy contracts that do not meet the definition of a financial instrument because physical delivery is expected.

Credit Arrangements In December 2000 and in January 2001, PPL Capital Funding entered into two short-term credit facilities At March 31, 2001, PPL Capital Funding had borrowed $200 million under each facility at floating rates tied to either one-, two-or three-month LIBOR. These funds were used for general corporate purposes, including making loans to PPL subsidiaries to reduce their debt balances In May 2001, PPL Capital Funding repaid its borrowings under both facilities and the credit facilities were terminated.

In order to enhance liquidity, and as a credit back-stop to their respective commercial paper programs, PPL Electric, PPL Capital Funding and PPL (as guarantor for PPL Capital Funding) shared a 364-day $750 million credit facility and a five-year $300 million credit facility, each with a group of banks. In June 2001, these credit facilities were terminated, PPL Electric entered into a new $400 million 364-day credit facility and PPL Energy Supply entered into two new credit facilities: a $600 million 364-day facility and a $500 million three-year facility At December 31, 2001, no borrowings were outstanding under any of these facilities and

$26 million of letters of credit were issued under the $500 million three year facility In addition, in June 2001, PPL Capital Funding entered into a 364-day credit facility with PPL Energy Supply PPL had guaranteed PPL Capital Funding's obligations under this agreement. The credit facility and related guaranty were terminated in December 2001 when PPL Capital Funding terminated its commercial paper program and at that time no borrowings were outstanding under this credit facility.

PPL CORPORATION 2001 ANNUAL REPORT (55

PPL Montana has a $100 million three-year credit facility with certain lenders which matures in November 2002. The matunty date may be extended with the consent of the lenders. The credit facility provides that up to $75 million of the commitment may be used to cause lenders to issue letters of credit. In the event that PPL Montana were to draw upon this facility or cause lenders to issue letters of credit on its behalf, PPL Montana would be required to reimburse the issuing lenders. At December 31, 2001, $44 million of loans were outstanding under this facility and $25 million of letters of credit were issued.

In April 2001, PPL Montana executed a new credit facility to allow for incremental letter of credit capacity of $150 million. There were no letters of credit outstanding under this facility at December 31, 2001.

PPL has executed a commitment to the lenders under PPL Montana's

$150 million credit facilrty that PPL will provide (or cause PPL Energy Supply to provide) letters of credit at such times and in such amounts as are necessary to permit PPL Montana to remain in compliance with its fixed-price forward energy contracts or its derivative financial instru ments entered into to manage energy pnce nsks, to the extent that PPL Montana cannot provide such letters of credit under its existing credit agreements. No such letters of credit had been issued as of December 31, 2001.

The subsidiaries of PPL are separate legal entities. PPL's subsidianes are not liable for the debts of PPL. Accordingly, creditors of PPL may not satisfy their debts from the assets of the subsidiaries absent a specific contractual undertaking by a subsidiary to pay PPL's creditors or as required by applicable law or regulation. Similarly, PPL is not liable for the debts of its subsidianes. Accordingly, creditors of PPL's subsidiaries may not satisfy their debts from the assets of PPL absent a specific contrac tual undertaking by PPL to pay the creditors of its subsidiaries or as required by applicable law or regulation.

Financing Activities Dunring December 2001:

"* PPL Electric terminated its existing commercial paper program and established a new $400 million program.

"* PPL Capital Funding terminated its commercial paper program.

"* PPL Energy Supply initiated a $1.1 billion commercial paper program.

At December 31, 2001, there was no commercial paper outstanding under either the PPL Electric or PPL Energy Supply programs.

In March 2001, PPL Electric bought back an option related to its 6%% Reset Put Secunties due 2006. The option would have permitted a third party to remarket these securities, at higher interest rates, in May 2001. PPL Electnc retired the $200 million, 6%% Reset Put Securities in May 2001.

In May 2001, PPL issued 23 million of 7.75% PEPS Units for

$575 million. See the "Consolidated Statement of Company-obligated Mandatonly Redeemable Securities" for information regarding the PEPS Units. The $575 million of PEPS Units are included in "Company-obligated Mandatonly Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Company Debentures" on the Balance Sheet at December 31, 2001. Net proceeds of $558 million were received, after giving effect to $17 million of issuance expenses. PPL used these proceeds to pay down short-term debt The $17 million of issuance expenses were charged to "Capital stock expense and other" on the Balance Sheet, as well as $7 million for the present value of the estimated liability for con tract adjustment payments.

In July 2001, PPL Electric retired all of its outstanding First Mortgage Bonds, 9%% Series due 2021, at $5 million aggregate par value through the maintenance and replacement fund provisions of the 1945 First Mortgage Bond Indenture.

In August 2001, PPL Electric issued $800 million of senior secured bonds as part of a strategic initiative. See Note 23 for addi tional information.

In September 2001, PPL Electric repurchased $15 million aggregate par value of its First Mortgage Bonds, 6%% Series due 2005, at a market value that approximated par value.

In October 2001, PPL Energy Supply sold $500 million aggregate principal amount of its 6.40% senior unsecured notes due 2011 in a pn vate placement, and agreed to make an exchange offer to exchange the privately placed senior notes for publicly registered senior notes. The exchange was completed in February 2002. The new registered senior notes have the same material financial terms as the old senior notes.

Proceeds of the senior note offering will be used to fund generation development and for general corporate purposes.

During November and December 2001, PPL Capital Funding rbpur chased $70 million, par value, of its medium-term notes, 7.75% Series due 2015, at a market value of $76 million.

During December 2001, PPL Electnc repurchased $4 million par value of its First Mortgage Bonds, 6 55% Series due 2006, at a market value that approximated par value. PPL Electnc also repurchased 148,000 shares of its 6%% Senes Preferred Stock, also at a market value that approximated par value.

During the year 2001, PPL Transition Bond Company made principal payments on bonds totaling $241 million.

In December 2000, PPL initiated a Structured Equity Shelf Program for the issuance of up to $100 million in PPL common stock in small amounts on a penodic basis. As of December 31, 2001, PPL had issued

$16 million of common stock under this program.

In 2001, PPL Global subsidiaries Emel and CEMAR, issued $127 mil lion and $99 million of long-term debt. A portion of CEMAR's debt was reclassified to short-term debt in conjunction with CEMAR's impairment.

(See Note 22.)

See Note 12 for a description of PPL's lease financings.

Domestic Generation Projects In January 2001, PPL Montour acquired an additional interest in the coal fired Conemaugh Power Plant from Potomac Electnc Power Company.

Under the terms of the acquisition agreement, PPL Montour and a sub sidiary of Allegheny Energ, Inc. jointly acquired a 9.72% interest in the 1,711 MW plant. PPL Montour paid $78 million for this additional 83 MW interest. The purchase increased PPL Montour's ownership interest to 16.25% in the two-unit plant.

56) PPL CORPORATiON 2001 ANNUAL REPORT Mm-

-ý Wi. G W, "AA u W-C, w lk rx" c L, W MCI ul M F. D

In August 2001, construction began on the University Park Energy project, a 540 MW natural gas-fired facility located in University Park, Illinois, and on the Sundance Energy project, a 450 MW natural gas-fired facility in Pinal County, Anzona. The projects are expected to be in service during the summer of 2002, at an estimated total project cost of approx imately $675 million PPL Susquehanna also announced plans to increase the capacity of its Susquehanna nuclear plant by 100 MW, with the instal lation of more efficient steam turbines on each of the two units These improvements will be made in 2003 and 2004 and are expected to cost approximately $120 million.

In December 2001, PPL Global and the Long Island Power Authority entered into agreements to build two 80 MW combustion turbine power facilities at sites in Shoreham and Edgewood on Long Island, New York.

Both facilities are expected to be in service during the summer of 2002 at an estimated total project cost of approximately $180 million.

In December 2001, a PPL Global subsidiary entered into a synthetic lease financing transaction for the development, construction and opera tion of its Lower Mt. Bethel combined cycle generating facility The Air Quality Plan Approval issued by the Pennsylvania DEP for construction of the Lower Mt Bethel facility has been appealed by the New Jersey DER PPL Energy Supply and the PPL Global subsidiary intend to work with the Pennsylvania DEP in opposing this appeal. In addition, the local town ship zoning hearing board granted zoning approval for the facility, but the approval has been appealed by a township resident as to the decibel levels allowed. An additional appeal was filed by the same resident to the township's issuance of a building permit pending the outcome of the zoning appeal PPL Energy Supply and the PPL Global subsidiary are aggressively opposing the zoning and building permit appeals. As a result of these three appeals, substantial additional requirements could be imposed on the construction and operation of the facility If, as a result of these appeals, the construction of the facility could not be com pleted by September 30, 2004, the PPL Global subsidiary, or PPL Energy Supply as guarantor, could be called upon to repay approximately 90%

of the then-outstanding facility costs, plus a make-whole premium on the total amount of debt commitments. Alternatively, PPL Energy Supply could, subject to certain conditions, purchase the facility from the lessor, offer to assume 100% of the outstanding debt, and pay a reduced make whole premium to any debtholder that does not accept such offer.

In light of continuing declines in wholesale energy prices in the east em and westem U.S. markets, PPL Global is scaling back its generation development program As a result, in December 2001, PPL Global made a decision to cancel approximately 2,100 MW of previously planned gen eration development in Pennsylvania and Washington state. These projects were in the early stage of development and would have had an estimated capital cost of approximately $1.3 billion The charge for cancellation of these generation projects, which was primarily due to cancellation fees under turbine purchase contracts, was approximately $150 million, and is reported on the Statement of Income as "Cancellation of generation projects," a component of "Other Charges."

International Distribution Projects In January 2001, PPL Global purchased an additional 5.6% direct and indirect equity interest in CGE from the Claro group, bnnging its total investment to $141 million, or about 8 5% CGE provides electricity deliv ery service to 1.4 million customers throughout Chile and natural gas delivery service to 200,000 customers in Santiago.

In May 2001, WPDL successfully completed the sale of Hyder's water business, Welsh Water, to the Welsh firm Glas Cymru Cyfyngedig for one British pound sterling and the assumption of all of Welsh Water's debt.

In September 2001, PPL Global increased its capital investment by 4 9% in CEMAR by purchasing the 25 7 billion shares of CEMAR that were held by CEMAR's employees at a price of $13 million. The increase resulted in a total 89.6% ownership in CEMAR.

In December 2001, PPL Global purchased an 80% interest in El Salvador Telecom, a small telecommunications company in El Salvador, for an initial investment of $8 million In December 2001, PPL Global recorded impairment charges for its investments in CEMAR, WPD 1953, and WPDL See Note 22 for addi tional information PPL applies the provisions of SFAS 13, "Accounting for Leases," to all leasing transactions. In addition, PPL applies the provisions of numerous other accounting pronouncements that provide specific guidance and additional requirements related to accounting for leases.

In March 2000, PPL Electnc terminated its nuclear fuel lease and repurchased $154 million of nuclear fuel from the lessor energy trust. In July 2000, all nuclear fuel was transferred to PPL Susquehanna in con nection with the corporate realignment.

In July 2000, PPL Montana sold its interest in the Colstnp generating plant to owner lessors who are leasing the assets back to PPL Montana under four 36-year operating leases. The proceeds from this sale approx imated $410 million PPL Montana used the proceeds to reduce out standing debt and make distributions to its parent, PPL Generation. PPL Montana leases a 50% interest in Colstnp Units 1 and 2 and a 30%

interest in Unit 3, through four non-cancelable operating leases The leases provide two renewal options based on the economic useful life of the generation assets In November 2000, a PPL Global subsidiary entered into a $555 mil lion operating lease arrangement for turbine generator units and related equipment (SCRs, transformers and spare engines) Certain obligations of the PPL Global subsidiary under this lease financing, including pay ment obligations, have been guaranteed by PPL The units are expected to go into service as they are completed, beginning in 2002.

In May 2001, a PPL Global subsidiary entered into an operating lease arrangement, initially for $900 million and increased in July 2001 to $1.06 billion upon syndication, for the development, construction and operation of several commercial power generation facilities Certain obligations of the PPL Global subsidiary under this lease financing, includ ing payment obligations, have been guaranteed by PPL Energy Supply.

PPL CORPORATION 2001 ANNUAL REPORT (57 1,

In February 2002, the PPL Global subsidiary reduced the available com mitment under the lease to approximately $700 million. There is a resid ual value guarantee that is expected to be up to $545 million at the end of the lease.

In December 2001, a PPL Global subsidiary entered into an operating lease arrangement for $455 million for the development, construction and operation of a 600 MW gas-fired combined-cycle generation facility located in Lower Mt. Bethel Township, Northampton County, Pennsylvania. The facility is expected to be operational in 2004. Certain obligations of the PPL Global subsidiary under this lease financing, including payment obli gations, have been guaranteed by PPL Energy Supply. There is a residual value guarantee that is expected to be up to $321 million at the end of the lease.

In addition to the leasing arrangements discussed above, PPL also has leases for vehicles, office space, land, buildings, personal computers and other equipment. Total future minimum lease payments for all operating leases are estimated as follows (millions of dollars): 2002, $368; 2003,

$108; 2004, $147; 2005, $140; 2006, $106; and thereafter, $881.

Under the PPL Incentive Compensation Plan ('ICP") and the Incentive Compensation Plan for Key Employees ("ICPKE") (together, the "Plans"),

restricted shares of PPL common stock as well as stock options may be granted to officers and other key employees of PPL, PPL Electric and other affiliated companies. Awards under the Plans are made in the com mon stock of PPL by the Compensation and Corporate Governance Committee ("CCGC") of the PPL Board of Directors in the case of the ICP, and by the PPL Corporate Leadership Council ("CLC') in the case of the ICPKE. Each Plan limits the number of shares available for awards to two percent of the outstanding common stock of PPL on the first day of each calendar year. The maximum number of options which can be awarded under each Plan to any single eligible employee in any calendar year is 1.5 million shares. Any portion of these options that has not been granted may be carried over and used in any subsequent year. If any award lapses or is forfeited or the rights to the participant terminate, any shares of common stock are again available for grant. Shares delivered under the Plans may be in the form of authorized and unissued common stock, common stock held in treasury by PPL or common stock pur chased on the open market (including pnvate purchases) in accordance with applicable securities laws.

Restricted Stock Restricted shares of PPL common stock are outstanding shares with full voting and dividend rights. However, the shares are subject to forfeiture or accelerated payout under Plan provisions for termination, retirement, disability and death. Restricted shares vest fully if control of PPL changes, as defined by the Plans.

Restncted stock awards of 202,590; 440,549; and 108,800 shares, with per share weighted-average fair values of $43.09, $21.30, and

$26.74, were granted in 2001, 2000 and 1999. Compensation expense for 2001 was $6 million and less than $3 million in 2000 and 1999. At December 31, 2001, there were 660,572 restricted shares outstanding.

These awards currently vest from three to 23 years from the date of grant Stock Options Under the Plans, stock options may also be granted with an option exer cise pnce per share not less than the fair market value of PPL's common stock on the date of grant The options are exercisable beginning one year after the date of grant, assuming the individual is still employed by PPL or a subsidiary, in installments as determined by the CCGC in the case of the ICI? and the CLC in the case of the ICPKE. The CCGC and CLC have discretion to accelerate the exercisability of the options. All options expire no later than 10 years from the grant date. The options become exercisable if control of PPL changes, as defined by the Plans.

PPL applies APB Opinion No. 25, 'Accounting for Stock Issued to Employees,' and related interpretations in accounting for stock options.

Since stock options are granted at the then current market pnce, no compensation cost has been recognized. Compensation calculated in accordance with the disclosure requirements of SFAS 123, 'Accounting for Stock-Based Compensation," for 2001, 2000 and 1999 would have been $5 million, $2 million and less than $1 million. The impact on basic and diluted EPS would have been approximately 2 cents per share in 2001, and approximately 1 cent per share in 2000.

A summary of stock option activity follows:

Stock Option Activity Balance at December 31, 1998 Options granted Options forfeited Balance at December 31, 1999 (13,570 options exercisable)

Options granted Options exercised Options forfeited Balance at December 31, 2000 (215,158 options exercisable)

Options granted Options exercised Options forfeited Balance at December 31, 2001 (306,544 options exercisable)

Weighted Number of Average Options Exercise Pnce 704,800 (78,780) 626,020 1,501,110 (56,590)

(101,239) 1,969,301 922,860 (548,424)

(88,686) 2,255,051

$2685

$2684

$26.85

$22 45

$2684

$2402

$2364

$43.16

$23.49

$31.31

$31.36 The weighted average fair values of options at their grant date during 2001, 2000 and 1999 were $10 42, $3 35 and $2.37. The estimated fair value of each option granted was calculated using a modified Black Scholes option-pricing model. The weighted average assumptions used in the model were as follows:

2001 2000 1999 Risk-free interest rate 5.46%

6.74%

5.61%

Expected option term 10 yrs 10 yrs 10 yrs Expected stock volatility 30.24%

19 79%

16.19%

Dividend yield 4.28%

5.70%

6.60%

58)

PPL CORPORATION 2001 ANNUAL REPORT U-sm VC.) W. LOC-14LIEwc. GMY-C)'O"i utscigulck

Options Outstanding Weighted Number Average Outstanding Remaining Weighted Average Exercise Options Exercisable Weighted Number Average Exercisable Exercise Range of Exercise Pnces at 12/31/01 Contractual Life Prices at 12/31/01 Pnce

$19.00-$24 00 962,249 8 1

$22 42 71,770

$21.99

$25.00-$30 00 407,812 7.2

$26 85 234,774

$26.85

$40.00-$45.00 884,990 9 1

$43 16 Outstanding options had a weighted-average remaining life of 8 3 years at December 31, 2001.

113 I,-Ml

ý unfunded nonqualified retirement plans.Substantially all employees of Pension and Other Postretirement Benefits PPL's subsidiaries will become eligible for certain health care and life insur ance benefits upon retirement through contributory plans Postretirement PPL and its subsidmnes sponsor vanous Pension and other postre-benefits under the PPL Retiree Health Plans (covering retirees of PPL tirement and87, stEmploymers'AccountibenefitPlnsPLfollowandstheguidaElectnc and various other affiliated PPL companies) and for the North "Employers' Accounting for Postretirem Besefios"OtandSFaSn106,Penn Gas Plans are paid from funded VEBA trusts sponsored by the "Employers' Accounting for Postretirement Benefits Other Than Pensions" for these benefits.

respective companies. At December 31, 2001, PPL Electric had a regula PPL and its subsidianes also provide supplemental retirement benefits tory asset of $6 million related to postretirement benefits that is being amortized and recovered in rates with a remaining life of 11 years.

to directors, executives and other key management employees through amrieanrcordinatswharmiiglfef11yr.

Net pension and postretirement medical benefit costs (credits) were Pension Benefits Postretirement Medical Benefits (Millions of dollars) 2001 2000 1999 2001 2000 1999 Service cost

$ 38

$ 40

$42

$ 5

$ 5

$ 5 Interest cost 94 86 78 22 22 19 Expected return on plan assets (142)

(113)

(99)

(11)

(8)

(7)

Net amortization and deferral (50)

(21)

(9) 12 12 12 Special termination benefits 3

3 Net penodic pension and postretirement benefit cost (credit)

$ (57)

(8)

$15

$ 28

$31

$29 The net periodic pension cost charged or (credited) to operating expense was $(47 million) in 2001, $(6 million) in 2000 and $9 million In 1999, excluding amounts charged or (credited) to construction and other non-expense accounts.

In 2001 PPL changed its method of amortizing unrecognized gains or losses in the annual pension expense/income determined under SFAS 87, "Employers' Accounting for Pensions." This change resulted in a cumula tive-effect credit of $10 million after-tax or $.07 per basic share, which Is reflected as a "Cumulative Effect of a Change in Accounting Principle" on the Statement of Income. Under the old method, unrecognized gains and losses in excess of 10% of the greater of the plan's projected bene fit obligation or market-related value of plan assets were amortized on a straight-line basis over the estimated average future service period of plan participants Under the new method, a second corridor will be utilized for unrecognized gains and losses in excess of 30% of the plan's projected benefit obligation Unrecognized gains and losses outside the second corridor will be amortized on a straight-line method over a period equal to one-half of the average future service penod of the plan participants. The new method is preferable under SFAS 87 because it provides more current recognition of gains and losses, thereby lessening the accumulation of unrecognized gains and losses.

Retiree health and welfare benefits costs charged to operating expense were approximately $21 million in 2001, $25 million in 2000 and $20 million in 1999, excluding amounts charged to construction and other non-expense accounts.

Postretirement medical costs at December 31, 2001, were based on the assumption that costs would increase 7.0% in 2001, then the rate of increase would decline gradually to 6% in 2006 and thereafter.

A one-percentage-point change in the assumed health care cost trend assumption would have the following effects:

One Percentage Point (In millions)

Increase Decrease Effect on service cost and Interest cost components

$ 1

$ (1)

Effect on postretirement benefit obligation

$11

$(10)

PPL CORPORATION 2001 ANNUAL REPORT (59

The following assumptions were used in the valuation of the benefit obligations:

2001 2000 1999 Pension Benefits Discount rate 7.25%

7.5%

7.0%

Expected return on plan assets 9.2%

9.2%

80%

Rate of compensation increase 4.25%

4.75%

5.0%

Postretirement Medical Benefits Discount rate 7.25%

7.5%

7.0%

Expected return on plan assets 7.60%

7.6%

6.35%

Rate of compensation increase 4.25%

4.75%

5 0%

The funded status of the combined plans was as follows:

Postretirement Pension Benefits Medical Benefits (Millions of dollars) 2001 2000 2001 2000 Change In Benefit Oblgation Benefit Obligation, January 1

$1,192

$1,206

$ 311

$ 317 Service cost 38 40 5

5 Interest cost 94 86 22 22 Plan amendments 4

13 Actuanal (gain)/loss 15 (98) 12 (17)

Acquisition/divestitures 30 Participant contnbutions I

Actual expense paid (4)

(4)

Net benefits paid (54)

(51)

(20)

(16)

Benefit Obligation, December 31 1,316 1,192 330 311 Change In Plan Assets Plan assets at fair value, January 1 1,794 1,799 149 130 Actual retum on plan assets (108) 44 (6) 2 Employer contnbutions 2

3 32 33 Acquisition/divestitures 23 3

Participant contributions I

Actual expense paid (4)

(4)

Net benefits paid (54)

(51)

(20)

(16)

Plan assets at fair value, December 31 1,654 1,794 155 149 Funded Status Funded Status of Plan 338 601 (175)

(162)

Unrecognized transition assets (36)

(40) 96 104 Unrecognized pnor service cost 110 114 23 27 Unrecognized net (gain)/loss (579)

(911) 42 14 Uability recognized

$ (167)

$ (236)

$ (14)

$ (17)

Amounts Recognized In the Balance Sheet Consist of Prepaid benefit cost 1

1 Accrued benefit liability (168)

(237)

$ (14)

$ (17)

Intangible asset 5

Additional minimum liability (14)

(9)

Accumulated other comprehensive income 9

9 Net Amount Recognized

$ (167)

$ (236)

$ (14)

$ (17)

The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans with accumulated benefit obli gations in excess of plan assets, were $116 million, $96 million and

$46 million, as of December 31, 2001 and $33 million, $29 million and

$0 as of December 31, 2000.

PPL Electric and its subsidiaries formerly engaged in coal mining accrued an additional liability for the cost of health care of their retired miners. At December 31, 2001, this liability was $22 million. The liability is the net of $52 million of estimated future benefit payments offset by

$30 million of available assets in a PPL Electric-funded VEBA trust.

PPL subsidianes engaged in the mechanical contracting business make contributions to various union-sponsored multiemployer pension and health and welfare plans. Contributions of $14 million, $10 million and $8 million were made in 2001, 2000 and 1999.

Savings Plans Substantially all employees of PPL's subsidiaries are eligible to partici pate in deferred savings plans (401(k)s). Contributions to the plans charged to operating expense approximated $10 million in 2001,

$9 million in 2000 and $6 million in 1999.

Employee Stock Ownership Plan PPL sponsors a non-leveraged ESOP, in which substantially all employees excluding those of PPL Global, PPL Montana, PPL Gas Utilities and the mechanical contractors are enrolled after one year of credited service.

Dividends paid on ESOP shares are treated as ordinary dividends by PPL.

Under existing income tax laws, PPL is permitted to deduct the amount of those dividends for income tax purposes and to contnbute the result ing tax savings (dividend-based contnbution) to the ESOR The dividend-based contnbution is used to buy shares of PPL's com mon stock and is expressly conditioned upon the deductibility of the con tribution for federal income tax purposes. Contnbutions to the ESOP are allocated to eligible participants' accounts as of the end of each year, based 75% on shares held in existing participants' accounts and 25%

on the eligible participants' compensation.

Amounts charged as compensation expense for ESOP contnbutions approximated $4 million in each of 2001, 2000 and 1999. These amounts were offset by the dividend-based contribution tax savings and had no impact on PPL's earnings.

ESOP shares outstanding at December 31, 2001 totaled 5,140,869, or 4% of total common shares outstanding, and are included in all EPS calculations.

Postemployment Benefits PPL subsidiaries provide health and life insurance benefits to disabled employees and income benefits to eligible spouses of deceased employ ees. Postemployment benefits charged to operating expenses were not significant in 2001, 2000 or 1999.

Certain of PPL Global subsidiaries, including Emel, EC, Elfec and Integra, provide limited non-pension benefits to all current employees.

All active employees are entitled to benefits in the event of termination or retirement in accordance with government sponsored programs. These plans generally obligate a company to pay one month's salary per year of service to employees in the event of involuntary termination. Under

60) PPL CORPORATION 2001 ANNUAL REPORT WME, % GGJM&fý-) rIMMU ft.ý

certain plans, employees with five or more years of service are entitled to this payment in the event of voluntary or involuntary termination There is no limit on the number of years of service in calculation of the benefit obligation The liabilities for these plans are accounted for under the guidance of EITF 88-1, "Determination of Vested Benefit Obligation for a Defined Benefit Pension Plan," using what is commonly referred to as the "shut down" method, where a company records the undiscounted obligation as if it was payable at each balance sheet date. The combined liabilities for these plans at December 31, 2001 and 2000 were $6 million, and are recorded in "Deferred Credits and Noncurrent Liabilities - Other" on the Balance Sheet.

At December 31, 2001, subsidiaries of PPL owned undivided interests in the following facilities:

Ownership Electnc Plant in Other Accumulated Construction Work in (Millions of dollars)

Interest Service Property Depreciation Progress PPL Generation Generating Stations Susquehanna 90.00%

$4,196

$3,525

$24 Keystone 12.34%

71 46 6

Wyman 833%

15 2

Conemaugh 1625%

185 58 4

Merrill Creek Reservoir 837%

$22 12 PPL Montana also has 50% and 30% undivided leasehold interests in Colstnp Units I and 2, and Colstnp Unit 3, respectively.

Each PPL Generation subsidiary provided its own funding for its share of the facility. Each receives a portion of the total output of the generabtng stations equal to its percentage ownership. The share of fuel and other operating costs associated with the stations is reflected on the Statement of Income PPL and its subsidiaries are involved in numerous legal proceedings, claims and litigation in the ordinary course of business. PPL and its subsidiaries cannot predict the ultimate outcome of such matters, or whether such matters may result in material liabilities.

Wholesale Energy Commitments As part of the purchase of generation assets from Montana Power, PPL Montana agreed to supply electricity under two wholesale transition ser vice agreements. In addition, PPL Montana assumed a power purchase agreement and another power sales agreement. In accordance with purchase accounting guidelines, PPL Montana recorded a liability of

$118 million as the estimated fair value of these agreements at the acquisition date. The liabilrty is being amortized over the agreement terms as adjustments to "Wholesale energy marketing and trading" revenues and "Energy purchases" on the Statement of Income. The unamortized balance at December 31, 2001 was $78 million and is included in "Other" in the "Deferred Credits and Other Noncurrent Liabilities" section of the Balance Sheet.

In October 2001, PPL announced that PPL EnergyPlus had reached an agreement to supply Montana Power with an aggregate of 450 MW of energy to be supplied by PPL Montana. The delivery term of this new contract is for five years beginning July 1, 2002, which is the day after the termination date of the last of the two existing contracts, pursuant to which PPL Montana presently supplies energy to Montana Power for its default supply.

Under the agreement, PPL EnergyPlus will supply 300 MW of around the-clock electricity and 150 MW of on-peak electricity In December 2001, the agreement was accepted for filing by the FERC. No further regulatory approvals are required under this agreement Uability for Above-Market NUG Contracts In 1998, PPL Electric recorded a loss accrual for above-market contracts with NUGs of $854 million, when its generation business was deregu lated Effective January 1999, PPL Electric began reducing this liability as an offset to "Energy purchases" on the Statement of Income. This reduction is based on the estimated timing of the purchases from the NUGs and projected market prices for this generation. The final existing NUG contract expires in 2014. In connection with the corporate realign ment, effective July 1, 2000, the remaining balance of this liability was transferred to PPL EnergyPlus. The liabilities associated with these above market NUG contracts were $580 million at December 31, 2001 Commitments - Acquisitions and Development Activities PPL Global and its subsidiaries have committed additional capital and extended loans to certain affiliates, joint ventures and partnerships in which they have an interest. At December 31, 2001, PPL Global and its subsidianes had approximately $561 million of such commitments.

The majonty of these commitments were for the purchase of LM-6000 turbine generators from General Electric The General Electnc commit ments have been reduced due to the decision to cancel generation projects as described in Note 11 PPL CORPORATION 2001. ANNUAL REPORT (61

MPSC Order In June 2001, the MPSC issued an order (MPSC Order) in which it found that Montana Power must continue to provide electnc service to its customers at tanffed rates until its transition plan under the Montana Electricity Utility Industry Restructunng and Customer Choice Act is finally approved, and that purchasers of generating assets from Montana Power must provide electricity to meet Montana Power's full load requirements at pnces to Montana Power that reflect costs calculated as if the gener ating assets had not been sold. PPL Montana purchased Montana Power's interests in two coal-fired plants and 11 hydroelectric units in 1999.

In July 2001, PPL Montana filed a complaint against the MPSC with the U S. District Court in Helena, Montana, challenging the MPSC Order.

In its complaint, PPL Montana asserted, among other things, that the Federal Power Act preempts states from exercising regulatory authonty over the sale of electricity in wholesale markets, and requested the court to declare the MPSC action preempted, unconstitutional and void. In addition, the complaint requested that the MPSC be enjoined from seek ing to exercise any authonty, control or regulation of wholesale sales from PPL Montana's generating assets.

At this time, PPL Montana cannot predict the outcome of the proceed ings related to the MPSC Order, what actions the MPSC, the Montana Legislature or any other govemmental authonty may take on these or related matters, or the ultimate impact on PPL, PPL Energy Supply and PPL Montana of any of these matters.

Montana Power Shareholders' Utlgation In August 2001, a purported class-action lawsuit was filed by a group of shareholders of Montana Power against Montana Power, the directors of Montana Power, certain unnamed advisors and consultants of Montana Power, and PPL Montana. The plaintiffs allege, among other things, that Montana Power was required to, and did not, obtain shareholder approval of the sale of Montana Power's generation assets to PPL Montana in 1999. Although most of the claims in the complaint are against Montana Power, its board of directors, and its consultants and advisors, two claims are asserted against PPL Montana. In the first claim, plaintiffs seek a declaration that because Montana Power shareholders did not vote on the 1999 sale of generating assets to PPL Montana, that sale "was null and void ab initio." The second claim alleges that PPL Montana was privy to and participated in a strategy whereby Montana Power would sell its generation assets to PPL Montana without first obtaining Montana Power shareholder approval, and that PPL Montana has made net profits in excess of $100 million as the result of this alleged illegal sale. In the second claim, plaintiffs request that the court impose a "resulting and/or constructive trust" on both the generation assets themselves and all profits, plus interest on the amounts subject to the trust. PPL Montana is unable to predict the outcome of this matter.

PUC Investigation Order In November 2001, the PJM Market Monitor publicly released a report prepared for the PUC entitled "Capacity Market Questions" relating to the pricing of installed capacity in the PJM daily market during the first quarter of 2001. The report concludes that PPL EnergyPlus (identified in the report as "Entity 1") was able to exercise market power to raise the market-cleanng price above the competitive level dunng that period. PPL EnergyPlus does not agree with the Market Monitor's conclusions that it exercised market power; in addition, the Market Monitor acknowledged in his report that PJM's standards and rules did not prohibit PPL EnergyPlus' conduct. In November 2001, the PUC issued an Investigation Order directing its Law Bureau to conduct an investigation into the PJM capacity market and the allegations in the Market Monitor's report. In January 2002, PPL filed comments as requested by the Investigation Order. The Order does not suggest what, if any, action the PUC may take as a result of the investigation, other than considering possible changes to its com petitive safeguards. While PPL EnergyPlus and PPL Electric have filed comments with the PUC as part of the investigation, they have taken the position that the PUC does not have jurisdiction to regulate the PJM capacity markets as those markets are for wholesale electncity trans actions and accordingly are within the exclusive junsdiction of the FERC.

In addition, PPL EnergyPlus and PPL Electric believe that PPL EnergyPlus' actions under review were at all times lawful and consistent with the rules of the market. At this time, neither PPL EnergyPlus nor PPL Electric can predict the outcome of the PUC investigation or what action the PUC may take in connection with the investigation.

FERC Market-based Rates In December 1998, the FERC issued an order authorizing PPL EnergyPlus to make wholesale sales of electric power and related products at market based rates. In that order, the FERC directed PPL EnergyPlus to file an updated market analysis within three years of the date of the order, and every three years thereafter. PPL EnergyPlus filed its initial updated mar ket analysis in December 2001. Several parties thereafter filed interven tions and protests requesting that, in light of the PJM Market Monitor's report described above, PPL EnergyPlus be required to provide additional information demonstrating that it has met the FERC's market power tests necessary for PPL EnergyPlus to continue its market-based rate authority.

PPL EnergyPlus has responded to those protests and interventions. PPL EnergyPlus has taken the position that the FERC does not require the economic test suggested by the intervenors and that, in any event, it would meet such economic test if required by the FERC. The matter is currently pending before the FERC.

Proposed Montana Hydroelectric Initiative In January 2002, the Montana Secretary of State certified, in accordance with applicable statutes, that it had approved the form of a proposed Montana "Hydroelectnc Security Act" initiative. The proposed initiative may be placed on the November 2002 statewide ballot if sufficient signa tures are obtained pnor to June 21, 2002. Among the stated purposes of the proposed initiative is to create an elected Montana public power commission to determine whether purchasing hydroelectric dams in Montana is in the public interest. Such a commission could decide to acquire PPL Montana's hydroelectric dams either pursuant to a negoti ated purchase or an acquisition at fair market value through the power of condemnation. At this time, PPL, PPL Energy Supply and PPL Montana cannot predict whether the proposed initiative will garner enough signa tures for placement on the November 2002 statewide ballot, whether there will be a successful legal challenge to the initiative, whether it

62) PPL CORPORATION 2001 ANNUAL REPORT VJNM FC. W&WUSEC. QCICRIOMý orcfaroxcl

would pass if on the ballot or what impact, if any, the measure might ultimately have upon PPL Montana or its hydroelectric operations. PPL Montana has declared its opposition to, and intends to vigorously oppose, the initiative.

Nuclear Insurance PPL Susquehanna is a member of certain insurance programs which provide coverage for property damage to members' nuclear generating stations. Facilities at the Susquehanna station are insured against property damage losses up to $2.75 billion under these programs PPL Susquehanna is also a member of an insurance program which provides insurance coverage for the cost of replacement power during prolonged outages of nuclear units caused by certain specified conditions. Under the property and replacement power insurance programs, PPL Susquehanna could be assessed retroactive premiums in the event of the insurers' adverse loss expenence At December 31, 2001, this maximum assess ment was about $20 million.

PPL Susquehanna's public liability for claims resulting from a nuclear incident at the Susquehanna station is limited to about $9.5 billion under provisions of The Price Anderson Amendments Act of 1988. PPL Susquehanna is protected against this liability by a combination of com mercial insurance and an industry assessment program. In the event of a nuclear incident at any of the reactors covered by The Pnce Anderson Amendments Act of 1988, PPL Susquehanna could be assessed up to

$176 million per incident, payable at $20 million per year.

Environmental Matters Air The Clean Air Act deals, in part, with acid rain, attainment of federal ambient ozone standards and toxic air emissions in the U.S. PPL sub sidiaries are in substantial compliance with the Clean Air Act.

The Bush administration and certain members of Congress have made proposals regarding possible amendments to the Clean Air Act.

These amendments could require significant further reductions In NOx, S02 and mercury and could possibly require measures to limit C0 2.

The Pennsylvania DEP has finalized regulations requinng further sea sonal (May-June) NOx reductions to 80% from 1990 levels starting in 2003. These further reductions are based on the requirements of the Northeast Ozone Transport Region Memorandum of Understanding and two EPA ambient ozone Initiatives: the September 1998 EPA State Implementation Plan (SIP) call (i.e., EPA's requirement for states to revise their SIPs) issued under Section 110 of the Clean Air Act, requinng reductions from 22 eastern states, including Pennsylvania; and the EPA's approval of petitions filed by northeastern states, requinng reductions from sources in 12 northeastern states and Washington D C., including PPL sources. The EPA's SIP-call was substantially upheld by the D.C.

Circuit Court of Appeals in an appeals proceeding. Although the Court extended the implementation deadline to May 2004, the Pennsylvania DEP has not changed its rules accordingly. PPL expects to achieve the 2003 NOx reductions with the recent installation of SCR technology on the Montour units and the possible use of SCR or SNCR technology on a Brunner Island unit.

The EPA has also developed new standards for ambient levels of ozone and fine particulates in the U.S. These standards were challenged and remanded to the EPA by the D.C. Circuit Court of Appeals in 1999.

However, on appeal to the United States Supreme Court, the D C. Circuit Court's decision was reversed in part and remanded to the D.C. Circuit.

The new particulates standard, if finalized, may require further reductions in SO2 for certain PPL subsidianes and year-round NOx reductions com mencing in 2010-2012 at SIP-call levels in Pennsylvania, and at slightly less stnngent levels in Montana. The revised ozone standard, if finalized, is not expected to have a material effect on facilities of PPL subsidiaries.

Under the Clean Air Act, the EPA has been studying the health effects of hazardous air emissions from power plants and other sources in order to determine what emissions should be regulated, and has determined that mercury emissions must be regulated In this regard, EPA is expected to develop regulations by 2004.

In 1999, the EPA initiated enforcement actions against several utilities, asserting that older, coal-fired power plants operated by those utilities have, over the years, been modified in ways that subject them to more stringent "New Source" requirements under the Clean Air Act The EPA has since issued notices of violation and commenced enforcement activi ties against other utilities. Although the EPA has threatened to continue expanding its enforcement actions, the future direction of the "New Source" requirements is presently unclear. Therefore, at this time, PPL is unable to predict whether such EPA enforcement actions will be brought with respect to any of its affiliates' plants. However, the EPA regional offices that regulate plants in Pennsylvania (Region Ill) and Montana (Region VIII) have indicated an intention to issue information requests to all utilities in their junsdiction, and the Region VIII office has issued such a request to PPL Montana's Corette plant. PPL has responded to the information request. PPL cannot presently predict what, if any, action the EPA might take in this regard. Should the EPA or any state initiate one or more enforcement actions against PPL, compliance with any such enforcement actions could result in additional capital and operating expenses in amounts which are not now determinable, but which could be significant.

The EPA is also proposing to revise its regulations in a way that will require power plants to meet "New Source" performance standards and/or undergo "New Source" review for many maintenance and repair activities that are currently exempt The New Jersey DEP and some New Jersey residents have raised environmental concerns with respect to the Martins Creek Plant, particu larly with respect to SO2 emissions. PPL Martins Creek is discussing these concerns with the New Jersey DER In addition, the plant experi enced several opacity violations in the first and second quarters of 2001, for which it paid a civil penalty of $30,300 and funded an environ mental project for $90,000. The cost of addressing New Jersey's SO2 concerns and the opacity issued is not now determinable but could be significant See Note 11 for information on the Lower Mt. Bethel appeal by the New Jersey DER PPL CORPORATION 2001 ANNUAL REPORT (63

Water/Waste The final NPDES permit for the Montour plant contains stringent limits for iron discharges. The results of a toxic reduction study show that additional water treatment facilities or operational changes are needed at this station. A plan for these changes has been developed and was submitted to the Pennsylvania DEP in August 2001.

A final NPDES permit has been issued to the Brunner Island plant.

The permit contains a provision requinng further studies on the thermal impact of the cooling water discharge from the plant. Depending on the outcome of these studies, the plant could be subject to capital and operating costs that are not now determinable but could be significant.

The EPA has significantly tightened the water quality standard for arsenic. The lowered standard may require PPL Generation to further treat wastewater and/or take abatement action at several of its sub sidianes' power plants, the cost of which is not now determinable but which could be significant.

The EPA recently finalized requirements for new or modified water intake structures. These requirements will affect where generating facili ties are built, will establish intake design standards, and could lead to requirements for cooling towers at new and modified power plants.

Another new rule, expected to be finalized in 2003, will address existing structures. Each of these rules could impose significant costs on PPL Generation, which are not now determinable but which could be significant.

Capital expenditures through the year 2003 to correct groundwater degradation at fossil-fueled generating stations and to address wastewater control at PPL Generation's facilities, are included in the table of construc tion expenditures in the section entitled "Financial Condition - Capital Expenditure Requirements" in Management's Discussion and Analysis.

Additional capital expenditures could be required beyond the year 2006 in amounts which are not now determinable but which could be signifi cant. Actions taken to correct groundwater degradation, to comply with the environmental regulations and to address wastewater control, are also expected to result in increased operating costs in amounts which are not now determinable but which could be significant.

Superfund and Other Remediatton In 1995, PPL Electric entered into a consent order with the Pennsylvania DEP to address a number of sites where it may be liable for remediation.

This may include potential PCB contamination at certain PPL Electric substations and pole sites; potential contamination at a number of coal gas manufacturing facilities formerly owned or operated by PPL Electric; and oil or other contamination which may exist at some of PPL Electric's former generating facilities. In connection with the July 1, 2000, corpo rate realignment, PPL Electric's generation facilities were transferred to subsidiaries of PPL Generation. As of December 31, 2001, work has been completed on approximately 80% of the sites included in the consent order.

In 1996, PPL Gas Utilities entered into a similar consent order with the Pennsylvania DEP to address a number of sites where subsidiaries of PPL Gas Utilities may be liable for remediation. The sites primarily include former coal gas manufacturing facilities. Subsidianes of PPL Gas Utilities are also investigating the potential for any mercury contamina tion from gas meters and regulators. Accordingly, PPL Gas Utilities and Pennsylvania DEP have agreed to add 72 meter/regulation sites to the consent order.

At December 31, 2001, PPL Electnc and PPL Gas Utilities had accrued approximately $5 million and $12 million, representing the esti mated amounts they will have to spend for site remediation, including those sites covered by each company's consent orders mentioned above.

In October 1999, the Montana Supreme Court held in favor of several citizens' groups that the right to a clean and healthful environment is a fundamental right guaranteed by the Montana Constitution. The court's ruling could result in significantly more stringent environmental laws and regulations, as well as an increase in citizens' suits under Montana's environmental laws. The effect on PPL Montana of any such changes in laws or regulations or any such increase in legal actions is not currently determinable, but it could be significant.

Under the Montana Power Asset Purchase Agreement, PPL Montana is indemnified by Montana Power for any pre-acquisition environmental liabilities. However, this indemnification is conditioned on certain circum stances that can result in PPL Montana and Montana Power shanng in certain costs within limits set forth in the agreement.

Future cleanup or remediation work at sites currently under review, or at sites not currently identified, may result in matenal additional oper ating costs for PPL subsidiaries that cannot be estimated at this time.

General Certain of PPL's affiliates have electric distribution operations in the U.K.

and Latin Amenca. PPL believes that these operations are in compliance with all applicable laws and government regulations to protect the environ ment PPL is not aware of any matenal administrative proceeding against these companies with respect to any environmental matter.

Due to the environmental issues discussed above or other environ mental matters, PPL subsidiaries may be required to modify, replace or cease operating certain facilities to comply with statutes, regulations and actions by regulatory bodies or courts. In this regard, PPL subsidiaries also may incur capital expenditures, operating expenses and other costs in amounts which are not now determinable but which could be significant.

Credit Support PPL and PPL Energy Supply provide certain guarantees for their sub sidiaries. PPL has guaranteed all of the debt of PPL Capital Funding. As of December 31, 2001, PPL had guaranteed $1.3 billion of PPL Capital Funding medium-term notes. PPL had also guaranteed certain obligations under power purchase and sales agreements of PPL EnergyPlus for up to

$1 billion and of PPL Montana for up to $138 million. As of December 31, 2001, there were $31 million of guarantees outstanding under the power purchase agreement and none under the sales agreement. In addition, PPL had guaranteed certain obligations of other subsidiaries, totaling $272 million at December 31, 2001. As of December 31, 2001, PPL Energy Supply has also guaranteed certain obligations under power purchase and sales agreements of PPL EnergyPlus for up to $121 mil lion and certain obligations of other subsidianes totaling $600 million.

64) PPL CORPORATION 2001. ANNUAL REPORT R U-U@ VC MOMUSAL QM-Iattl Crf.TCVUXCI

Source of Labor Supply As of December 31, 2001, PPL and its subsidiaries had 12,496 full time employees. This included 3,594 in PPL Electric and 425 in PPL Gas Utilities, 2,550 in PPL Generation, 1,943 in PPL EnergyPlus, 44 in PPL Global, 2,765 in several Central and South Amencan electric companies controlled by PPL Global and 1,175 in PPL Services.

Approximately 54%, or 5,243, of PPL's domestic workforce are mem bers of labor unions, with four IBEW locals representing nearly 4,200 employees. The other unions primarily represent small locals of gas util ity employees in Pennsylvania. The bargaining agreement with the largest union was negotiated in 1998 and expires in May 2002. Eight new three year contracts with smaller gas utility locals in Pennsylvania were negoti ated in 2000 and five additional agreements with two-year terms were negotiated in 2001. New contracts were also concluded with two IBEW locals in Montana PPL Montana is currently negotiating with the Teamsters Union for a new agreement.

PPL Global provided temporary financing to WPDL and WPD 1953 in connection with the acquisition of Hyder The outstanding loan receiv ables and accrued interest, 154 5 million Bntish pounds sterling (approximately $220 million), were repaid in May 2001.

At December 31, 2000, PPL Global had a $135 million note payable to an affiliate of WPD 1953. The note was denominated in U.S. dollars, and provided for interest at market rates. PPL Global repaid this note in January 2001 SFAS 141 In June 2001, the FASB issued SFAS 141, "Business Combinations,"

which eliminates the pooling-of-interest method of accounting for busi ness combinations and requires the use of the purchase method. In addition, SFAS 141 requires the reassessment of intangible assets to determine If they are appropriately classified either separately or within goodwill. SIAS 141 is effective for business combinations initiated after June 30, 2001. PPL adopted SFAS 141 on July 1, 2001, with no mate rial impact on the financial statements.

SFAS 142 In June 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets," which eliminates the amortization of goodwill and other acquired intangible assets with indefinite economic useful lives. SFAS 142 requires an annual impairment test of goodwill and other intangible assets that are not subject to amortization PPL adopted SFAS 142 on January 1, 2002 In accordance with the provisions of SEAS 142, PPL ceased amortiza tion of goodwill and all intangible assets with indefinite useful lives The elimination of amortization will result in $18 million less expense (pre tax) in 2002. In addition, PPL is in the process of conducting the transi tion impairment analysis and may record a goodwill impairment of up to

$100 million (pre-tax) as a change in accounting principle in the first quarter of 2002. The potential impairment relates to reporting units within the International segment.

SFAS 143 In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retire ment Obligations," on the accounting for obligations associated with the retirement of long-lived assets. SFAS 143 requires a liability to be recog nized in the financial statements for retirement obligations meeting spe cific criteria. Measurement of the initial obligation is to approximate fair value, with an equivalent amount recorded as an increase in the value of the capitalized asset The asset will be depreciated in accordance with normal depreciation policy and the liability will be increased, with a charge to the income statement, until the obligation is settled. SFAS 143 is effective for fiscal years beginning after June 15, 2002. The potential impact of adopting SFAS 143 is not yet determinable, but may be matenal.

SFAS 144 In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," that replaces SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." For long-lived assets to be held and used, SFAS 144 retains the requirements of SEAS 121 to (a) recognize an impairment loss only if the carrying amount is not recoverable from undiscounted cash flows and (b) measure an impairment loss as the difference between the carrying amount and fair value of the asset For long-lived assets to be disposed of, SFAS 144 establishes a single accounting model based on the framework established in SFAS 121 The accounting model for long-lived assets to be disposed of by sale applies to all long-lived assets, including discontinued operations, and replaces the provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurnng Events and Transactions," for the disposal of segments of a business. SFAS 144 also broadens the reporting of discontinued operations PPL adopted SFAS 144 on January 1, 2002, with no matenal impact on the financial statements PPL adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," on January 1, 2001 Upon adoption and in accor dance with the transition provisions of SFAS 133, PPL recorded a cumu lative-effect credit of $11 million in earnings, included as an increase to "Wholesale energy market and trading" revenues and a decrease to "Energy purchases" on the Statement of Income. PPL also recorded a cumulative-effect charge of $182 million in "Accumulated other compre hensive income," a component of Shareowners' Common Equity As of December 31, 2001, the balance in "Accumulated other comprehen sive income" related to unrealized gains and losses on qualifying denva tives was a net gain of $23 million, as a result of reclassifying part of the transition adJustment into earnings, changes in market prices and the adoption of DIG Issue C15 (see discussion in "Implementation Issues" on the following page)

PPL CORPORATION 2001 ANNUAL REPORT (65

Management of Market Risk Exposures PPL's market nsk exposure is the adverse effect on the value of a trans action that results from a change in commodity prices, interest rates or currency exchange rates. The market risk associated with commodity pnce, interest rate and foreign exchange contracts is managed by the establishment and monitonng of parameters that limit the types and degree of market risk that may be undertaken. PPL actively manages the market risk inherent in its commodity, debt and foreign currency posi tions. The PPL Board of Directors has adopted risk management policies to manage the risk exposures related to energy prices, interest rates and foreign currency exchange rates. These policies monitor and assist in controlling these market risks and use denvative instruments to man age some associated commodity, debt, and foreign currency activities.

PPL's derivative activities are subject to the management, direction and control of the RMC. The RMC is composed of the chief financial officer and other officers of PPL. The RMC reports to the Finance Committee of the PPL Board of Directors on the scope of its derivative activities.

The RMC sets forth risk-management philosophy and objectives through a corporate policy, provides guidelines for denvative-instrument usage, and establishes procedures for control and valuation, counterparty credit approval and the monitoring and reporting of denvative activity.

PPL utilizes forward contracts, futures contracts, options and swaps as part of its nsk-management strategy to minimize unanticipated fluctu ations in eamings caused by commodity price, interest rate and foreign currency volatility. All denvatives are recognized on the balance sheet at their fair value, unless they meet SFAS 133 criteria for exclusion (see discussion in "Implementation Issues" below).

Fair Value Hedges PPL enters into financial contracts to hedge a portion of the fair value of firm commitments of forward electricity sales and to hedge fluctua tions in market value of existing debt issuances. These contracts range in maturity through 2006. For the 12 months ended December 31, 2001, PPL recognized a net gain of $7 million, after-tax, resulting from firm commitments that no longer qualified as fair value hedges (reported in "Wholesale energy marketing and trading" revenues and "Energy pur chases" on the Statement of Income). PPL did not recognize any gains or losses from the ineffective portion of fair value hedges.

Cash Row Hedges PPL enters into physical and financial contracts, including forwards, futures and swaps, to hedge the pnce risk associated with electric, gas and oil commodities. Additionally, PPL enters into financial interest rate swap contracts to hedge interest expense associated with both existing and anticipated debt issuances. These contracts and swaps range in maturity through 2004. PPL also enters into foreign currency forward contracts to hedge exchange rates associated with firm commitments denominated in foreign currencies and to hedge the net investment of foreign operations. These forward contracts range in matunty through 2003, excluding those contracts forecasted to relate to the payment of vanable interest on existing financial instruments. For the 12 months ended December 31, 2001, PPL recorded a net gain of $23 million in "Accumulated other comprehensive income" relating to these contracts.

As a result of an unplanned outage, Enron's bankruptcy and changes in other economic conditions, PPL discontinued certain cash flow hedges which resulted in a net loss of $14 million, after-tax, for the 12 months ended December 31, 2001 (reported in "Wholesale energy marketing and trading" revenues and "Energy purchases' on the Statement of Income). The impact on the financial statements resulting from cash flow hedge ineffectiveness for the 12 months ended December 31, 2001 was immaterial.

As of December 31, 2001, the deferred net gain on denvative instru ments in "Accumulated other comprehensive income" expected to be reclassified into earnings dunng the next 12 months was $6 million.

Implementation Issues On June 29, 2001, the FASB issued definitive guidance on DIG Issue C15: "Scope Exceptions: Normal Purchases and Normal Sales Exception for Option-Type Contracts and Forward Contracts in Electricity." Issue C15 provides additional guidance on the classification and application of SFAS 133 relating to purchases and sales of electricity utilizing forward contracts and options. This guidance became effective as of July 1, 2001. In December 2001, the FASB revised the guidance in Issue C15, pnncipally related to the eligibility of options for the normal purchases and normal sales exception. The revised guidance is effective as of January 1, 2002.

Purchases and sales of forward electricity and option contracts that require physical delivery and which are expected to be used or sold by the reporting entity in the normal course of business would generally be considered "normal purchases and normal sales" under SFAS 133.

These transactions, while within the scope of SFAS 133, are not required to be marked to fair value in the financial statements because they qual ify for the normal purchases and sales exception. As of December 31, 2001, "Accumulated other comprehensive income" included a net gain of $11 million related to forward transactions classified as cash flow hedges pnor to adoption of DIG Issue C15. This gain will be reversed from "Accumulated other comprehensive income" and recognized in earnings as the contracts deliver through 2008.

Unrealized Galns/(Losses) on Qualifying Derivatives (Millions of dollars, after-tax)

December 31, 2001 Cumulative unrealized gain on qualifying denvatives, beginning of period:

0 Unrealized gains (losses) arising dunng period Cumulative effect of change in accounting pnnciple at January 1, 2001 (182)

Net reclassification into eamings (16)

Net change associated with current penod hedging transactions 221 Unrealized gain on qualifying derivatives 23 Cumulative unrealized gain on qualifying denvatives, end of penod

$ 23

66)

PPL CORPORATION 2001 ANNUAL REPORT G a W C I ý C. I W. A ". UKE (A RfXjact CUSMIMC

Credit Concentration PPL enters into contracts with many entities for the purchase and sale of energy. Most of these contracts are considered a normal part of doing business and, as such, the mark-to-market value of these contracts is not reflected in the financial statements. However, the mark-to-market value of these contracts is considered when committing to new business from a credit perspective. At year-end, PPL had a credit exposure of

$412 million to energy trading partners. The majonty of this amount was the mark-to-market value of multi-year contracts for energy sales.

Therefore, if the counterparties fail to perform their obligations, PPL would not expenence an Immediate financial loss, but would expenence lower revenues in future years to the extent that replacement sales could not be made at the same pnces as the defaulted contracts. Of the $412 million, four counterparties account for 81% of the exposure.

No other individual counterparty accounted for more than 3% of the expo sure. Each of the four pnmary counterparties has an "investment grade" credit rating with Standard & Poor's, with the exception of one counter party that is a governmental agency and, as such, is not rated With the exception of the government agency, PPL has the nght to request collat eral from each of these counterparties in the event their credit rating falls below investment grade. It is also PPL's policy to enter into netting agreements with all of its counterparties to minimize credit exposure.

Through subsidianes, PPL has made approximately $18 million of sales to the Califomia ISO, for which PPL has not yet been paid in full. Given the myriad of electricity supply problems presently faced by the Califomia electric utilities and the Califomia ISO, PPL cannot predict whether or when it will receive payment As of December 31, 2001, PPL has fully reserved for possible underrecoveries of payments for these sales.

Litigation ansing out of the Califomia electncity supply situation has been filed at the FERC and in California courts against sellers of energy to the Califomia ISO The plaintiffs and intervenors in these proceedings allege abuses of market power, manipulation of market pnces, unfair trade practices and violations of state antitrust laws, among other things, and seek price caps on wholesale sales in California and other western power markets, refunds of excess profits allegedly earned on these sales of energy, and other relief, including treble damages and attorneys' fees.

Certain of PPL's subsidiaries have intervened in the FERC proceedings in order to protect their Interests, but have not been named as defendants in any of the court actions alleging abuses of market power, manipulation of market pnces, unfair trade practices and violations of state antitrust laws. A PPL subsidiary has been named as a defendant in a declaratory judgment action initiated by the State of Califomia to prevent certain members of the California Power Exchange from seeking compensation for the state's seizure of certain energy contracts. PPL Montana is a member of the California Power Exchange, but it has no energy contracts with or through the Califomia Power Exchange and has not sought com pensation in connection with the state's seizure.

Attorneys general in several western states, Including California, have begun investigations related to the electricity supply situation in California and other western states The FERC has determined that all sellers of energy in the California markets, including PPL Montana, should be subject to refund liability for the period beginning October 2, 2000 through June 20, 2001, and has initiated an evidentiary hearing concerning refund amounts The FERC also Is considering whether to order refunds for sales made in the Pacific Northwest, including sales made by PPL Montana. The FERC Administrative Law Judge assigned to this proceeding has recommended that no refunds be ordered for sales into the Pacific Northwest. The FERC presently is considenng this recommendation. PPL cannot predict whether or the extent to which any of its subsidianes will be the target of any governmental investigation or named in these lawsuits, refund proceedings or other lawsuits, the out come of any such proceedings or whether the ultimate impact on PPL of the electricrty supply situation in Califomia and other westem states will be material In connection with the December 2, 2001 bankruptcy filings by Enron Corporation and its affiliates ("Enron"), certain PPL subsidianes have ter minated certain electncity and gas agreements with Enron. PPL and its subsidiaries' 2001 earnings reflect a loss associated with termination of these contracts of $8 million after-tax, which is recorded in 'Wholesale energy marketing and trading" and "Energy purchases" on the Statement of Income Additionally, certain of these contracts with Enron extended through 2006, and were at prices more favorable to PPL than current market pnces. However, there is no further accounting charge to be recorded. PPL expects to make a claim in Enron's bankruptcy proceeding with respect to all amounts payable by Enron resulting from the termina tion of these contracts.

PPL Global has a 51% economic interest in WPD 1953, a 15.4% equity investor in Teesside Power Limited, the owner of the 1,875 MW Teesside Power Station, located in northeast England. Through its European affil ates, Enron was an owner, operator and power purchaser of the station's output As a result of Enron being placed into receivership in the U.K.

and its default on obligations under the power purchase agreements, WPD 1953 wrote off its entire equity investment in Teesside Power Limited. PPL Global's share of the impairment loss was $21 million and is included in "Wnte-down of international energy projects," a com ponent of "Other Charges" on the Statement of Income.

In connection with the Enron bankruptcy and the probable resulting loss of Teesside cash flows, PPL and its subsidianes evaluated the carry ing value of the investment in WPD 1953 and WPDL. Fair value, mea sured using discounted cash flows, was compared to the carrying value PPL CORPORATION 2001 ANNUAL REPORT (67

to determine whether impairment existed at December 31, 2001. Fair value was determined considenng the loss of the value of the future cash flows from the Teesside Power Station and a forecasted reduction in future operating cash flows at WPD 1953 and WPDL. The probability weighted impairment loss was $117 million, after-tax. The pre-tax charge was $134 million, and was recorded as a charge to "Wnte-down of inter national energy projects."

PPL Global owns 89 6% of CEMAR, which distributes and sells elec tncity in Brazil, under a 30-year concession agreement with the govem ment. The combined effects of growth in demand, decreased rainfall on the country's heavily hydroelectnc-dependent generating capacity and delays in the development of new non-hydroelectnc generation have led to shortages of electricity in certain regions. As a result, the Brazilian government implemented countrywide electricity rationing in mid-2001.

In addition, the wholesale energy markets in Brazil have been substan tially disrupted. CEMAR's results of operations, its cash flows, and its continued ability to meet its financial obligations have detenorated due to the continuing impact of the electricity rationing, the disruption in the energy markets, the failure of the electricity regulator to adequately address these problems, the resulting effects on the Brazilian capital markets and related factors.

In December 2001 and January 2002, the Brazilian electricity regu lator issued tariff rulings that CEMAR believes are inadequate to com pensate for CEMAR's rationing-related losses and to meet its ongoing operational and financial requirements. Moreover, CEMAR believes that these tanff rulings demonstrate that the regulator may not take the nec essary steps to resolve the current problems in a satisfactory manner.

In addition, the Brazilian wholesale energy markets continue to be dis rupted and recent actions by the electricity regulator indicate that ade quate compensation to CEMAR for its transactions in that market may not be made. Finally, the continued problems in the Brazilian energy market and the lack of appropnate regulatory actions have significantly decreased the availability of local financing for CEMAR.

As a result of the above events, PPL Global estimates that the long-term viability of the CEMAR operation is jeopardized and that there is minimal probability of positive future cash flows. Consequently, at December 31, 2001, PPL Global recorded an impairment loss in the carrying value of its net assets in CEMAR of $179 million, reflected in "Write-down of international energy projects." In addition, CEMAR increased its valuation allowance in deferred tax assets, thereby record ing $44 million in additional foreign deferred income taxes. A related

$6 million credit to "Minority Interest" was also reflected on the State ment of Income. The net result of these transactions was a $217 mil lion charge to earnings. PPL Global currently anticipates writing off the remaining portion of its CEMAR investment, approximately $100 million, in 2002.

As a result of the financial difficulties discussed above, CEMAR has failed to pay certain of its creditors for obligations when due. CEMAR is currently in discussions with creditors, governmental officials, regulators and other parties to address these problems.

In addition, CEMAR expects that it will not be in compliance with the financial covenants in its $150 million debenture indenture when it closes its books for the quarter ended December 31, 2001. In that case, CEMAR will be required to notify the indenture agent. In accordance with the indenture, the agent will call a meeting of the holders of the deben tures within three business days of the notice to hold a vote regarding the acceleration of the debentures. Unless three-fourths of the holders vote against acceleration, the agent will be obligated under the indenture to accelerate the debentures. CEMAR expects the required notice to the indenture agent to occur in the first quarter of 2002.

In August 2001, PPL completed a strategic initiative to confirm the structural separation of PPL Electric from PPL and PPL's other affiliated companies. This initiative enabled PPL Electnc to reduce business nsk by secunng a supply contract adequate to meet its PLR obligations, enabled PPL EnergyPlus to lock in an electric supply agreement at current favorable prices, and enabled PPL to raise capital at attractive rates for its unregulated businesses, while allowing PPL to retain valu able advantages related to operating both energy supply and energy delivery businesses.

68) PPL CORPORATION 2001 ANNUAL REPORT QEBQC-- W. G ME WOUT-C. 0 11"JuilaW, U (xc:ca3ufD

In connection with this initiative, PPL Electnc:

"* obtained a long-term electric supply contract to meet its PLR obliga tions, at pnces generally equal to the pre-determined "capped" rates it is authorized to charge its PLR customers from 2002 through 2009 under the 1998 PUC settlement order;

"* agreed to limit its businesses to electric transmission and distnbution and activities relating to or ansing out of those businesses;

"* adopted amendments to its Articles of Incorporation and Bylaws con taining corporate governance and operating provisions designed to reinforce its corporate separateness from affiliated companies;

"* appointed an independent director to its Board of Directors and required the unanimous consent of the Board of Directors, including the consent of the independent director, to amendments to these cor porate governance and operating provisions or to the commencement of any insolvency proceeding, including any filing of a voluntary petition in bankruptcy or other similar actions;

"* appointed an independent compliance administrator to review, on a semi-annual basis, its compliance with the new corporate governance and operating requirements contained in its amended Articles of Incorporation and Bylaws; and

"* adopted a plan of division pursuant to the Pennsylvania Business Corporation Law The plan of division resulted in two separate corpora tions. PPL Electnc was the surviving corporation and a new Pennsylvania corporation was created. Under the plan of division, $5 million of cash and certain of PPL Electric's potential liabilities were allocated to the new corporation. PPL has guaranteed the obligations of the new corporation with respect to such liabilities.

The enhancements to PPL Electnc's legal separation from its affil ates are Intended to minimize the risk that a court would order PPL Electnc's assets and liabilities to be substantively consolidated with those of PPL or another affiliate of PPL in the event that PPL or another PPL affiliate were to become a debtor in a bankruptcy case At a special meeting of PPL Electric's shareowners held on July 17, 2001, the plan of division and the amendments to PPL Electric's Articles of Incorporation and Bylaws were approved, and became effective upon filing the articles of division and the plan of division with the Secretary of State of the Commonwealth of Pennsylvania. This filing was made in August 2001.

As part of the strategic initiative, PPL Electric solicited bids to con tract with energy suppliers to meet its obligation to deliver energy to its customers from 2002 through 2009. In June 2001, PPL Electnc announced that PPL EnergyPlus was the low bidder, among six bids examined, and was selected to provide the energy supply requirements of PPL Electric from 2002 through 2009. Under this contract, PPL EnergyPlus will provide electricity at pre-determined capped pnces that PPL Electnc is authorized to charge its PLR customers, and received a $90 million payment to offset differences between the revenues expected under the capped pnces and projected market prices through the life of the supply agreement (as projected by PPL EnergyPlus at the time of its bid). The contract resulted in PPL EnergyPlus having an eight year contract at current market prices. PPL has guaranteed the obliga tions of PPL EnergyPlus under the new contract.

In July 2001, the energy supply contract was approved by the PUC and accepted for filing by the FERC.

Also in July 2001, PPL Electric filed a shelf registration statement with the SEC to issue up to $900 million in debt. In August 2001, PPL Electnc sold $800 million of senior secured bonds under this registration statement. The offenng consisted of two series of bonds. $300 million of 51/% Series due 2007 and $500 million of 6%% Senes due 2009 PPL Electric used a portion of the proceeds from these debt issuances to make the $90 million up-front payment to PPL EnergyPlus, and $280 mil lion was used to repurchase a portion of its common stock from PPL. The remainder of the proceeds will be used for general corporate purposes.

Taken collectively, the steps in the strategic initiative are intended to protect the customers of PPL Electric from volatile energy prices and facilitate a significant increase in leverage at PPL Electric, while lowenng its cost of capital. PPL's shareowners also benefited from this initiative because it provided low-cost capital to the higher-growth, unregulated side of PPL's business.

PPL CORPORATION 2001 ANNUAL REPORT (69

1945 First Mortgage Bond Indenture PPL Electnc's Mortgage and Deed of Trust, dated as of October 1, 1945, to Bankers Trust Company as trustee, as supplemented.

2001 Senior Secured Bond Indenture PPL Electric's Indenture, dated as of August 1, 2001, to JPMorgan Chase Bank, as trustee, as supplemented.

AFUDC (Allowance for Funds Used During Construction) The cost of equity and debt funds used to finance construction projects of regulated businesses that Is capitalized as part of construction cost.

APB Accounting Principles Board.

Bangor Hydro Bangor Hydro-Electnc Company.

BG&E Baltimore Gas & Electric Company.

BGG Bolivian Generating Group, LLC, an energy consortium with a 50% interest in an electric generating company in Bolivia.

CEMAR Companhia Energ6tica do Maranh~o, a Brazilian electric distribution company in which PPL Global has a majority ownership interest.

CGE Compaiia General Electncidad, SA, a distributor of energy in Chile and Argentina in which PPL Global has a minority ownership interest.

Clean Air Act Federal legislation enacted to address certain environmental issues related to air emissions including acid rain, ozone and toxic air emissions.

CO2 Carbon Dioxide.

CTC Competitive transition charge on cus tomer bills to recover allowable transition costs under the Customer Choice Act.

Customer Choice Act (Pennsylvania Electricity Generation Customer Choice and Competition Act) Legislation enacted to restructure the state's electric utility industry to create retail access to a competitive market for generation of electricity DelSur Distribuidora Electricidad del Sur S.A.,

an electric distnbutlon company in El Salvador, a majority of which is owned by EC.

DEP Department of Environmental Protection.

Derivative A financial instrument or other contract with all three of the following characteristics:

a. It has (1) one or more underlyings and (2) one or more notional amounts or pay ment provisions or both. Those terms determine the amount of the settlement or settlements, and, in some cases, whether or not a settlement is required.

b. It requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors.

c. Its terms require or permit net settlement, it can readily be settled net by a means outside the contract, or it provides for delivery of an asset that puts the recipient in a position not substantially different from net settlement.

DIG Derivatives Implementation Group.

DOE Department of Energy.

DRIP Dividend Reinvestment Plan.

EC Electricidad de Centroamenca, S A.

de C.V, an El Salvadoran holding company and the majority owner of Del Sur. PPL Global has 100% ownership of EC.

EGS Electnc Generation Supplier.

EITF (Emerging Issues Task Force) An organi zation that assists the FASB in improving financial reporting through the identification, discussion and resolution of financial issues within the framework of existing authoritative literature.

Emel Empresas Emel, S.A., a Chilean electnc distribution holding company of which PPL Global has majority ownership.

EMF Electric and magnetic fields.

Enrichment The concentration of fissionable isotopes to produce a fuel suitable for use in a nuclear reactor.

EPA Environmental Protection Agency.

EPS Earnings per Share.

ESOP Employee Stock Ownership Plan.

EWG Exempt Wholesale Generator.

Fabrication The process that manufactures nuclear fuel assemblies for insertion into the reactor.

FASB (Financial Accounting Standards Board)

A rulemaking organization that establishes financial accounting and reporting standards.

FERC (Federal Energy Regulatory Commission)

Federal agency that regulates interstate trans mission and wholesale sales of electricity and related matters.

GAAP Generally Accepted Accounting Principles.

Hyder Hyder Limited, a subsidiary of WPDL and previous owner of South Wales Electncity plc. In March 2001, South Wales Electncity plc was acquired by WPD 1953 and renamed WPD (South Wales).

IBEW International Brotherhood of Electncal Workers.

ICP Incentive Compensation Plan.

ICPKE Incentive Compensation Plan for Key Employees.

IRS Internal Revenue Service.

ISO Independent System Operator.

ITC Intangible transition charge on customer bills to recover intangible transition costs associated with secuntizing stranded costs under the Customer Choice Act.

JCP&L Jersey Central Power & Light Company.

kWh Kilowatt-hours.

kVA Kilovolt-amperes.

MBOR London Interbank Offered Rate.

MIrant Mirant Corporation, formerly Southern Energy Inc., a diversified energy company based in Atlanta. PPL Global and Mirant jointly own WPD 1953.

Montana Power The Montana Power Company, a Montana-based company engaged in diversified energy and communication related businesses. Montana Power sold its generating assets to PPL Montana in December 1999.

MPSC Montana Public Service Commission.

MW Megawatts.

NOx Nitrogen Oxide.

NPDES National Pollutant Discharge Elimination System.

NRC (Nuclear Regulatory Commission) Federal agency that regulates operation of nuclear power facilities.

NUGs (Non-Utility Generators) Generating plants not owned by public utilities, whose electrical output must be purchased by utilities under the PURPA if the plant meets certain cnteria.

OSM United States Office of Surface Mining.

PCB (Polychlonnated Biphenyl) Additive to oil used in certain electrical equipment up to the late-1970s. Now classified as a hazardous chemical.

PEPS Units (Premium Equity Participating Secunty Units) Securities issued by PPL Capital Funding Trust I and PPL, consisting of a Preferred Security and a forward contract to purchase PPL Corporation common stock.

PJM (PJM Interconnection, LLC) Operates the electric transmission network and electnc energy market in the mid-Atlantic regjon of the United States.

70) PPL CORPORATION 2001 ANNUAL REPORT MEEM CTII ICUMM mm 3LW4)@M

PLR Provider of Last Resort, refers to PPL Electnc providing electricity to retail customers within its delivery territory who have chosen not to shop for electricity under the Customer Choice Act.

PPL PPL Corporation, the parent holding com pany of PPL Electric, PPL Energy Funding and other subsidiaries PPL Capital Funding PPL Capital Funding, Inc.,

a PPL financing subsidiary.

PPL Capital Funding Trust I A Delaware statutory business trust created to issue PEPS Units, whose common secunties are held by PPL.

PPL Capital Trust A Delaware statutory business trust created to issue Preferred Secunties, whose common securities are held by PPL Electric PPL Capital Trust II A Delaware statutory business trust created to issue Preferred Securities, whose common securities are held by PPL Electric.

PPL Coal Supply A partnership between PPL Coal Holdings, LLC (a subsidiary of PPL Generation) and Iris Energy, LLC. PPL Coal Supply procures coal, which it sells to PPL Generation power plants and to Ins Energy for purposes of producing synfuel PPL Electric PPL Electric Utilities Corporation, a regulated utilrty subsidiary of PPL that trans mits and distnbutes electricity in rts service terntory and provides electnc supply to retail customers in this temtory as a PLR.

PPL Energy Funding PPL Energy Funding Corporation, which is a subsidiary of PPL and the parent company of PPL Energy Supply.

PPL EnergyPlus PPL EnergyPlus, LLC, a subsidiary of PPL Energy Supply that markets wholesale and retail electricity and supplies energy and energy services in newly deregu lated markets.

PPL Energy Supply PPL Energy Supply, LLC, the parent company of PPL Generation, PPL EnergyPlus, PPL Global and other subsidiaries.

Formed in November 2000, PPL Energy Supply is a subsidiary of PPL Energy Funding PPL Gas Utilities PPL Gas Utilities Corporation, a regulated utility subsidiary of PPL specializing in natural gas distribution, transmission and storage services, and the sale of propane.

PPL Generation PPL Generation, LLC, a subsidiary of PPL Energy Supply that, effective July 1, 2000, owns and operates U.S. generat ing facilities through various subsidiaries PPL Global PPL Global, LLC, a subsidiary of PPL Energy Supply that invests in and develops domestic and intemational power projects and owns and operates international power projects PPL Holtwood PPL Hottwood, LLC, a subsidiary of PPL Generation that owns PPL's hydroelec tric generating operations in Pennsylvania.

PPL Maine PPL Maine, LLC, a subsidiary of PPL Generation that owns generating opera tions in Maine PPL Martins Creek PPL Martins Creek, LLC, a fossil generating subsidiary of PPL Generation PPL Montana PPL Montana, LLC, an indirect subsidiary of PPL Generation that generates electricity for wholesale and retail sales in Montana and the Northwest.

PPL Montour PPL Montour, LLC, a fossil gen erating subsidiary of PPL Generation.

PPL Services PPL Services Corporation, a subsidiary of PPL that provides shared services for PPL and its subsidianes.

PPL Susquehanna PPL Susquehanna, LLC, the nuclear generating subsidiary of PPL Generation.

PPL Transition Bond Company PPL Transition Bond Company, LLC, a wholly owned subsidiary of PPL Electric formed to issue transition bonds under the Customer Choice Act.

Preferred Securities Company-obligated mandatonly redeemable preferred securities issued by PPL Capital Trust, PPL Capital Trust II and PPL Capital Funding Trust I, holding solely debentures of PPL Electric, in the case of PPL Capital Trust and PPL Capital Trust II, and solely debentures of PPL Capital Funding, in the case of PPL Capital Funding Trust I.

PRP Potentially Responsible Parties under Superfund.

PUC (Pennsylvania Public Utilrty Commission)

State agency that regulates certain ratemak ing, services, accounting and operations of Pennsylvania utilities PUC Final Order Final order issued by the PUC on August 27, 1998, approving the settle ment of PPL Electric Utilities' restructuring proceeding PUHCA Public Utility Holding Company Act of 1935 PURPA (Public Utility Regulatory Policies Act of 1978) Legislation passed by Congress to encourage energy conservation, efficient use of resources and equitable rates.

PURTA Public Utility Realty Tax Act RMC Risk Management Committee RTO Regional Transmission Organization.

SCR Selective Catalytic Reduction.

SEC Securities and Exchange Commission SERP Supplemental Executive Retirement Plan.

SFAS (Statement of Financial Accounting Standards) Accounting and financial reporting rules issued by the FASB.

SNCR Selective Non-Catalytic Reduction SO2 Sulfur Dioxide.

Superfund Federal and state environmental legislation that addresses remediation of con taminated sites.

SWEB The trading name for South Western Electricity plc, a British regional electric utility company. Following the sale of its supply business in 1999, SWEB was renamed Western Power Distnbution and then WPD (South West). See WPD (South West), below Synfuel projects Production facilities that manufacture synthetic fuel from coal or coal by-products. Favorable federal tax credits are available on qualified synfuel products.

Tolling agreement Agreement whereby PPL, as owner of an electric generating facility, agrees to use that facility to convert ('toll")

fuel provided by a third party into electric energy for delivery back to the third party.

UF Inflation-indexed peso-denominated unit.

UGI UGI Corporation.

VEBA (Voluntary Employee Benefit Association Trust) Trust accounts for health and welfare plans for future benefit payments for employ ees, retirees or their beneficiaries.

WPD (South Wales) Western Power Distnbution (South Wales) plc, a Welsh regional electric utility company.

WPD (South West) Western Power Distribution (South West) plc, a Bntish regional electric utility company.

WPD 1953 WPD 1953 hmited, a jointly owned subsidiary of PPL Global and Mirant.

WPD 1953 owns WPD Holdings U K,which owns WPD (South West) and WPD (South Wales).

WPDL Western Power Distnbution Umited, a wholly owned subsidiary of WPD Investment Holdings Limited, which is a jointiy owned sub sidiary of PPL Global and Mirant. WPDL owns 100% of the common shares of Hyder PPL CORPORATION 2001 ANNUAL REPORT (71

pwafLQ 1Tfwx-cc Uk GU Uaj M Frederick M. Bernthal Washington, D.C.

President Universities Research Association A not-for-profit consortium of research universities, engaged in the construction and operation of major research facilities Age 59, Director since 1997 John W. Conway Philadelphia, Pa.

Chairman of the Board, President and Chief Executive Officer Crown, Cork & Seal Company, Inc.

International manufacturer of packaging products for consumer goods Age 56, Director since 2000 William J. Rood Drums, Pa.

Secretary-Treasurer Highway Equipment & Supply Co.

Supplier of heavy equipment for highway construction and industry Age 66, Director since 1990 h,.

John R. Biggar Allentown, Pa.

Executive Vice President and Chief Financial Officer PPL Corporation Age 57, Director since 2001 E. Allen Deaver Lancaster, Pa.

Former Executive Vice President Armstrong World Industries, Inc.

Manufacturer of intenor furnish ings and specialty products Age 66, Director since 1991 Elmer D. Gates Bethlehem, Pa.

Former Vice Chairman Fuller Co.

Manufacturer of plants, machin ery and equipment for industry Age 72, Director since 1989 William F. Hecht Chairman, President and Chief Executive Officer PPL Corporation John R. Blggar Executive Vice President and Chief Financial Officer PPL Corporation Lawrence E. Do Slmone Executive Vice President-Supply PPL Corporation Robert J. Grey Senior Vice President, General Counsel and Secretary PPL Corporation Michael E. Bray President PPL Electnc Utilities Paul T. Champagne President PPL EnergyPlus James H. Miller President PPL Generation Roger L. Petersen President PPL Global William F. Hecht Allentown, Pa.

Chairman, President and Chief Executive Officer PPL Corporation Age 59, Director since 1990 W. Keith Smith Pittsburgh, Pa Former Senior Vice Chairman Mellon Financial Corporation Age 67, Director since 2000 Stuart Heydt Hershey, Pa.

Former President and Chief Executive Officer Geisinger Health System A not-for-profit corporation involved in health care and related services Age 62, Director since 1991 Susan M. Stalnecker Wilmington, Del.

Vice President-Finance and Treasurer E I duPont de Nemours and Company Manufacturer of pharmaceuticals, spe cialty chemicals, biotechnology and high-performance materials Age 49, Director since 2001

72) PPL CORPORATION 2001 ANNUAL REPORT I

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Annual Meeting Shareowners are invited to attend the annual meeting to be held on Friday, Apnl 26, 2002, at Lehigh University's Stabler Arena in Bethlehem, Pa. The meeting will begin at 10 a m.

Stock Exchange Ustings PPL Corporation common stock is listed on the New York and Philadelphia stock exchanges. The symbol is PPL.

Common Stock Prices Dividends 2001 High Low Declared 1st quarter

$46 75

$33 88

$.265 2nd quarter 62.36 44.03

.265 3rd quarter 56.50 30.99

.265 4th quarter 37.65 31.20

.265 Divdends 2000 High Low Declared 1st quarter

$24.00

$18.38

$.265 2nd quarter 25.00 20.38

.265 3rd quarter 44.44 21.94

.265 4th quarter 46.13 37.56

.265 The company has paid quarterly cash dividends on its common stock in every year since 1946. The dividends declared per share in 2001 and 2000 were $1.06 The most recent regular quarterly dividend paid by the company was 26.5 cents per share (equivalent to $1 06 per annum) paid Jan. 1, 2002. On Jan. 29, 2002, the company increased its quarterly dividend to 36 cents per share (equivalent to $1.44 per annum), effec tive with the quarterly dividend payable April 1, 2002, to holders of record on March 8, 2002.

Dividends The dates for consideration of the declaration of dividends by the board of directors or its Executive Committee for the balance of 2002 are May 24, Aug. 23 and Nov 22. Subject to the declaration, these dividends would be paid on the first day of July, October and January.

Dividend checks are mailed in advance of those dates with the intention that they arnve as close as possible to the payment dates. The 2002 record dates for those dividends are expected to be June 10, Sept. 10 and Dec. 10.

Direct Deposit of Dividends Sharreowners may choose to have their dividend checks deposited directly into their checking or savings account. Quarterly dividend payments are electronically credited on the dividend date, or the first business day thereafter.

Dividend Reinvestment Plan Shareowners may choose to have dividends on their PPL Corporation common stock or PPL Electric Utilities preferred stock reinvested in PPL Corporation common stock instead of receiving the dividend by check.

Certificate Safekeeping Shareowners participating in the Dividend Reinvestment Plan may choose to have their common stock certificates forwarded to the company for safekeeping.

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Lost Dividend Checks Dividend checks lost by investors, or those that may be lost in the mail, will be replaced if the check has not been located by the 10th business day following the payment date.

Transfer of Stock Stock may be transferred from one name to another or to a new account in the name of another person. Please contact Investor Services regard ing transfer instructions.

Lost Stock Certificates Please call the Shareowner Information Line or write to Investor Services for an explanation of the procedure to replace lost stock certificates.

Duplicate Mailings Annual reports and other investor publications are mailed to each investor account. If you have more than one account, or if there is more than one investor in your household, you may contact Investor Services to request that only one publication be delivered to your address.

Form 10-K PPL Corporation's annual report on Form 10-K, filed with the Securities and Exchange Commission, is available about mid-March. Investors may obtain a copy, at no cost, by calling the Shareowner Information Line.

Investor Services For any questions you have or additional information you require about PPL Corporation and its subsidianes, please call the Shareowner Information Line, or write to:

Manager - Investor Services Two North Ninth Street (GENTW14)

Allentown, PA 18101 Internet Access Registered shareowners can access their account information by visiting www.shareowneronline.com. For other information, visit our Web site at www.pplweb com or contact Investor Services via e-mail at invserv@pplweb.com Stock Transfer Agents and Registrars Wells Fargo Bank Minnesota, N A.

Shareowner Services 161 North Concord Exchange South St. Paul, MN 55075-1139 PPL Investor Services Department Dividend Disbursing Office and Dividend Reinvestment Plan Agent PPL Investor Services Department Shareowner Information Une 1.800.345.3085 PPL, the PPI logo and PPL Project Earth are trademarks of PPL Corporation or an affiliate

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