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
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PLA-5491
Download: ML022070358 (135)

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.,ONTINENTAL I

.,OOPERATIVE ERVIC-E-1,

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 14 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

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 Soyland Power cooperatives affiliated with CCS serve nearly one-third of the state's land Cooperative, Inc. Territory area across 46 counties. The 13 CCS affiliated cooperatives in Pennsylvania own approximately 12 percent of the I1. Adams Electric Cooperative 8. Menard Electric Cooperative state's electric distribution lines, span 2. Coles-Moultrie Electric Cooperative 9. Rural Electric Convenience ning one-third of the Commonwealth 3. Eastern Illini Electric Cooperative Cooperative Company in 41 counties. New Jersey's lone 4. Farmers Mutual Electric Cooperative 10. Shelby Electric Cooperative electric cooperative maintains roughly 5. Illinois Rural Electric Cooperative 11. Spoon River Electric Cooperative, Inc.

1 percent of the Garden State's total

6. McDonough Power Cooperative 12. Western Illinois Electrical Cooperative miles of line.

7. M.J.M. Electric Cooperative, Inc.

(

Allegheny Electric Cooperative, Inc. Territory

1. Adams Electric Cooperative, Inc. 6. Northwestern Rural Electric 10. Sussex Rural Electric Cooperative, Inc.

2. Bedford Rural Electric Cooperative, Inc. Cooperative Association, Inc. 11. Tri-County Rural Electric

7. REA Energy Cooperative, Inc. Cooperative, Inc.

3. Central Electric Cooperative, Inc.

8. Somerset Rural Electric 12. United Electric Cooperative, Inc.

4. Claverack Rural Electric Cooperative, Inc. 13. Valley Rural Electric Cooperative, Inc.

Cooperative, Inc.

9. Sullivan County Rural Electric 14. Warren Electric Cooperative, Inc.

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

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A Message From the Executive Committee and President &CEO cupied cabins and two businesses our principles and our first respon which sums up the core of without power for much of the day. sibility is to live by them." For ncooperative unity, strength. That business phrase, practice, Prevented from immediately electric cooperatives like CCS, took on extra meaning for repairing the damage, Somerset living by our principles means Continental Cooperative Services REC staff contacted neighboring working together and finding ways (CCS) following the tragic events private power company GPU to more efficiently accomplish our of September 11, 2001. Energy. Through quick and gener primary mission - providing reli One of our affiliated electric ous assistance provided by the able, competitively priced electricity distribution cooperatives, Somerset company, Somerset REC was able that maximizes value to those we Rural Electric Cooperative (REC), to tap off a GPU line to provide serve.

based in Somerset, Pa., was directly service to the eight residences by The dynamics of a competitive affected by the coordinated terrorist early evening. electricity marketplace, where strikes which took place that morn This cooperation between two long-term power contracts are a ing. United Airlines Flight 93 - a very different types of electric utilities thing of the past, favor larger sup hijacked Boeing 757 carrying 45 was just one small example of how pliers that can generate and pur heroic passengers and crew the American people came together chase electricity at the lowest possi slammed into a reclaimed strip mine after September 11 and became a ble price. Based on its first full year within the cooperative's service ter Re-United States once again. of operations, CCS has shown that ritory. The disaster and resulting In his historic September 20 two generation and transmission fireball melted a three-phase power address to Congress outlining the cooperatives 1,000 miles apart line and left 14 cooperative con war on terrorism, President Bush Allegheny Electric Cooperative, Inc.

sumers - eight homes, four unoc- noted that "we are in a fight for (Allegheny), serving Pennsylvania

and New Jersey, and Soyland CCS Board of Directors enters CCS restate their belief in this Power Cooperative, Inc. (Soyland), 2002 hard at work examining alliance, in its ability to grow and covering central Illinois - can power supply possibilities detailed in its ability to prosper within effectively channel geographic and in an Integrated Resource Plan today's vastly restructured energy product diversities into negotiating (IRP). The IRP provides a techni industry. By living the principle of cal and economic road map to help "cooperation among cooperatives" leverage. The bottom line - lower prices for our electric cooperative the board answer key questions and marching forward together, consumers than would otherwise about CCS' power supply future. CCS provides a way for electric be possible. Through the IRP process, the cooperatives to ensure a bright Building off this success, the board, management and staff of future for consumers everywhere.

2 1 2 44 4 I I 4 2 I j 2 j 4 4 t

I 442 .2 22 2 I' II 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; andJames Coleman, secretary.

I ,4.

The Value of Fuel Diversity for Proposals to secure the energy and capacity needs of CCS-mcmber Allegheny in western Pennsylvania A diverse mix of self-owned generation coupled with (WEM&T) for the supplemental energy needs of CCS load in por starting on December 1, 2002, and the Illinois needs of CCS-membcr Ademand-side management tions of Pennsylvania and New Soyland beginning January 1, 2003.

capabilities, provides the corner Jersey. VWEM&T is a division of New power supply contracts for the stone for Continental Cooperative the Fortune 500 Williams two areas are to be finalized in Services to fulfill its core mission Company. 2002.

- achieving stable and affordable Under the contract with CCS' generation and demand wholesale power rates for affiliated WEM&T, which runs through side management mix includes:

electric distribution cooperatives in March 31, 2006, WEM&T will Illinois, New Jersey and receive the output of CCS-member Alsey GeneratingStation Pennsylvania. Allegheny's generating assets in A five-unit, natural gas-fired "Fuel diversity" affords CCS Pennsylvania and New Jersey and peaking complex located in Scott better balance and increased lever provide electric cooperative energy County, Ill., near the village of age in a competitive energy market requirements (approximately 450 Alsey. Owned by CCS-member easily shaped by national and glob megawatts) within sections of the Soyland and operated by CCS al events. Crude oil prices, natural CCS system. By operating in sever staff, it entered service in July gas supplies, drought, even market al areas of the U.S. and with 1999 and has a nameplate peak jitters over regional power crises all approximately 9,000 megawatts of rating capacity of 125 megawatts.

affect how electricity markets oper generation under its control, Alsey Station operates in con ate and significantly impact power WEM&T will be able to optimize junction with a private power com prices. use of CCS-member Allegheny's pany when it is more cost effective During 2001, CCS' diversified power resources on a broader to run the combustion turbines generation portfolio played a key scale, then share captured savings than purchase power from other role in helping us negotiate a with CCS. providers. It is designed to run favorable new wholesale power Diversified generation holdings during periods of peak electric use supply arrangement with Williams should also provide benefits for CCS - roughly 600 "called upon" Energy Marketing & Trading as we move forward on a Request hours per year on average, but no Alsey GeneratingStation.

New York additional 2 MW from both proj Power ects is allocated to Sussex REC, a Authority CCS affiliated electric distribution Since 1966, cooperative.

CCS-member CCS-member Allegheny han Allegheny has pur dles all contract negotiations, chased power gener billing and transmission arrange ated by federal ments for Pennsylvania utilities hydroelectric proj that receive NYPA power in its role ects located along as state NYPA Bargaining Agent.

the Niagara and St.

Lawrence rivers in Raystown upstate New York. Hydroelectric Both are operated by Project the New York Power The Raystown Hydroelectric Authority (NYPA). Project, William F. Matson Pennsylvania Generating Station, is a two-unit, receives an allocation 21-megawatt, run-of-river of 47.9 megawatts hydropower facility located at (MW) from the Raystown Lake and Dam in Niagara Power Huntingdon County, Pa. On aver Project and 20.3 age, the plant generates approxi MW from the St. mately 3.5 percent of the energy Lawrence Power requirements of the 14 CCS affiliat Project. Out of this, ed electric distribution cooperatives CCS-member in Pennsylvania and New Jersey.

Pearl Station. Allegheny and its Due to the effects of record more than 937 hours0.0108 days <br />0.26 hours <br />0.00155 weeks <br />3.565285e-4 months <br />. The hourly member electric cooperatives in the drought impacting the Mid-Atlantic figures are based on U.S. Commonwealth receive nearly region, Raystown in fiscal 2001 Environmental Protection Agency 42 MW (41 MW from Niagara provided approximately 59.4 mil limitations which state that no and 1 MW from St. Lawrence). An lion kilowatt-hours at delivery, more than 250 tons of nitrogen oxide can be emitted annually.

PearlStation 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.

NiagaraPower Project operated by the New York Power Authority.

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 27 percent below projections based and operates the boiling water reac uled refueling and maintenance on historic average water flow. tor facility. outage. During the outage, workers Plant availability of 97.5 percent In fiscal 2001, the 10 percent replaced about 35 percent of the was recorded, significantly above share of SSES provided 1.75 billion unit's uranium fuel and completed the small hydro industry average. kilowatt-hours of electricity at deliv about 2,300 separate maintenance CCS staff operates the hydro cry, accounting for 69 percent of jobs. Both Unit 1 and Unit 2 run project in close cooperation with Pennsylvania and New Jersey elec- on a 24-month refueling cycle.

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,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 CoordinatedLoad Management System.

purchased power and reduces the need for new generating capacity. facilities and generating plant per power company, remote terminal CLMS has also been used during formance. Through SCADA, real units have been installed on all 50 summer peaks to reduce CCS time decisions about generation or of the cooperative's interconnec capacity obligations under proce purchased power requirements and tion points with another private dures established by the PJM consumer load reductions can be power company. These units, con Interconnection. made based on forecasts, schedules nected through the SCADA sys In 2001, CLMS reduced coop and actual system performance. tem, allow CCS to furnish real erative purchased power costs by This decision-making capability is time load signals from one control

$7.4 million, bringing total power key in today's market-based elec area to another as a way to help cost savings achieved since tric utility industry. minimize energy imbalance costs December 1986 to more than $58 As part of an energy supply incurred under transmission tariffs.

million. Currently, 182 substations agreement with a local private 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

participating in choice on Meeting the Challenge of December 31, 530,469 were resi dential, 20,045 were commercial Electric Competition and 592 industrial. Overall, EGS served load stood at nearly 2,323

• No requirement that utilities sell megawatts (about 9 percent of Through and its 26 affiliated electric hardcooperatives distribution Illinois, New Jersey and work, CCS in off generation assets or prohibi tion against entering into long term power contracts as a way to electricity used in the state).

All electric cooperative con sumer-members in the Pennsylvania have proven that lock in low electric generation Commonwealth - like their pri "competition" and "cooperation" prices. vate power company counterparts are not mutually exclusive terms. In Pennsylvania - considered - are eligible to shop for power.

Even in a deregulated energy envi the nation's leader in creating a However, there has been only lim ronment, electric cooperatives are vibrant, robust competitive elec ited marketing by EGSs in coopcr more than capable of accomplish tricity market - 551,106 private ative service territories to date.

ing their primary mission: provid power company customers (rough This EGS reluctance does not ing rural consumers with a ly 10 percent of come as a surprise. The same reliable source of power the total) were economies of scale that kept pri at an attractive price. buying kilo vate power companies from run Illinois, New watt-hours ning electric lines into the country Jersey and from alter side more than 60 years ago (which Pennsylvania nate electric led to the formation of electric are three generation sup cooperatives) are alive and well states at the pliers (EGSs) today. For starters, cooperative forefront of as of service territories remain sparsely electric December populated and boast a high per utility 31, 2001, centage of residential consumers.

competi according to Since EGSs are in business to make tion, each power money, the lack of large commer with shopping" cial and industrial (C&I) cus restructur statistics tomers in rural areas results in ing laws by lower profit potential compared Sreleasedto designed to the state Office other market opportunities.

protect con of Consumer Still, the defining reason why sumers from the marketplace melt Advocate. The tally was nearly EGSs have not targeted down that occurred in California in identical to numbers that opened Pennsylvania's electric cooperative early 2001. Among the safeguards: the year, but represented nearly a consumers remains a very competi

" Extended and orderly transitions 25 percent drop-off from the tive generation price - one that to a fully mature deregulated year's shopping peak of 787,846 makes it extremely difficult for electric generation market - a recorded on April 1. EGSs to offer a better deal. This "grace period" that gives regula Outside of two largely urban favorable pricing has been achieved tors and the marketplace time to private power company service by meeting the competitive chal correct and adjust to any prob areas, very few Keystone State cus lenge head on and doing the things lems that crop up. tomers were changing suppliers. needed to gear up for customer

"*Rate cuts or rate freezes that The chief reason - significantly choice - organizational restructur result in consumer savings even if higher wholesale power prices dur ing, budget cutting and forming no one ever shops for power. ing the year had forced most EGSs alliances, all the while maintaining

"*More power supply resources into hibernation, leaving con ownership of its generating assets.

than are required and sufficient sumers with no lower-cost genera CCS affiliated electric distribu reserves to maintain reliability tion options to choose from. tion cooperatives in Illinois have into the future. Of Pennsylvania consumers also taken an aggressive approach

to addressing the uncertainties of a Illinois electric cooperatives can tition in New Jersey, the state Board competitive marketplace, notably "opt out" of competition as long of Public Utilities in December by adding the Alsey Generating as they do not pursue customers of approved a private power company Station, a five-unit, 125-megawatt other utilities. Four of the 12 CCS sponsored plan to auction off a natural gas-fired peaking complex affiliated electric distribution co year's worth of wholesale power located in Scott County, I11. operatives in the state have elected roughly 17,000-18,000 megawatts to open up their systems, at least - via Internet beginning on Peaking capacity from Alsey has allowed CCS affiliated distribution on a limited basis, although no February 4, 2002. As outlined, cooperatives in Illinois to line up cooperative consumers have yet alternate generation suppliers offer significantly lower bids for pur elected to switch. ing the lowest prices in the joint chased power. In New Jersey, all 3.5 million online bidding will win the right to Businesses and industries customers of the state's four pri sell power to the state's regulated vate power companies were offi utilities for a year, beginning on served by private power companies cially given the ability to choose August 1, 2002.

in Illinois have already been phased in for retail choice; residential cus an alternate electric generation Just as in Illinois, the Garden tomers will get a chance to shop supplier on November 14, 1999. State's lone electric cooperative on May 1, 2002. As 2001 closed, However, less than 9,000 of them Sussex REC - is exempt from 21,841 C&I customers in the - accounting for 1.3 percent of competition unless it markets out Prairie State (4 percent of those state electricity use - were buying side of its service territory.

eligible), comprising 31 percent power competitively at year's end, a of total C&I load, had switched fraction of the activity seen in 2000.

suppliers. To help jumpstart retail compe-

Continental Cooperative McDonough Power Cooperative, Services Fact Sheet Macomb, I11.

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

Incorporated: March 2000 Raystown Lake, Menard Electric Cooperative, Huntingdon County, Pa.) Petersburg, Ill.

Members: Allegheny Electric

• 154 megawatts of oil- and Rural Electric Convenience Cooperative, Inc. and Soyland gas-fired peaking units Cooperative Company, Power Cooperative, Inc. 125-megawatt Alsey Auburn, Ill.

Generating Station, a gas Shelby Electric Cooperative, States Served: Illinois, New Jersey fired peaking facility in Scott Shelbyville, Ill.

and Pennsylvania County, Alsey, Ill. Spoon River Electric megawatt oil-fired peaker Cooperative, Inc., Canton, Ill.

Total Meters Served By Affiliated at Pearl, Ill. Western Illinois Electrical Electric Distribution Cooperatives: - Nine-megawatt diesel peaker Cooperative, Carthage, Ill.

Nearly 300,000, representing at Pittsfield, Ill.

approximately one million elec New Jersey:

tric cooperative consumers 682 miles of transmission lines Sussex Rural Electric

• 600 miles of transmission Cooperative, Inc., Sussex, N.J.

Governance: 26-member board of lines in Illinois directors (one director represent 0 42 miles of high-voltage trans Pennsylvania:

ing each affiliated electric distri mission lines in Pennsylvania Adams Electric Cooperative, Inc.,

bution cooperative)

• 40 miles of other transmis Gettysburg, Pa.

sion lines in Pennsylvania Bedford Rural Electric NERC Operating Regions: operated at various voltages Cooperative, Inc., Bedford, Pa.

• Mid-Atlantic Area Council in conjunction with member Central Electric Cooperative, (MAAC) cooperatives Inc., Parker, Pa.

• Mid-America Interconnected Claverack Rural Electric Network (MAIN) Other facilities Cooperative, Inc., Wysox, Pa.

• East Central Area Reliability 0 100 substations in Illinois New Enterprise Rural Electric Coordination Agreement

• 199 power delivery points in Cooperative, Inc., New (ECAR) Pennsylvania, one in New Enterprise, Pa.

Jersey Northwestern Rural Electric Total 2001 System Peak Load: 892 0 Load management system Cooperative Association, Inc.,

megawatts with maximum peak reduc Cambridge Springs, Pa.

tion capabilities of 90 REA Energy Cooperative, Inc.,

Generation and megawatts Indiana, Pa.

Transmission Facilities Somerset Rural Electric Affiliated Electric Cooperative, Inc.,

417 megawatts of generation Distribution Cooperatives Somerset, Pa.

• 263 megawatts of nuclear, coal Sullivan County Rural Electric and hydro baseload generation Illinois: Cooperative, Inc.,

- 220 megawatts nuclear base Adams Electric Cooperative, Forksville, Pa.

load (Susquehanna Steam Camp Point, Ill. Tri-County Rural Electric Electric Station, Luzerne Coles-Moultric Electric Cooperative, Inc.,

County, Berwick, Pa.) Cooperative, Mattoon, I11. Mansfield, Pa.

- 22 megawatts coal-fired Eastern Illini Electric United Electric Cooperative, baseload (Pearl Station, Pike Cooperative, Paxton, I11. Inc., DuBois, Pa.

County, Pearl, Ill.) Farmers Mutual Electric Valley Rural Electric Cooperative,

- 21 megawatts hydro base Company, Genesco, I11. Inc., Huntingdon, Pa.

load (Raystown Illinois Rural Electric Warren Electric Cooperative, Hydroelectric Project at Cooperative, Winchester, Ill. Inc., Youngsville, Pa.

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.

CCS Board c David White David Cowan Wayne Hillegass Rural Electric Convenience Chairman Bedford Rural Electric Cooperative Company Adams Electric Cooperative, Inc. Cooperative, Inc. Auburn, Ill.

Gettysburg, Pa. Bedford, Pa.

Lowell Friedline David Bergland George (Bud) Francisco Jr. Somerset Rural Electric Vice Chairman Central Electric Cooperative, Inc. Cooperative, Inc.

Spoon River Electric Parker, Pa. Somerset, Pa.

Cooperative, Inc.

Canton, Ill. John McNamara John Anstadt Claverack Rural Electric Sullivan County Rural Electric James Coleman Cooperative, Inc. Cooperative, Inc.

Secretary Wysox, Pa. Forksville, Pa.

Shelby Electric Cooperative Shelbyville, Ill. Mark Degler James Henderson Coles-Moultrie Electric Sussex Rural Electric Kathryn Cooper-Winters Cooperative Cooperative, Inc.

Treasurer Mattoon, Ill. Sussex, N.J.

Northwestern Rural Electric Cooperative Association Murray Madsen Stephen Marshall Cambridge Springs, Pa. Farmers Mutual Electric United Electric Cooperative, Inc.

Company DuBois, Pa.

Bradley Ludwig Geneseo, Ill.

At-Large Robert Holmes Eastern Illini Electric Cooperative Merton Pond Valley Rural Electric Paxton, I1l. Illinois Rural Electric Cooperative, Inc.

Cooperative Huntingdon, Pa.

Alston Teeter Winchester, Ill.

At-Large Dave Turner Tri-County Rural Electric William Pollock Warren Electric Cooperative, Inc.

Cooperative, Inc. McDonough Power Cooperative Youngsville, Pa.

Mansfield, Pa. Macomb, Ill.

Haven Vaughn Robert Willis Dennis Keiser Western Illinois Electrical Adams Electric Cooperative M.J.M. Electric Cooperative, Inc. Cooperative Camp Point, Ill. Carlinville, I11. Carthage, Ill.

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

Soyland Board of Directors Douglas Aeilts, RE. David White*

Sccrctatv-Trcasu rcr Assistant 1 1Vanager Scrctary-Trcasurcr Di)rector Mark-Degler* Wm. David Champion Jr.

Director Mauqzicr Murray Madse n* Bruce Giffin Director" Malu~qer

Soyland Board of Directors Merton Pond* Dickson Dunsworth William Pollock* Dennis Keiser*

I)irector Mall ager Director Ma nager L

I Robert Lehmann Lynn Frasco, PE. Michael Carls* David Stuva Dirccto" ManagCr Dircctor Manager Richard Boggs W.Edward Cox Paul Dion Haven Vaughn*

Dircctor 3Mazager A'fanegev lirector

• Denotes CCS director.

Allegheny Board of Directors Alston Teeter Lowell Friedline Stephen Marshall John Ritchey Chairman Vice Ch airmcan Secretary Trcasurer Director Director Director IDirector David Cowan Wayne Hillegass George (Bud) John McNamara Kathryn Director Director Francisco Jr. Dircctor Cooper-WI~inters Director ])ircctor Sam Eckenrod John Anstadt James Henderson Robert Holmes Dave Turner Director Dircctor Director D)ircctor I)ircctor All Allegheny Electric Cooperativc, Inc. directorsalso serlve as CCS directors.

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rý4o 2001 Allegheny Electric Cooperative, Inc.

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

Financial Review

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 2001 2000 ELECTRIC UTILITY PLANT:

In service S 728,656 S 725,705 Construction work-in-process 3,837 3,332 Nuclear fuel in process 12,709 6,364 745,202 735,401 Less accumulated depreciation and amortization 654,744 645,057 90,458 90.344 OTHER ASSETS AND INVESTMENTS:

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

$3,897 in 2001 and S3,642 in 2000) 4,297 4,464 Investments in associated organizations 957 990 Notes receivable from members, less current portion 121 148 Other investments 36,525 33,983 Other noncurrent assets 574 261 42,474 39,846 CURRENT ASSETS:

Cash and cash equivalents 11,422 23,442 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) 14,627 31,807 Inventories 4,206 3,615 Other current assets 2,038 1,272 32,293 60,136 RESTRICTED INVESTMENTS 18,261 DEFERRED CHARGES:

Capital retirement asset 201,268 237,110 Other 2,779 2,979 204,047 2430,48 TOTAL ASSETS $ 387,533 $ 430,415 EQUITIES (DEFICIENCIES) AND LIABILITIES EQUITIES (DEFICIENCIES):

Memberships S 3 $ 3 Donated capital 38 38 Patronage capital 34,122 34,122 Other margins and equities (deficiencies) (30,041) (41,070) 4,122 (6,907)

LONG-TERM DEBT, Less current portion 293,123 330,769 CURRENT LIABILITIES:

Current portion of long-term debt 35,395 46,567 Accounts payable and accrued expenses 13,485 23,164 Accounts payable to affiliated organizations 441 1,418 49,321 71,149 OTHER LIABILITIES AND DEFERRED CREDITS:

Accrued nuclear decommissioning 34,690 28,5)3 Accrued decontamination and decommissioning of nuclear fuel 1,233 1,873 Deferred income tax obligation from safe harbor lease 3,395 3,717 Other deferred credits 1,649 1,3 l1 40,967 35,404 TOTAL EQUITIES (DEFICIENCIES) AND LIABILITIES $ 387,533 S 430,415

Allegheny Electric Cooperative, Inc.

STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2001 AND 2000 (In Thousands) 2001 20OO OPERATING REVENUE, Including sales to members of $143,620 in 2001 and $151,979 in 2000 $ 150,574 OPERATING EXPENSES:

Purchased power 46,152 53,044 Transmission:

Operation 20,700 17,727 Maintenance 26 39 Production:

Operation 25,742 20,810 Maintenance 8,859 9,095 Fuel 8,731 8,832 Depreciation 3,500 3,679 Amortization of Capital Retirement Asset 35,842 37,328 Administrative and general 6,614 6,190 Taxes 832 (2,553) 154,191 OPERATING MARGIN BEFORE INTEREST AND OTHER DEDUCTIONS (6,424)

INTEREST AND OTHER DEDUCTIONS:

Interest expense 1,247 1,523 Other deductions, net 1,480 649 2,727 2,172 Operating (loss) gain (9,151) 459 NON-OPERATING MARGINS:

Net non-operating rental income 1,248 1,150 Other income 17,900 Interest income 1,590 3,009 Allowance for doubtful accounts - non-operating (991) (3,990)

Other 433 913 20,18 1,082 NET MARGIN See notes to financial statements.

Allegheny Electric Cooperative, Inc.

STATEMENTS OF EQUITIES (DEFICIENCIES)

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

Other Margins and Donated Patronage Equities Memberships Capital Capital (Deficiencies) Total BALANCE, DECEMBER 31, 1999 $3 $38 $ 34,122 $ (42,611) $ (8,448)

Net margin 1,541 1,541 BALANCE, DECEMBER 31, 2000 3 38 34,122 (41,070) (6,907)

Net margin 11,029 11,029 BALANCE, DECEMBER 31, 2001 $3 $38 $34,122 $ (30,041) $ 4,122 See notes to financial statements.

Allegheny Electric Cooperative, Inc.

STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001 AND 2000 (In Thousands) 2001 2W00 OPERATING ACTIVITIES:

Net margin 11,029 $ 1,541 Depreciation and fuel amortization 10,357 10,735 Amortization of deferred charges and deferred credits 35,716 37,623 (Gain) loss on sale of other investments (233) 183 Changes in assets and liabilities which provided (used) cash:

Accounts receivable 17,180 (1,106)

Inventories (591) 148 Other current and non-current assets (668) 1,596 Accounts payable and accrued expenses (9,679) (1,889)

Accounts payable to members (977) 504 3,102 1,792 Other liabilities and deferred credits Net cash provided by operating activities INVESTING ACTIVITIES:

Additions to electric utility plant and non-utility property (9,889) (10,554)

Decrease in notes receivable from members 27 591 Purchases of restricted investments (18,261)

Purchases of other investments (21,678) (32,331)

Proceeds from sale of other investments 21,363 32,425 Net cash used in investing activities (28,438) (9,869)

FINANCING ACTIVITIES:

Payments on long-term debt (48,818) (38,060)

Net cash used in financing activities (48,818) (38,060)

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (12,020) 3,198 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR CASH AND CASH EQUIVALENTS, END OF YEAR $ 11,422 $ 23ý442 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid during the year for:

$ _1,487 Interest $ 1,335 Income taxes $ 1,481 $ 207 See notes to financial statements.

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 DecommissioningNuclear 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.

PreliminarySurveys - 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 CertainInvestments 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.

PatronageCapitaland 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, Deregulationof 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 DiscontinuationofApplication 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, Accountingfor 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, Accountingfor 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 hItangibleAssets, and Statement No. 143, Accountingfor 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, Accountingfor 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 Total $34,416 $2,322 $(213) $ 36,525

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 $ 35,325 2003 33,546 2004 30,214 2005 38,840 2006 37,030 Thereafter 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)

Current $ 0 $ 92 Deferred 0 0 Total $ 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

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 PowerAuthority - 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.

RestrictedInvestments - 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 Receivablefrom 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 (AQtP 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 Amemberof Moores Rowtand Intemabonal

- 11 Soyland Power Cooperative, Inc.

Balance Sheets December 31, 2001 and 2000 Assets 2001 2000 Electric Utility Plant, at cost In service $ 75,616,898 S 75,211,055 Less accumulated depreciation (36,736.731) (35,802,0391 38,880,167 39,409,016 Construction work in progress 5,465,068 4,660,050 Plant site held for future use 3,921,195 31921,195 Net electric utility plant 48,266,430 47,990,261 Investments 12,144J715 11,683,875 Current Assets Cash 109,606 232,780 Temporary investments 1,754,131 1,176,932 Accounts receivable, members 8,755,472 8,501,136 Other receivables 346,737 1,610,904 Inventories 2,486,539 2,465,161 Prepayments and other assets 321,344 156,747 Excess recoverable energy costs 6,015,140 Advance energy payments 359M050 359,050 Total current assets 14.132.879 20,517,850 Deferred Charges Deferred loss on asset writedown 24,923,299 35,946,197 Deferred opt-out fee 43,215,460 43,215,460 Deferred recoverable energy 12,000,000 80,138.759 79,161,657 S 15466-82,783 S -15ý9353ý643 See Notes to FinancialStatements.

Soyland Power Cooperative, Inc.

Members' Equities (Deficits) and Liabilities 2001 2000 Members' Equities Membership fees $ 1,675 $ 1,675 1,638,736 1,638,736 Patronage capital Retained earnings (deficit) 1,996,756 (4,585,739) 3,637,167 (2,945,328) 93,580,738 98,815,824 Long-Term Debt Current Liabilities Current installments of long-term debt 21,117,789 18,091,082 11,350,000 8,750,000 Line of credit 6,396,121 11,608,868 Accounts payable Member prepayments 1,964,676 2,561,766 374,818 648,106 Accrued interest 3,345,784 3,657,303 Accrued expenses Total current liabilities 44,549,188 45,317,125 Deferred Revenue 12,915,690 18,166,022

$ 154,682,783 $ 159,3.643

Soyland Power Cooperative, Inc.

Statements of Income December 31, 2001 and 2000 2001 2000 2000 Operating Revenues Electric energy sales S 87,200,149 $ 85,769,748 Distribution revenue 961,099 916,217 Rent of electric property 48,873 63,098 Other operating revenue 2,918.479 77,872 91,128,600 86W826,935 Operating Expenses Operations Purchased capacity and energy costs 48,892,011 50,350,660 Production-other 7,677,980 7,984,885 Transmission 963,279 348,927 Distribution 366,551 323,191 57,899,821 59,007,663 Maintenance 1,233,024 1,307,242 Administrative and general 3,166,888 2,798,774 Depreciation and amortization 13,976,126 14,225,308 Property and other taxes 508,008 344,284 76,783,867 77,683,271 Net Operating Margin 14,344,733 9,143,664 Other Revenue - Interest and Other Patronage Capital Income 1,283,214 1,453,948 Gain on sale of land and building 474,761 Net Margin Before Interest Charges 15,627,947 11,072,373 Interest Charges 9,090,194 Interest on long-term debt 7,751,419 Other 1,294,033 1,181,522 9,045,452 10,271,716 Net Income S_ 652*-95 $ 800 657 See Notes to FinancialStatements.

Soyland Power Cooperative, Inc.

Statements of Members' Equities (Deficits)

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

Balance, January 1, 2000 1,675 $ 2,779,263 $ (5,386,396) $ (2,605,458)

Refund of capital credits due to prior year buyouts (1,140,527) - (1,140,527)

Net income 800,657 800,657 Balance, December 31, 2000 1,675 1,638,736 (4,585,739) (2,945,328)

Net income -- -- 6,582,495 6,582,495 Balance, December 31, 2001 $ 1,675 $ 1,638,736 $ 1 996.756 $ 3.637,167 See Notes to FinancialStatements.

II Soyland Power Cooperative, Inc.

Statements of Cash Flows December 31, 2001 and 2000 2001 2000 Operating Activities Net income S 6,582,495 S 800,657 Items not requiring (providing) cash Gain on sale of land and building (474,761)

Depreciation of electric utility plant 2,953,228 2,193,641 Amortization of deferred loss on asset writedown 11,022,898 11,397,896 Patronage capital allocations not received in cash (66,661) (94,589)

Deferred recoverable energy charge (12,000,000)

Change in Accounts and other receivables 1,009,831 4,504,196 Inventories (21,378) (7,567)

Prepayments and other assets (164,597) (90,397)

Excess recoverable energy costs 6,015,140 5,706,450 Accounts payable and accrued liabilities (5,797,554) 7,045,788 Deferred revenue (5,250 332 (14,499,634)

Net cash provided by operating activities 4,283,070 16,481,680 Investing Activities Additions to electric utility plant, net (3,229,397) (5,529,773)

Proceeds from sale of land and building 993,511 Additions to investments (752,186) (476,737)

Proceeds from investments 358,007 295,217 Net cash used in investing activities (3,623,576) (4,717,782)

Financing Activities Net proceeds (payments) from line of credit 2,600,000 (3,313,902)

Principal payments on long-term debt (14,208,379) (8,358,275)

Proceeds from long-term debt 12,000,000 Refund of capital credits (1,140,527)

Change in member prepayments (597,090) 650,207 Net cash used in financing activities (205,469) (12,162,4971 Net Increase (Decrease) in Cash and Cash Equivalents 454,025 (398,599)

Cash and Cash Equivalents, Beginning of Year 1,409,712 1,808,311 Cash and Cash Equivalents, End of Year S 1 ,8636737 $ j 409 712 Supplemental Cash Flows Information Cash paid for interest $ 9,318,740 $ 10,300,869 See Notes to FinancialStatements.

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).

2001 2000 Member buyout payments $ 11,140,157 $ 14,932,695 Regulatory asset prepayments 1,775,533 3,233,327 Total $ 12915690 $-- 8,16681022 Note 2: Electric Utility Plant in Service 2001 2000 Steam and other production plant $ 38,070,550 $ 37,245,996 Transmission plant 23,572,834 22,724,819 Distribution plant 9,689,050 9,585,394 General plant 4,284,464 5,654,846 Total $ 75 6168ý98 $ 75211 055 Note 3: Investments 2001 2000 National Rural Utilities Cooperative Finance Corporation (CFC)

Membership fees 1,000 $ 1,000 Patronage capital 4,184,145 4,117,484 Subscription capital term certificates 2,252,049 2,252,049 Loan capital term certificates 4,800,439 4,809,446 Total 11,237,633 11,179,979 Other associated organizations 228,966 228,966 Investments in economic development organizations 175,930 274,930 Other investments 502,186 Total Ta12-144,715 $ 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 2001 2000 2000 CFC - variable rate (4.70% at December 3 1, 2001) promissory notes payable, due in quarterly installments through 2022 $ 27,598,841 $ 28,226,030 CFC - variable rate (4.70% at December 31, 2001) mortgage note payable, due in various quarterly installments through 2006 24,027,076 29,132,818 CFC variable rate (4.70% at December 31, 2001) capital addition loan note payable, due in quarterly installments through 2014 21,900,000 23,100,000 CFC - fixed rate (7.05%) promissory notes payable, due in quarterly installments through 2007 "' 29,172,610 36,448,058 CFC - variable rate (4.70% at December 31, 2001) promissory note payable, due in quarterly installments through 2011 () 12,000,000 Total long-term debt 114,698,527 116,906,906 Less current installments 21,117,789 18,091,082 Long-term debt, excluding current installments S 93,580238 $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.

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

Other patronage 4,184,145 4,117,484 Memberships and miscellaneous patronage (2) 229,966 229,966 Other associated organizations (3) 175,930 274,930 Other investments (4) 502,186 Total $ T1a2j , 715 $ l11683,875

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 S 12,144,715 (see above) $ 11,683,875 (see above)

Cash and temporary investments 1,863,737 1,863,737 1,409,712 $ 1,409,712 Liabilities Long-term debt (including current maturities) 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

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PPL is new power plants in Illinois and three other states.

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

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

t's 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 1 13.78 Price/earnings ratio - excluding unusual items" ) f 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 m 5.7 Number of customers (millions) "'

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.

N ~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 Allentown, Pa.

Electricity generation 2001 Diversifled Fuel MIx PPL Global Fairfax, Va.

International Operation of international electricity delivery and G0a/0.1 generation businesses Hydro and Other N. tr e 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)

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

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 30 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

Ir 1%AZf."3m@w 9 and technologies; performance of new ventures; political, regulatory or Certain statements contained in this report concerning expectations, economic conditions in states or countries where PPL or its subsidiaries beliefs, plans, objectives, goals, strategies, future events or performance conduct business; receipt of necessary governmental approvals; capital and underlying assumptions and other statements which are other than market conditions and decisions regardingcapital structure; stock pnce statements of histoncal facts are "forward-looking statements" within the performance; credit ratings, foreign exchange rates; state and federal meaning of the federal securities laws. Although PPL believes that the regulatory developments; new state or federal legislation; national or expectations and assumptions reflected in these statements are reason regional economic conditions, including any potential effects arising from able, there can be no assurance that these expectations will prove to the September11, 2001 terroristattacks in New York, Washington, DC have been correct. These forward-looking statements involve a number of and Pennsylvania and consequential hostilities; and the commitments risks and uncertainties, and actual results may differ matenally from the and liabilities of PPL and its subsidiaries. Any such forward-looking state results discussed in the forward-looking statements. In addition to the ments should be considered in light of such important factors and in specific factors discussed in the Review of the FinancialCondition and conjunction with other documents of PPL on file with the SEC Results of Operations sections herein, the following are among the New factors that could cause actual results to differ materially from important factors that could cause actual results to differ matenally from those described in forward-looking statements emerge from time to the forward-looking statements: market demand and pnces for energy, time, and it is not possible for PPL to predict all of such factors, or the capacity and fuel, weather variations affecting customer energy usage; extent to which any such factor or combination of factors may cause competition in retail and wholesale power markets; the effect of any actual results to differ from those contained in any forward-looking state business or industry restructuring, the profitability and liquidity of PPL ment. Any forward-looking statement speaks only as of the date on which and its subsidiaries;new accountingrequirements or new interpretations such statement is made, and PPL undertakes no obligations to update or applications of existing requirements; operatingperformance of plants the information containedin such statement to reflect subsequent and other facilities; environmental conditions and requirements; system developments or information.

conditions and operating costs; development of new projects, markets cussion of certain of these items. The items without note references are The following discussion explains significant changes in principal items on discussed in "Other Charges," "Other Operation Expenses" and "Other the Statement of Income, companng 2001 to 2000, and 2000 to 1999. Income and (Deductions)."

Certain items on the Statement of Income have been impacted by (Millions of dollars) 2001 2000 1999 PPL Global's investment in CEMAR. The results of CEMAR are included i for the entire year in 2001, but were included for only the last three Net income - actual $179 $498 $432 months of 2000 Unusual items (net of tax)

Write-down of WPD 1953 investment Certain items on the Statement of Income have also been impacted in Teesside (Note 22) (21) by the acquisition of the Montana generating assets by PPL Montana in Write-down investment in WPD 1953 December 1999. As such, the results of PPL Montana are included for and WPDL (Note 22) (117) all of 2000 and 2001, but only for the last two weeks of 1999. Write-down investment in CEMAR (Note 22) (217)

Earnings Accounting method change Net income, and the related EPS, were as follows: pensions (Note 14) 10 Enron impact on trading (Note 21) (8) 2001 2000 1999 Cancellation of generation Net Income (millions of dollars) $179 $ 498 $ 432 projects (Note 11) (88)

EPS - basic $1.23 $3 45 $2.84 Environmental insurance recovenes 24 Sale of Sunbury plant and related assets 42 The changes in net income from year to year are, in part, attributable Sale of SWEB supply business 64 to several unusual items with significant earnings impacts that are Secuntization (Note 5) 19 shown below. Refer to specific Notes to the Financial Statements for dis- Wnte-down of carrying value of Investments (51)

Net income from core operations $ 620 $474 $358 PPL CORPORATION 2001 ANNUAL REPORT (25

alwir-affMceEl ac-com,011, ME Ix"'VeM, Excluding the effects of unusual items, net income from core opera Operating revenues from retail electric operations increased in 2001 tions increased from $474 million in 2000 to $620 million in 2001, or compared to 2000 primarily due to:

31%. The earnings improvement was primarily due to: "* higher net supply revenues (increases in PPL Electric revenues as a PLR,

"* higher margins on eastern and western U.S. wholesale energy offset by decreased emphasis of PPL EnergyPlus as a retail supplier);

transactions; "*increase in PPL Global intemational electric delivery revenues, primarily

"* lower operating costs, partially due to lower pension expense; due to the acquisition of CEMAR; and

"*favorable tax credits from synfuel operations; and "*higher delivery revenues, reflecting a 2% increase in deliveries

"* higher eamings from mechanical contracting subsidiaries. of electricity.

These eamings improvements in 2001 were partially offset by higher Operating revenues from retail electnc operations increased in 2000 levels of interest expense and increased dividends resulting from the compared to 1999 primanly due to:

issuance of the PEPS Units. "* higher supply revenues (increases in PPL EnergyPlus revenues as a PPL expects that lower wholesale pnces will adversely impact core retail supplier and PPL Electric revenues as a PLR);

earnings in 2002. Additionally, PPL anticipates wnting off the remaining "* increased PPL Global international electric delivery revenues, pnmanly balance of its investment in CEMAR, approximately $100 million, in due to the acquisition of CEMAR; and 2002. See Note 22 for additional information. "* higher delivery revenues, reflecting an end of a one-year 4% rate Excluding the effects of unusual items, net income from core opera reduction for delivery customers.

tions increased from $358 million in 1999 to $474 million in 2000, or Pursuant to the Customer Choice Act and a restructunng settlement 32%. The earnings improvement was primarily due to:

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

"*the end of a one-year 4% rate reduction for delivery customers alternate supplier. While these supply rates vary by customer class, the settlement provides for average rates ranging from 4.16 cents per kWh in Pennsylvania; in 2001, increasing to 5.02 cents per kWh in 2009. As part of this set

"* gains on sales of emission allowances;

"* lower depreciation on certain fossil generating assets; and tlement agreement, PPL Electric also agreed to a cap on its average transmission and distnbution rates of 1.74 cents per kWh through 2004.

"* fewer common shares outstanding.

Both PPL Gas Utilities and PPL EnergyPlus expenenced higher retail These eamings improvements in 2000 were partially offset by higher gas revenues in both periods. PPL Gas Utilities' increase in 2001 com levels of interest expense, higher costs of wages and employee benefits, pared to 2000 was primanly due to a base rate increase effective and the write-off of a regulatory asset related to the loss incurred in the January 1, 2001, and higher gas commodity prices. PPL Gas Utilities' Pennsylvania Retail Access Pilot Program. increase in 2000 compared to 1999 was pnmarily due to greater demand and higher gas commodity pnces. PPL EnergyPlus' increase in both pen Operating Revenues ods was pnmarily due to intensified gas marketing efforts, and increased Retail Electric and Gas The increase (decrease) in retail revenues from electric and gas opera retail pncing attributed to higher wholesale gas commodity costs.

tions was attributable to the following: Wholesale Energy Marketing and Trading The increase (decrease) in revenues from wholesale energy marketing (Millions of dollars) 2001 vs. 2000 2000 vs. 1999 and trading activities was attnbutable to the following:

Retail Electnc Revenue PPL Electric (Millions of dollars) 2001 vs. 2000 2000 vs. 1999 Electnc delivery $ 12 $ 28 Eastern U.S. markets PLR electric generation supply 283 32 Bilateral/Spot market $(203) $315 PPL EnergyPlus Cost-based (58) (38)

Electnc generation supply (228) 88 Gas & oil (140) (39)

PPL Global Other 11 (3)

Electric delivery 88 75 Other (8) 3 (390) 235 Western U.S. markets 71 438 147 226 Intercompany eliminations (49) (33)

Retail Gas Revenue

$(368) $640 PPL Gas Utlirties 21 25 PPL EnergyPlus 22 43 The decrease in revenues in eastern U.S. markets in 2001 compared 43 68 to 2000 was primarily due to lower bilateral/spot market sales, caused Retail Revenues - total $190 $294 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

with JCP&L and BG&E, and lower gas and oil trading activity (Energy pur The cost of natural gas and propane increased by $24 million in 2000 chases also decreased in 2001 compared with 2000 Refer to "Energy compared with 1999 This increase was pnmanly due to higher sales by Purchases' for more information.) The increase in western U.S markets PPL Gas Utilities and intensified gas marketing efforts by PPL EnergyPlus.

was due to higher wholesale energy prices related to the energy supply Energy Purchases shortage in the western U.S in the first quarter of 2001. The increase (decrease) in energy purchases was attnbuted to the In June 2001, the FERC instituted a series of pnce controls designed following:

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 (Millions of dollars) 2001 vs. 2000 2000 vs 1999 lowering of spot and forward energy pnces in the western U.S. Domestic The increase in revenues in eastern U S. markets in 2000 compared Eastern markets $(506) $216 to 1999 was pnmarily due to higher bilateral market pricing and Western markets 63 121 increased sales volumes to other counterparties. The increase in rev International 47 46 enues in western U.S. markets was due to the acquisition of the $(396) $383 Montana generating assets by PPL Montana in December 1999.

Energy Related Businesses Excluding energy purchases of CEMAR, energy purchases decreased Energy related businesses (see Note I to the Financial Statements) by $443 million in 2001 compared with 2000. This decrease was pri contributed $84 million to the 2001 operating income of PPL, an increase manly due to lower purchases of electricity and gas in the eastern U.S.

of $38 million from 2000. The increase pnmanly reflects PPL Global's markets, attributable to a reduction in volumes due to fewer wholesale higher equity earnings from its U.K. investments and higher operating load obligations and less trading. Partially offsetting these reductions income from the mechanical contracting and engineering subsidianes. in volumes were higher average purchased power costs in the first half These gains were partially offset by an increase in PPL Global's project of 2001, and recognized losses on certain long-term transactions by development expenses and pre-tax operating losses from synfuel projects. PPL Montana.

(However, after the recording of tax credits associated with synfuel opera Excluding the impact of PPL Montana, energy purchases increased tions, the synfuel projects contnbuted approximately $19 million to net by $262 million during 2000, compared with 1999. This increase was income for 2001.) primarily due to higher wholesale pnces for energy purchases needed Energy related businesses contributed $46 million to the 2000 oper to supply retail load obligations.

ating income of PPL, which was a decrease of $14 million from 1999. This Other Operation Expenses decrease was pnmanly due to operating losses incurred by PPL's synfuel Other operation expenses increased by $54 million in 2001 compared to projects. These and other losses were partially offset by increased oper 2000. This increase was primranly due to a gain on the sale of emission ating income of the mechanical contracting and engineenng subsidianes, allowances and an insurance settlement for environmental liability cover and higher equity earnings from PPL Global's international investments. age in 2000 (both recorded as reductions of expense). The increase also Fuel reflects additional operating expenses of CEMAR in 2001. These increases Fuel costs increased by $63 million in 2001 compared with 2000, and were partially offset by lower pension costs in 2001 primarily due to by $47 million in 2000 compared with 1999. pension investment performance.

Electric fuel costs increased by $32 million in 2001 compared with Other operation expenses increased by $40 million in 2000 com 2000. The increase was pnmanly attributable to increased generation pared to 1999. Excluding the expenses of PPL Montana, other operation output of PPL Generation's oil/gas-fired units, and higher per-unit costs expenses decreased by $37 million in 2000 when compared with 1999.

for this generation, to support an unplanned outage. The increase also This decrease was pnmanly the result of environmental insurance recov reflects higher interchange transmission requirements and higher coal enes, gains on the sale of emission allowances and reduced pension costs. The increase was partially offset by a decrease In coal-fired gener costs. These reductions were partially offset by increased expenses due ation due to the unplanned outage. to the CEMAR acquisition, an environmental loss accrual and increased Electric fuel costs increased by $23 million in 2000 compared with costs of wages and other benefits.

1999. Excluding PPL Montana, electric fuel costs decreased by $8 million Amortization of Recoverable Transition Costs dunng 2000 compared with 1999 The decrease was attributable to lower Amortization of recoverable transition costs increased by $24 million in unit costs for nuclear generation, in part due to a $5 million accrual in 2001 compared to 2000 This increase was primarily due to the collection 1999 for dry cask canisters for on-site spent fuel storage. The decrease of CTC revenues related to prior year CTC deferrals of amounts in excess from lower unit costs was partially offset by higher generation at the of the Pennsylvania rate cap The increase also reflects higher amortiza Susquehanna station.

tion of intangible transition property due to lower interest expense on The cost of natural gas and propane increased by $31 million in the transition bonds issued under the Customer Choice Act.

2001 compared with 2000. The increase reflects higher gas pnces as well as greater off-system sales volume by PPL Gas Utilities.

PPL CORPORATION 2001 ANNUAL REPORT (27

M-IffmWE Etcloma-C-Gl MM ulftivelIc-,

Amortization of recoverable transition costs increased by $33 million in Interest expense increased by $99 million in 2000 compared with 2000 compared to 1999. This increase was the result of recording twelve 1999. This increase was pnmarily due to the issuance of transition months of amortization in 2000 as compared to five months of amortiza bonds in August 1999, and interest on PPL Montana's bndge financing.

tion in 1999. This increase was partially offset by a decrease in CTC rev Dividends on preferred securities increased by $26 million in 2001 enues related to a deferral of CTC amounts in excess of the rate cap. compared with 2000 due to the issuance of the PEPS Units in the second quarter of 2001.

Maintenance Expenses Maintenance expenses increased by $44 million in 2000 compared with Income Taxes 1999. Excluding the expenses of PPL Montana, maintenance expenses Income tax expense decreased by $33 million in 2001 compared increased by $31 million in 2000 compared with 1999. This increase with 2000. This decrease was primanly due to a change in pre-tax was primarily due to higher maintenance costs at the Susquehanna gen domestic book income and additional federal synfuel tax credits recog erating station, higher transmission and distnbution line maintenance nized. These decreases were offset by deferred income tax valuation expenses and higher costs of wages. allowances recorded on the company's investments in Brazil and the U K. (see Note 22).

Other Charges Income tax expense increased by $120 million in 2000 compared Other charges of $486 million in 2001 consisted of the wnte-down with 1999. This increase was pnmanly due to an increase in pre-tax of international energy projects (see Note 22) and the cancellation of book income and a release of deferred income taxes no longer required generation development projects (see Note 11).

Other charges of $51 million in 1999 consisted of the write-downs due to securitization, recognized in the third quarter of 1999.

of PPL Global's investments in WPD and two smaller projects.

Other Income and (Deductions) Liquidity Other income increased by $27 million in 2001 compared with 2000. At December 31, 2001, PPL's net cash position was $832 million, which This increase was due to charges in 2000 resulting from a PUC ruling reflects $950 million in cash and cash equivalents less $118 million of requinng the wnte-off of the regulatory asset for the loss incurred in short-term debt. PPL expects this cash and anticipated cash flows from Pennsylvania's Retail Access Pilot Program, an adverse FERC decision operations to be sufficient to meet PPL's cash requirements for 2002.

regarding investments in PJM, and an environmental loss contingency. If PPLs cash requirements exceed its available cash, PPL would attempt Other income decreased by $163 million in 2000 compared with to obtain the necessary funds from the issuance of commercial paper, 1999 This decrease was due to the charges recorded in 2000, as drawing on credit lines, or capital market financings subject to market descnbed above, and to gains in 1999 on the sale of SWEB's electric conditions. PPL cannot provide assurances that any of these funding supply business ($78 million pre-U.S. tax) and the Sunbury plant and sources will be available to PPL on acceptable terms.

related assets ($66 million pre-tax). Cash and cash equivalents are derived from cash from operations, cash from financing activities and cash from investing activities. Cash Taxes, Other Than Income from operations in 2001 was $908 million, compared to $871 million Taxes, other than income, decreased by $21 million in 2001 compared with 2000 This decrease was pnmanly the result of lower gross receipts in 2000. As an asset-backed provider of electncity, the stability of PPLs tax accruals due to a reduction in the Pennsylvania gross receipts tax 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 rate. Changes in gross receipts tax do not significantly affect earnings duction of electricity and the operational availability of generating units, as they are substantially recovered in rate-based revenues.

Taxes, other than income, increased by $39 million in 2000 compared among other factors.

with 1999. This increase was primanly due to a higher Pennsylvania gross An important element supporting the stability of PPL's cash from receipts tax rate, and increased PURTA, real estate and capital stock taxes. operations is its continuing effort to secure long-term commitments from wholesale and retail customers and long-term fuel supply contracts. In Financing Costs 2001, PPL EnergyPlus signed a full requirements, eight-year contract to Interest expense increased by $11 million in 2001 compared with 2000. supply PPL Electric with estimated peak demand between 6,700 and This increase was the net effect of higher interest on long-term debt, off 7,000 MW for PPL Electric's PLR load. PPL EnergyPlus also signed a set by lower interest on short-term debt. The increase in interest on long five-year contract with Montana Power for 300 MW of around-the-clock term debt reflects the issuance of $800 million of senior secured bonds electricity supply and 150 MW of on-peak supply. Commitments under by PPL Electric, $500 million of senior unsecured notes by PPL Energy these contracts represent between 75%-85% of total anticipated margins Supply and debt issued by PPL Global's consolidated affiliates. A portion from wholesale and retail activity over the next five years (2002-2006).

of these proceeds were used to pay down commercial paper balances, Also, PPL has contracted for over 90% of its anticipated fuel require which decreased such interest expense. 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

agreements, PPL will convert fuel supplied by the Long Island Power These credit lines contain borrowing conditions, including the absence Authonty to electricity and will receive payments for use of its facilities. of certain material adverse changes, financial and other covenants, that PPL is also providing up to 135 MW of supply, for vanous terms, to large if not met, would limit or restrict the ability to borrow or issue letters of industnal customers in Montana. credit or cause early payment of outstanding borrowings In addition, the PPL EnergyPlus enters into contracts under which it agrees to sell and interest rates applicable to borrowings under the credit lines are based purchase electricity, natural gas, oil and coal. PPL also enters into contracts on a scale indexed to the respective companies' credit ratings designed to lock-in interest rates for future financings or effect changes Under its credit lines, PPL Energy Supply must maintain a consolidated in PPL's exposure to fixed or floating interest rates These contracts often debt to capitalization percentage not greater than 65%, and an interest provide for cash collateral or other credit enhancement, or reductions or coverage ratio of not less than 2.0 times consolidated earnings before terminations of a portion or all of the contract through cash settlement income taxes, depreciation and amortization, in each case as calculated in the event of a downgrade of PPL or the respective subsidiary's credit in accordance with the credit lines At December 31, 2001, PPL Energy ratings or adverse changes in market prices. For example, in addition to Supply's consolidated debt to capitalization percentage, as developed in limiting its trading ability, if PPL or its respective subsidiary's ratings were accordance with its credit lines, was 29% At December 31, 2001, PPL lowered to below "investment grade" and energy prices increased by Energy Supply's interest coverage ratio, as developed in accordance with more than 100%, PPL estimates that, based on its December 31, 2001 its credit line, was 12.6. PPL Energy Supply did not have credit lines in position, it would have to post collateral of approximately $150 million. 2000 Under its credit line, PPL Electric must maintain a consolidated PPL has in place risk management programs that, among other things, debt to capitalization percentage not greater than 70% At December 31, are designed to monitor and manage its exposure to volatility of cash 2001 and December 31, 2000, PPL Electnc's consolidated debt to capi flows related to changes in energy pnces, interest rates, foreign currency talization percentage, as developed in accordance with its credit line, was exchange rates, counterparty credit quality and the operational perfor 57% and 43%, respectively Under its credit lines, PPL Montana must mance of its generating units. maintain a consolidated debt to capitalization percentage not greater Net cash provided by financing activities was $267 million in 2001, than 60% At December 31, 2001 and December 31, 2000, PPL Montana's compared to $233 million in 2000. Commercial paper programs at PPL consolidated debt to capitalization percentage, as developed in accor Energy Supply and PPL Electric, providing for the issuance of up to dance with its credit lines, was 51% and 44%, respectively. At this time,

$1.1 billion and $400 million, respectively, are maintained to meet short PPL believes that these covenants and other borrowing conditions will term cash needs. If the existing credit ratings on these commercial paper not limit access to these funding sources.

programs of each company were lowered, it is unlikely that there would PPL and its subsidiaries also have available funding sources that are be sufficient investor demand for the commercial paper. In addition, the provided through operating leases that are not recorded on the balance amount of commercial paper that could be outstanding under either sheet. These operating leases provide funds for developing, constructing PPL Energy Supply or PPL Electric's program is generally limited to the and operating generation facilities and equipment. Failure to meet the amount of their respective unused credit lines. financial and other covenants contained in these operating leases PPL Energy Supply and PPL Electric maintain unsecured credit lines could limit or restrict access to these funds or require early payment of $1.1 billion and $400 million that are available as backstops for their of obligations. At this time, PPL believes that these covenants will not respective commercial paper programs or for direct borrowings. PPL Energy limit access to these funding sources.

Supply's and PPL Electric's credit lines are also available to issue up to Under the operating leases entered into to manufacture and construct

$700 million and $200 million, respectively, in letters of credit that may the natural gas-fired simple-cycle generation facilities, PPL Energy Supply's be needed for general corporate purposes, including margin requirements subsidiaries act as a construction agent for the lessor to manufacture resulting from energy contracts. There was no commercial paper out the equipment and for construction of the facility Upon commercial oper standing or borrowings under its credit line by PPL Electric at December 31, ation, PPL Energy Supply subsidianes will operate the facilities, be respon 2001 or 2000. There was no commercial paper outstanding or borrowings sible for all of the costs associated with the operation and maintenance under its credit line by PPL Energy Supply at December 31, 2001, and of the facilities and will make rental payments to the lessor trusts.

PPL Energy Supply did not have a commercial paper program or credit line In November 2005, under the terms of the $555 million operating in 2000 In addition, the lenders in the credit line had issued $26 million lease for the turbine generators, which terminates in November 2007, of letters of credit on PPL Energy Supply's behalf at December 31, 2001. one of PPL Global's subsidianes is required to deposit in a cash collat PPL Montana also maintains a $250 million unsecured credit line that is eral account an amount equal in cash to approximately 82% of all funded available for borrowings and letters of credit. PPL Montana can directly equipment costs. Also, PPL guarantees the payment obligations under borrow up to $100 million or request that lenders issue up to $225 million this lease financing Accordingly, as guarantor, PPL must maintain a con in letters of credit provided that combined borrowings and outstanding solidated debt to capitalization percentage not greater than 70%. At letters of credit do not exceed $250 million. PPL Montana had borrowed December 31, 2001 and December 31, 2000, PPL's consolidated debt

$44 million under its credit line at December 31, 2001, as compared to to capitalization percentage, as developed in accordance with the guaran no borrowings at December 31, 2000. The lenders in the credit line tee, was 62% and 63%, respectively At December 31, 2001, the out had issued $25 million of letters of credit on PPL Montana's behalf at standing lease balance was $271 million.

December 31, 2001, as compared to $70 million at December 31, 2000.

PPL CORPORATION 2001 ANNUAL REPORT (29

at"C'MUIP(b fsxjc.) Klytv-OU In May 2006, under the terms of the $1.06 billion operating lease make-whole premium to any debt holder that does not accept such offer.

which terminates in April 2008, one of PPL Global's subsidiaries is Also, PPL Energy Supply guarantees the payment obligations under this required to deposit in a cash collateral account an amount equal in cash operating lease. Accordingly, as guarantor, PPL Energy Supply must meet to approximately 83% of all funded asset costs. Also, PPL Energy Supply the same covenant tests as applied to its credit lines. At December 31, guarantees the payment obligations under this operating lease. Accord 2001 the outstanding lease balance was $116 million.

ingly, as guarantor, PPL Energy Supply must meet the same covenant The PPL Montana Colstrip leases provide two renewal options based tests as applied to its credit lines. At December 31, 2001, the outstand on the economic useful life of the generation assets at the end of the ing lease balance was $454 million. In February 2002, the PPL Global 36-year lease term that terminates in 2036. In addition, the lease places subsidiary reduced the available commitment under the lease to approxi certain restriction on PPL Montana's ability to incur additional debt, sell mately $700 million. assets and declare dividends. At December 31, 2001 the outstanding Under the terms of the $455 million Lower Mt. Bethel combined-cycle debt balance within the lease was $334 million.

operating lease which terminates no later than September 30, 2014, the In addition to the leasing arrangements discussed above, PPL and PPL Global subsidiary is not required to make any cash payments to the its subsidiaries lease vehicles, office space, land, buildings, personal lessor until the facility is completed. However, the PPL Global subsidiary computers and other equipment under separate lease arrangements.

could be called upon to repay approximately 90% of the then-outstanding See Note 12 to the Financial Statements for a further discussion of facility costs. In addition, during the lease term, the PPL Global sub the operating leases.

sidiary could, subject to certain conditions, purchase the facility from the At December 31, 2001, the estimated contractual cash obligations lessor, offer to assume 100% of the outstanding debt, and pay a reduced of PPL were as follows:

Contractual Cash Obligations 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

The terms goveming the securities, guarantees, lease obligations and PPL's trading contracts mature at various times through 2006. The other commitments issued by PPL and its subsidiaries contain financial following chart sets forth PPL's net fair market value of trading contracts and other covenants that require compliance in order to avoid defaults as of December 31, 2001.

and accelerations of payments Further, a change in control under certain of these arrangements would constitute a default and could result in early (Millions of dollars) Gains/(Losses) maturity of such arrangements. In addition, certain of these arrangements Fair value of contracts outstanding restnct the ability of PPL's subsidiaries to pay or declare dividends, issue at the beginning of the year $22 additional debt, sell assets, or take other actions if certain conditions Contracts realized or otherwise settled are not met. At this time, PPL believes that it and its subsidiaries will be during the year (16)

Fair value of new contracts when entered able to meet these covenant requirements. In order to meet its maturing Into during the year (4) obligations in future years, PPL expects that it and its subsidiaries will Other changes in fair values (2) have to continue to access both the bank and capital markets. The long Fair value of contracts outstanding term debt and similar securities of PPL and its subsidianes and their at the end of the year $0 maturities are set forth in the table of Contractual Cash Obligations on the previous page.

Dunng 2001, PPL reversed net gains of approximately $16 million Net cash used in investing activities In 2001 was $702 million, com related to contracts entered into prior to January 1, 2001. This amount pared to $757 million in 2000 Capital expenditures have histoncally been does not reflect intra-year contracts that were entered into and settled for acquisitions and to support both existing and construction of new gen dunng the penod.

eration, transmission and distribution facilities. PPL's capital investment The fair value of new contracts when entered into during the year is needs are expected to Increase in 2002. A significant portion of PPL's usually zero, because they are entered into at current market prices.

2002 capital requirements will be funded through the lessor trusts estab However, PPL sometimes enters into certain contracts at a value other lished in 2001 with the remainder funded from cash and cash equivalents than zero. These contracts consist of options, TCCs and FTRs. When PPL on hand at December 31, 2001, and cash from operations in 2002.

enters into an option contract, a premium is paid or received TCCs and (See "Capital Expenditure Requirements" for additional information.)

FTRs purchased or sold at public auctions are entered Into at an agreed Energy Marketing and Trading Activities upon auction price. PPL paid $4 million net-of-tax during 2001 to enter PPL, through PPL EnergyPlus, sells and purchases physical energy at into these contracts the wholesale level under FERC market-based tariffs throughout the U S Other changes in fair value, a loss of approximately $2 million, Because of the generating assets PPL owns or controls, the majority of represent changes in the market value of contracts outstanding at the PPL's energy transactions qualify for accrual or hedge accounting. In end of 2001.

addition, PPL enters into financial contracts to hedge the price risk asso PPL's short-term trading contracts, other than exchange-traded futures ciated with its electricity, gas and oil positions At December 31, 2001, contracts, are recorded as 'Price risk management assets" and "Price PPL had net assets of $50 million related to its energy hedging activities. risk management liabilities" on the Balance Sheet. Long-term trading Certain transactions, however, meet the definition of trading activities contracts are included in "Regulatory and Other Noncurrent Assets as defined by EITF 98-10, 'Accounting for Contracts Involved in Energy Other" and "Deferred Credits and Other Noncurrent Liabilities - Other" Trading and Risk Management Activities." These trading activities include Exchange-traded futures contracts are recorded as "Other investments" physical and financial energy contracts, such as forwards, futures, options, and "Other current liabilities" on the Balance Sheet. All unrealized gains and swaps that do not qualify for hedge accounting or were entered into and losses on trading activities are recognized currently in earnings as to profit from market fluctuations. Trading activities also include certain "Wholesale energy marketing and trading" revenues and "Energy pur transactions for capacity and ancillary products, such as transmission chases" on the Statement of Income.

congestion credits (TCCs) and fixed transmission rights (FTRs). As of December 31, 2001, the net loss on PPL's trading activities TCC and FTR contracts are financial instruments that enable the expected to be recognized in earnings during the next three months is holder to receive compensation for certain congestion-related transmis approximately $1 million.

sion charges incurred to relieve that congestion. PJM grants FTRs to PPL Modeling Methodologies based upon load being served and owned generation and these FTRs are PPL uses vanous methodologies to simulate forward pnce curves in the utilized during the normal course of business These transactions are energy markets to estimate the size and probability of changes in market accounted for under accrual accounting. In addition to FTRs granted, PPL value resulting from commodity pnce movements. The methodologies can purchase and sell TCCs and FTRs at auctions. Only these auction require several key assumptions, including selection of confidence levels, related TCCs and FTRs, as well as capacity transactions that are not the holding period of the commodity positions, and the depth and appl related to PPL's generating assets, are included in trading activities. Net cability to future periods of histoncal commodity price information.

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 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 in Matunty Less Matunty Maturity Excess of Total (Mihons of dollars) Than 1 year 1-3 years 4-5 years 5 years Fair Value a 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 Credit Risk fair value of exchange-traded futures contracts quoted on the New York Credit nsk relates to the risk of loss that PPL would incur as a result of Mercantile Exchange. The fair value of contracts provided by other exter non-performance by counterparties of their contractual obligations. PPL nal sources represents the midpoint of the bid/ask spreads obtained maintains credit policies and procedures with respect to counterparties through third-party brokers. To be conservative, the open position is then (including requirements that counterparties maintain certain credit rat adjusted so that it is marked at the ask price (for open purchase positions) ings cnteria) and requires other assurances in the form of credit support or the bid price (for open sales positions). PPL utilizes internal valuation or collateral in certain circumstances in order to limit counterparty credit models to determine the fair value of certain non-exchange traded con nsk. However, PPL has concentrations of suppliers and customers among tracts, including TCCs, FTRs and capacity contracts, because they cannot electric utilities, natural gas distribution companies and other energy be quoted through an organized exchange or brokers. The fair value of marketing and trading companies. These concentrations of counterpar these contracts on PPL's financial statements reflects a valuation adjust ties may impact PPL's overall exposure to credit risk, either positively or ment for the change in market value as determined by the internal model. negatively, in that counterparties may be similarly affected by changes in economic, regulatory or other conditions. PPL records certain non-per Commodity Price Risk formance reserves to reflect the probability that a counterparty with If PPL were unable to deliver firm capacrty and energy under its agree contracts that are out of the money (from the counterparty's standpoint) ments, under certain circumstances it would be required to pay damages.

will default in its performance, in which case PPL would have to sell into These damages would be based on the difference between the market a lower-priced market or purchase from a higher-priced market. These pnce to acquire replacement capacity or energy and the contract price of reserves are reflected in the fair value of assets recorded in "Pnce risk the undelivered capacity or energy. Depending on price volatility in the management assets" on the financial statements. PPL has also estab wholesale energy markets, such damages could be significant. Extreme lished a reserve with respect to certain sales to the California ISO for weather conditions, unplanned power plant outages, transmission disrup which PPL has not yet been paid, as well as a reserve related to PPL's tions, non-performance by counterparties (or their counterparties) with exposure as a result of the Enron bankruptcy, which is reflected in which it has power contracts and other factors could affect PPL's ability "Accounts receivable." See Notes 20 and 21 to the Financial Statements.

to meet its firm capacity or energy obligations, or cause significant increases in the market price of replacement capacity and energy. Related Party Transactions Although PPL attempts to mitigate these risks, there can be no assur PPL is not aware of any matenal ownership interests or operating respon ance that it will be able to fully meet its firm obligations, that it will not sibility by senior management of PPL or its subsidianes in outside part be required to pay damages for failure to perform, or that it will not expe nerships or other entities doing business with PPL.

rience counterparty non-performance in the future. PPL attempts to miti For additional information on related party transactions, see Note 17 gate risks associated with open contract positions by reserving to the Financial Statements.

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.

32) PPL CORPORATION 2001 ANNUAL REPORT

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 Cash Flow about $4.8 billion Capital expenditure plans are revised from time to Cash and cash equivalents increased by $123 million more dunng time to reflect changes in conditions. 2001 compared with 2000. The reasons for this change were

"*A $37 million increase in cash provided by operating activities, pnrmanly Acquisitions and Development due to an increase in operating income when adjusted for non-cash From time to time, PPL and Its subsidiaries are involved in negotiations charges, partially offset by changes in current assets and liabilities.

with third parties regarding acquisitions, joint ventures and other arrange ments which may or may not result in definitive agreements. See Note

"* A $55 million decrease in cash used in investing activities, pnmanly due to lower investments in generating assets and electnc energy 11 to the Financial Statements for information regarding recent acquisi projects tions and development activities At December 31, 2001, PPL Global had investments in foreign facili

"* A $34 million increase in cash provided by financing activities, primanly due to higher net issuances of securities offset by a decrease in ties, including consolidated investments in Emel, EC, CEMAR and others.

short-term debt.

See Note 3 to the Financial Statements for information on PPL's uncon solidated investments accounted for under the equity method. Environmental Matters At December 31, 2001, PPL Global had domestic generation pro See Note 16 to the Financial Statements for a discussion of environ jects, either announced or under development, which would provide mental matters 2,440 MW of additional generation. In January 2002, construction activi Competition ties were completed on the Gnffith project, located near Kingman, The electnc industry has expenenced, and may continue to experience, Anzona, and the facility began commercial operations Griffith is currently an increase in the level of competition in the energy supply market at in the process of applying for membership in the Southwest Reserve both the state and federal levels. PPL and its subsidiaries believe that, Sharing Group. Acceptance into the Southwest Reserve Sharing Group assuming deregulation of the energy industry continues and markets are would allow Griffith to sell significantly more of the plant's generation at opened to new participants and new services, competition will continue firm prices and require fewer reserves for the firm sales.

to be intense. Additionally, competitive pressures have resulted from PPL Global is continuously reexamining development projects based technological advances in power generation and electronic communica on market conditions and other factors to determine whether to proceed tions, and the energy markets have become more efficient.

with these projects, sell them, cancel them, expand them, execute tolling agreements or pursue other opportunities.

PPL CORPORATION 2001 ANNUAL REPORT (33

CAMUMEXI 6-fic. kfim*m

"* "Trading around the assets" means that PPL EnergyPlus matches a PPL's financial condition and results of operations are necessarily impacted contract to sell electricity, previously to be delivered from PPL genera by the methods, assumptions and estimates used in the application of tion, with a physical or financial contract to purchase electricity. These critical accounting policies. The following accounting policies are particu contracts can qualify for fair value hedge treatment. When the con lady important to the financial condition or results of operations of PPL, tracts' terms are identical, there is no earnings impact until delivery.

and require estimates or other judgments of matters inherently uncer "* Physical electncity purchases needed to meet obligations due to a tain. Changes in the estimates or other judgments included within these change in the physical load or generation forecasts are considered accounting policies could result in a significant change to the information "normal."

presented in the financial statements. (These accounting policies are "*Physical electricity purchases that increase PPL's long position and any also discussed in Note I to the Financial Statements.) energy sale or purchase considered a "market call" are speculative with unrealized gains or losses recorded immediately through eamings.

1) Price Risk Management PPL follows the provisions of SFAS 133, "Accounting for Derivative

"* Financial electncity transactions, which can be settled in cash, cannot be considered "normal" because they need not result in physical deliv Instrument and Hedging Activities," as amended by SFAS 138, 'Account ery. These transactions receive cash flow hedge treatment if they lock ing for Certain Derivative Instrument and Certain Hedging Activities,"

in the price PPL will receive or pay for energy in the spot market. Any and interpreted by DIG issues (together, "SFAS 133") and EITF 98-10, unrealized gains or losses on transactions receiving cash flow hedge "Accounting for Contracts Involved in Energy Trading and Risk Manage treatment are recorded in other comprehensive income.

ment Activities," for its activities in the area of price nsk management.

PPL utilizes forward contracts, futures contracts, options and swaps as

"* Physical and financial transactions for gas and oil to meet fuel and retail requirements can receive cash flow hedge treatment if they lock part of its nsk management strategy to minimize unanticipated fluctua in the price PPL will pay in the spot market. Any unrealized gains or tions in earnings caused by price, interest rate and foreign currency losses on transactions receiving cash flow hedge treatment are volatility. SFAS 133 requires that all denvative instruments be recorded recorded in other comprehensive income.

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

"* Option contracts that do not meet the requirements of DIG Issue C15, "Scope Exceptions: Interpreting the Normal Purchases and Normal tive's fair value be recognized currently in earnings unless specific hedge Sales Exception as an Election," do not receive hedge accounting accounting critena are met. EITF 98-10 requires that derivative and non treatment and are marked to market through earnings.

derivative contracts that are designated as trading activities be marked to market through earnings. In addition to energy-related transactions, PPL enters into financial PPL markets and/or purchases electncity, gas, oil, capacity, and interest rate and foreign currency swap contracts to hedge interest ancillary products such as transmission congestion contracts. PPL uses expense associated with both existing and anticipated debt issuances, exchange pnces and external broker quotes to value electncity, gas, and as well as to hedge the fair value of firm commitments. As with energy oil contracts. Since there are no market quotes available for capacity transactions, the circumstances and intent existing at the time of the and ancillary products, PPL values these products using internal models transaction determine its accounting designation, which is subsequently to forecast future cash flows. PPL then recognizes a modeling reserve verified by PPL's trading controls group on a daily basis. The following is for values calculated using intemal models to recognize the lack of inde a summary of certain guidelines that have been provided to the treasury pendence in the valuation of the contracts. Therefore, the net value of department which is responsible for contract designation:

the capacity and ancillary products on the financial statements is their "*Transactions entered into to lock in an interest rate pnor to a debt amortized cost. issuance are considered cash flow hedges. Any unrealized gains or The circumstances and intent existing at the time that energy trans losses on transactions receiving cash flow hedge treatment are actions are entered into determine their accounting designation. These recorded in other comprehensive income and are amortized as a com designations are venfied by PPL's trading controls group on a daily basis. ponent of interest expense over the life of the debt.

The following is a summary of the guidelines that have been provided to "*Transactions entered into to hedge fluctuations in the value of existing the traders who are responsible for contract designation: debt are considered fair value hedges with no earnings impact until the

• Any wholesale and retail contracts to sell electricity that are expected debt is terminated because the hedged debt is also marked to market.

to be delivered from PPL generation are considered "normal." These "*Transactions which do not qualify for hedge accounting treatment are transactions are not recorded in the financial statements and have no marked to market through earnings.

earnings impact until delivery. Most wholesale electricity sales contracts To record derivative assets at fair value, PPL reduces the assets' car in the eastern and western U S. markets receive "normal" treatment.

rying value to recognize differences in counterparty credit quality and The methodology utilized in determining the amount of sales that can potential illiquidity in the market.

be delivered from PPL generation is based on a calculation approved

• The credit adjustment takes into account the bond ratings (and the by the RMC. This calculation uses market prices compared to dispatch implied default rates) of the counterparties that have an out-of-the rates as well as planned and forced outage rates by plant by month.

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

• The liquidity adjustment takes into account the fact that it may not be During 2001, PPL made changes to its assumptions related to the appropriate to value contracts at the midpoint of the bid/ask spread discount rate, the rate of compensation increase and the method of PPL might have to accept the "bid" price if PPL wanted to close an amortization of gains/(losses).

open sales position or PPL might have to accept the "ask" price if A variance in the discount rate, expected return on plan assets, rate PPL wanted to close an open purchase position. of compensation increase or amortization method could have a signifi cant impact on the pension costs recorded under SFAS 87.

At December 31, 2001, PPL had assets of $210 million and liabilities A variance in the health care cost trend assumption could have a of $168 million that were accounted for under SFAS 133 and EITF 98-10. significant impact on costs recorded under SFAS 106 for postretirement Shareowners' Common Equity included $23 million of net unrealized medical expense. The impact of a one-percentage-point vanance in that derivative gains, after-tax, in "Accumulated other comprehensive income."

assumption Is calculated by PPL's actuaries and is detailed in Note 14 During the year ended December 31, 2001, PPL recorded $7 million in to the Financial Statements pre-tax income for net unrealized mark-to-market gains, primanly on denva tive instruments used for speculative (non-hedge) purposes. During this 3) Asset Impairment penod, PPL also reclassified into eamings an after-tax loss of $7 million PPL and its subsidiaries review long-lived assets for impairment when for derivatives that no longer qualified as hedges. events or circumstances indicate carrying amounts may not be recover See "Quantitative and Qualitative Disclosures about Market Risk" in able. Assets subject to this review, and for which impairments have been Management's Discussion and Analysis for further discussion regarding recorded in 2001 or prior years, include international equity investments, price risk management, and sensitivities of hedged portfolios to changes generation plant and consolidated international energy projects.

in prices and interest rates. Reviews were performed for equity investments in accordance with APB Opinion No 18, "The Equity Method of Accounting for Investments

2) Pension and Other PostretIrement Benefits in Common Stock." APB Opinion No. 18 provides that "a loss in value of PPL follows the guidance of SIAS 87, "Employers' Accounting for Pensions," an investment which is other than a temporary decline should be recog and SFAS 106, "Employers' Accounting for Postretirement Benefits Other nized." PPL identifies and measures loss in value of equity investments Than Pensions," for these benefits. Under these accounting standards, based upon a comparison of fair value to carrying value.

assumptions are made regarding the valuation of benefit obligations and Through December 31, 2001, such reviews were also performed for performance of plan assets. Delayed recognition of differences between generation plant and consolidated international energy projects in accor actual results and those assumed is a guiding pnnciple of these standards. dance with SFAS 121, "Accounting for the Impairment of Long-lived Assets This approach allows for a smoothed recognition of changes in benefit and for Long-Lived Assets to be Disposed Of." On January 1, 2002, PPL obligations and plan performance over the working lives of the employees adopted SFAS 144, "Accounting for the Impairment or Disposal of Long who benefit under the plans. The pnmary assumptions are as follows:

Lived Assets," which replaces SFAS 121. For long-lived assets to be held

"* Discount Rate - The discount rate Is used to record the value of bene and used, SFAS 144 retains the requirements of SFAS 121 to (a) recog

"* fits, which are based on future projections, in terms of today's dollars Expected Return on Plan Assets - Management projects the future nize an impairment loss only if the carrying amount is not recoverable from undiscounted cash flows and (b) measure an impairment loss as return on plan assets based pnncipally on prior performance. The pro the difference between the carrying amount and fair value of the asset.

jected future value of assets reduces the benefit obligation a company Refer to Note 18 for additional information on SFAS 144 will record. At December 31, 2001, PPL Global evaluated its international invest

"* Rate of Compensation Increase - Management projects employees' ments for impairment, as events and circumstances indicated that the annual pay increases, which are used to project employees' pension carrying value of its investments in Brazil (CEMAR) and the U.K (WPD benefits at retirement.

1953 and WPDL) may not be recoverable. The events that led to these

"* Health Care Cost Trend - Management projects the expected impairment reviews were:

increases in the cost of health care. "*CEMAR: A prolonged drought that caused electncity rationing, an unfa

"* Amortization of Gains/(Losses) - Management can select the method vorable regulatory environment and disruption of Brazil's electricity mar by which gains or losses are recognized in financial results. These kets, all of which indicated that the future cash flow stream would be gains or losses are created when actual results differ from estimated adversely impacted results based on the above assumptions

"*WPD 1953 and WPDL: The Enron bankruptcy led to an impairment At December 31, 2001, PPL had recognized accrued pension and review of WPD 1953's equity investment in the Teesside generating postretirement liabilities of $181 million, included in "Deferred Credits station, in which Enron was a part owner, operator and purchaser of and Other Noncurrent Liabilities - Other" on the Balance Sheet. PPL's the station's output. PPL Global's investments in WPD 1953 and WPDL total obligations for these benefits was approximately $1.6 billion, but were then tested for impairment, based on the loss of cash flow from was offset by $1.8 billion of assets held in various trusts. PPL has not the Teesside impairment and the forecasted reduction in operating yet recognized this over-funding due to the delayed recognition provisions cash flows at WPD 1953 and WPDL.

of SIAS 87 and SFAS 106.

PPL CORPORATION 2001 ANNUAL REPORT (35

WX-ewk"040 DMIEDC-131 ME "IMSUE-1 In 2001, PPL Global recorded pre-tax impairment charges of $336 At December 31, 2001, PPL participated in four major leasing trans million. Impairments included $179 million for its investment in CEMAR, actions involving unconsolidated SPEs. In accordance with GAAIthese

$134 million for its investment in WPD 1953 and WPDL, $21 million for its SPEs were not consolidated because the equity owners (entities unrelated share of the Teesside impairment recorded by WPD 1953, and approxi to PPL) were required to contribute and maintain a minimum of 3% equity mately $2 million for another international investment. interest throughout the life of the SPE.

In determining asset impairments, management must make significant See Note 12 for additional information related to operating lease judgments and estimates to calculate the fair value of an investment Fair payments.

value is developed through consideration of several valuation methods

5) Contingencies including companson to market multiples, companson of similar recent PPL periodically records the estimated impacts of various conditions, sales transactions and discounted cash flow Discounted cash flow is situations or circumstances involving uncertain outcomes. These events calculated by estimating future cash flow streams, applying appropnate are called "contingencies," and PPL's accounting for such events is pre discount rates to determine the present values of the cash flow streams, scribed by SFAS 5, "Accounting for Contingencies." SFAS 5 defines a and then assessing the probability of the vanous cash flow scenarios. The contingency as "an existing condition, situation, or set of circumstances impairment is then recorded based on the excess of the carrying value involving uncertainty as to possible gain or loss to an enterprise that of the investment over fair value.

will ultimately be resolved when one or more future events occur or Changes in assumptions and estimates included within the impairment fail to occur.*

reviews could result in significantly different results than those identified SFAS 5 does not permit the accrual of gain contingencies under above and recorded in the Financial Statements.

any circumstances. For loss contingencies, the loss must be accrued In June 2001, the FASB issued SFAS 142, "Goodwill and Other Intan if (1) information is available that indicates it is probable that the loss gible Assets," which eliminates the amortization of goodwill and other has been incurred, given the likelihood of the uncertain future events; acquired intangible assets with indefinite economic useful lives. SIAS 142 and (2) that the amount of the loss can be reasonably estimated.

requires an annual impairment test of goodwill and other intangible assets The accrual of a contingency involves considerable judgment on that are not subject to amortization. PPL adopted SFAS 142 on January 1, the part of management. PPL uses its internal expertise, and outside 2002. Refer to Note 18 for additional information on SFAS 142.

experts (such as lawyers, tax specialists and engineers), as necessary,

4) Leasing to help estimate the probability that a loss has been incurred and the PPL applies the provisions of SFAS 13, "Accounting for Leases," to all amount (or range) of the loss. The largest contingency on PPL's balance leasing transactions. In addition, PPL applies the provisions of numerous sheet is the loss accrual for above market NUG purchase commitments, other accounting pronouncements that provide specific guidance and being the difference between the above market contract terms and the additional requirements related to accounting for leases. In general, fair value of the energy. This loss accrual of $854 million was recorded there are two types of leases from a lessee's perspective: operating in 1998, when PPL Electric's generation business was deregulated. Under leases - leases accounted for off-balance sheet; and capital leases regulatory accounting, PPL Electric recorded the above market cost of leases capitalized on the balance sheet. the purchases from NUGs as part of its purchased power costs on an In accounting for leases, management makes significant assump as-incurred basis, since these costs were recovered in regulated rates tions, including the discount rate, the fair market value of the leased When the generation business was deregulated, the loss contingency assets and the estimated useful life. Changes in these assumptions associated with the commitment to make above market NUG purchases could result in a significant change to the amounts recognized in the was recorded. This loss accrual for the above market portion of NUG financial statements. purchase commitments was recorded because it was probable that the In addition to uncertainty inherent in management's assumptions, loss had been incurred and the estimate of future energy prices could leasing transactions become increasingly complex when they involve be reasonably determined, using forward pncing information. This loss sale/leaseback accounting (leasing transactions where the lessee previ accrual was transferred to PPL EnergyPlus in the July 1, 2000 corporate ously owned the leased assets), synthetic leases (leases that qualify for realignment. PPL EnergyPlus periodically reviews the reasonableness of operating lease treatment for book accounting purposes and financing the remaining accrual, which was $580 million at December 31, 2001.

treatment for tax accounting purposes), or unconsolidated special pur PPL has also recorded contingencies for uncollectible accounts, envi pose entities (SPEs) (entities that retain ownership of the property, plant ronmental remediation, taxes and litigation in situations where manage and equipment and the related financing). GAAP requires that SPEs be ment determined that it was probable a loss had been incurred and it consolidated if several conditions exist, including if the owners of the could be reasonably estimated.

SPEs have not made an initial substantive residual equity capital invest ment that is at nsk during the entire lease term.

36) PPL CORPORATION 2001 ANNUAL REPORT i

opportunities As a result, PPL may at times create a net open position Market Risk-Sensitive Instruments in its portfolio that could result in significant losses if pnces do not move PPL actively manages the market risk inherent in its commodity, debt, in the manner or direction anticipated and foreign currency and equity positions, as detailed in Notes 9 and Interest Rate Risk 19 to the Financial Statements. PPL has a comprehensive nsk manage PPL and its subsidiaries have issued debt to finance their operations.

ment policy to manage the risk exposures related to counterparty credit, PPL utilizes various financial derivative products to adjust the mix of fixed energy prices, interest rates and foreign currency exchange rates An and floating-rate interest rates in its debt portfolios, adjusting the duration RMC comprised of senior officers oversees the risk management func of its debt portfolios and locking in U.S. Treasury rates (and interest rate tion. Nonetheless, adverse changes in commodity prices, interest rates, spreads over treasunes) in anticipation of future financing, when appro foreign currency exchange rates and equity prices may result in losses in pnate. Risk limits under the nsk management program are designed to earnings, cash flows and/or fair values The forward-looking information balance risk exposure to volatility in interest expense and losses in the presented below provides estimates of what may occur in the future, fair value of PPL's debt portfolio due to changes in the absolute level assuming certain adverse market conditions, due to reliance on model of interest rates.

assumptions. Actual future results may differ materially from those pre At December 31, 2001, PPL's potential annual exposure to sented. These disclosures are not precise indicators of expected future increased interest expense, based on a 10% increase in interest rates, losses, but only indicators of reasonably possible losses.

was estimated at $6 million, as compared to a $7 million increase Commodity Price Risk at December 31, 2000.

PPL uses various methodologies to simulate forward pnce curves in the PPL is also exposed to changes in the fair value of its debt portfolio energy markets to estimate the size and probability of changes in market At December 31, 2001, PPL estimated that its potential exposure to value resulting from commodity price movements The methodologies a change in the fair value of its debt portfolio, through a 10% adverse require several key assumptions, including selection of confidence levels, movement in interest rates, was $111 million, as compared to $66 mil the holding penod of the commodity positions and the depth and applica lion at December 31, 2000.

bility to future penods of histoncal commodity pnce information. PPL utilizes vanous risk management instruments to reduce its expo As of December 31, 2001, PPL estimated that a 10% adverse move sure to adverse interest rate movements for future anticipated financings.

ment in market prices across all geographic areas and time penods would While PPL is exposed to changes in the fair value of these instruments, have decreased the value of its non-hedge portfolio by an insignificant they are designed such that an economic loss in value should generally amount, as compared to a $6 million decrease at December 31, 2000. be offset by interest rate savings at the time the future anticipated A similar adverse movement in market prices would have decreased the financing is completed. At December 31, 2001, PPL estimated that its value of its hedge portfolio by approximately $8 million at December 31, potential exposure to a change in the fair value of these instruments, 2001, as compared to a $292 million decrease at December 31, 2000 through a 10% adverse movement in interest rates, was approximately However, the change in the value of the hedge portfolio would have been $13 million, as compared to an $18 million exposure at December 31, offset by an increase in the value of the underlying commodity, the elec 2000 See Notes 9 and 19 to the Financial Statements for a discussion tricity generated. The decline in forward prices from 2000 to 2001 is the of financial derivative instruments outstanding at December 31, 2001.

pnmary reason for the differences between 2001 and 2000's sensitivity Foreign Currency Risk analyses. In addition to commodity price nsk, PPL's commodity positions PPL is exposed to foreign currency risk primanly through investments in are also subject to operational and event risks including, among others, affiliates in Latin Amenca and Europe. In addition, PPL may make purchases increases in load demand and forced outages at power plants.

of equipment in currencies other than U.S dollars.

PPL's nsk management program is designed to manage the risks PPL has adopted a foreign currency nsk management program designed associated with market fluctuations In the price of electricity, natural gas, to hedge certain foreign currency exposures, including firm commitments, oil and emission allowances. PPL's risk management policy and programs recognized assets or liabilities and net investments include risk identification and risk limits management, with measurement During the first quarter of 2001, PPL entered into contracts for the and controls for real-time monitonng. PPL has entered into forward, option forward purchase of 51 million euros to pay for certain equipment in and tolling contracts that require physical delivery of the commodity, as 2002 and 2003. The estimated value of these forward purchases as of well as futures, exchange-for-physical transactions and other financial December 31, 2001, being the amount PPL would have to pay to terminate contracts (such as swap agreements where settlement is generally based them, was $3 million At December 31,2000, PPL had a forward purchase on the difference between a fixed price and an index-based pnce for the contract for 37 million euros The estimated amount that PPL would have underlying commodity) PPL expects to continue to use these contracts had to pay to terminate the forward purchases was insignificant 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 PPL CORPORATION 2001 ANNUAL REPORT (37

(TUM -1 " Oi Nuclear Decommissioning Fund - Secunties Price Risk decommissioning trust policy statement. At December 31, 2001, a hypo In order to meet NRC requirements, PPL Susquehanna maintains trust thetical 10% increase in interest rates and a 10% decrease in equity funds to fund certain costs of decommissioning the Susquehanna sta pnces would have resulted in an estimated $17 million reduction in the tion. As of December 31, 2001, these funds were invested primanly in fair value of the trust assets, as compared to an $18 million reduction domestic equity secunties and fixed-rate, fixed-income secunties and at December 31, 2000.

are reflected at fair value on PPL's balance sheet. The mix of securities PPL Electnc's 1998 restructunng settlement agreement provides for is designed to provide returns to be used to fund Susquehanna's decom the collection of authonzed nuclear decommissioning costs through the missioning and to compensate for inflationary increases in decommis CTC. Additionally, PPL Electric is permitted to seek recovery from cus sioning costs. However, the equity securities included in the trusts are tomers of up to 96% of any increases in these costs. Under the power exposed to price fluctuation in equity markets, and the values of fixed supply agreement between PPL Electric and PPL EnergyPlus, these rate, fixed-income securities are exposed to changes in interest rates. revenues are passed on to PPL EnergyPlus. Similarly, these revenues PPL Susquehanna actively monitors the investment performance and are passed on to PPL Susquehanna under a power supply agreement penodically reviews asset allocation in accordance with its nuclear between PPL EnergyPlus and PPL Susquehanna. Therefore, PPL's securities price risk is expected to remain insignificant.

fluý U---f r ic-f,- iIýW;C=c fokcý (-C.GC.Lqfffjý%-

To the Board of Directors and Shareowners of PPL Corporation: As discussed in Note 19 to the consolidated financial statements, PPL changed its method of accounting for derivative and hedging activi In our opinion, the accompanying consolidated balance sheet and ties pursuant to Statement of Financial Accounting Standards No. 133, the related consolidated statements of income, of cash flows, and of Accounting for Denvative Instruments and Hedging Activities, as amended shareowners' equity present fairly, in all material respects, the financial by Statement of Financial Accounting Standards No. 138, Accounting for position of PPL Corporation and its subsidianes at December 31, 2001 Certain Derivative Instruments and Certain Hedging Activities (an amend and 2000, and the results of their operations and their cash flows for ment of FASB Statement 133). PPL also changed its method of each of the three years in the period ended December 31, 2001 in accounting for amortizing unrecognized gains or losses in the annual conformity with accounting principles generally accepted in the United pension expense/income determined under Statement of Financial States of America. These financial statements are the responsibility of Accounting Standards No. 87, Employers' Accounting for Pensions, as the Company's management; our responsibility is to express an opinion discussed in Note 14 to the consolidated financial statements.

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 PricewaterhouseCoopers LLP whether the financial statements are free of material misstatement. Philadelphia, Pennsylvania An audit includes examining, on a test basis, evidence supporting the February 4, 2002 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.

38) PPL CORPORATION 2001 ANNUAL REPORT

,fka M;)raA-i (Da ýk aM, ýOJAL The management of PPL is responsible for the preparation, integrity and its system of internal control and has taken actions which are believed to objectivity of the consolidated financial statements and all other sections be cost-effective in the circumstances to respond appropnately to these of this annual report. The financial statements were prepared in accor recommendations. Management believes that PPL's system of internal dance with accounting pnnciples generally accepted in the United States control is adequate to accomplish the objectives discussed in this report.

of Amenca, and the Uniform System of Accounts prescnbed by the Federal The Board of Directors, acting through its Audit Committee, oversees Energy Regulatory Commission for regulated domestic businesses. In management's responsibilities in the preparation of the financial state preparing the financial statements, management makes informed esti ments In performing this function, the Audit Committee, which is composed mates and judgments of the expected effects of events and transactions of four independent directors, meets periodically with management, the based upon currently available facts and circumstances Management internal auditors and PWC to review the work of each PWC and the inter believes that the financial statements are free of material misstatements nal auditors have free access to the Audit Committee and to the Board and present fairly tile financial position, results of operations and cash of Directors, without management present, to discuss internal accounting flows of PPL. control, auditing and financial reporting matters.

PPL's consolidated financial statements have been audited by Management also recognizes its responsibility for fostenng a strong PncewaterhouseCoopers LLP (PWC), independent certified public accoun ethical climate so that PPL's affairs are conducted according to the high tants. PWC's appointment as auditors was previously ratified by the est standards of personal and corporate conduct. This responsibility is shareowners. Management has made available to PWC all PPL's financial characterized and reflected in the business policies and guidelines of records and related data, as well as the minutes of shareowners' and PPL's operating subsidianes. These policies and guidelines address, the directors' meetings. Management believes that all representations made necessity of ensuring open communication within PPL; potential conflicts to PWC dunng its audit were valid and appropnate. of interest; proper procurement activities; compliance with all applicable PPL maintains a system of internal control designed to provide reason laws, including those relating to financial disclosure; and the confidential able, but not absolute, assurance as to the integrity and reliability of the ity of proprietary information.

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. William F Hecht Fundamental to the control system is the selection and training of Chairman, President and Chief Executive Officer 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 John R. Biggar considers the internal auditors' and PWC's recommendations concerning Executive Vice President and Chief Financial Officer PPL CORPORATION 2001 ANNUAL REPORT (39

(Millions of dollars, except per share data) For the years ended December31, 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 December31, 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

EU-Alal MW EM"LEU OlUff, (Milions of dollars) At December31, 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

(Millions of dollars) At December31, 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

W- &GOUSCE 056SOWSr WIF, co, UWXMI C<WljkW, (Millions of dollars) For the years ended December31, 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

SX(D.-40A-M--Yfm3mw W I;Wmz M, -50. W Outstanding Shares Outstanding Shares (Millions of dollars) At December31, 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)

(CWThese 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

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 IIissued 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 11to 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.

(cWIn 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

aE10% O-.N-#3 D.@11513TUBW w ý I'MD ID-SOR Outstanding (Millions of dollars) At December 31, 2001 2000 Maturntyioi First Mortgage Bonds"')

73A% $ 28 $ 28 May 1, 2002 67/s% 19 19 February 1, 2003 61/2a% 25 25 March 1, 2004 61/2% 110 (C) 125 April 1, 2005 6 55% 146 (d) 150 March 1, 2006 61/s% (e) 200 May 1, 2006 10 10 2012-2016 (M 5 2017-2021 63/4% to 8Y2% 83 83 2022-2026 First Mortgage Pollution Control Bonds l 6 40% Senes H 90 90 November 1, 2021 5.50% Senes I 53 53 February 15, 2027 6 40% Senes J 116 116 September 1, 2029 6 15% Senes K 55 55 August 1, 2029 Senior Secured Bonds (b) 57/s% 300 (g August 15, 2007 61/4% 500 (g 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

I 0-4(*- iFC., EC.RM4(W,f a.) 41 ýf.IZC. V-t Cfýc IWi-CC, Accounting Records The accounting records for PPL Electric and PPL Gas Utilities are main Business and Consolidation tained in accordance with the Uniform System of Accounts prescribed PPL is an energy and utility holding company based in Allentown, by the FERC and adopted by the PUC.

Pennsylvania. PPL is the parent of PPL Energy Funding, PPL Electric, PPL Gas Utilities, PPL Services and PPL Capital Funding Regulation PPL Energy Funding is the parent of PPL Energy Supply, which serves Historically, PPL Electric accounted for its regulated operations in accor as the holding company for PPL's pnncipal unregulated subsidiaries: PPL dance with the provisions of SFAS 71, "Accounting for the Effects of Generation, PPL EnergyPlus and PPL Global. The principal business of PPL Certain Types of Regulation," which requires rate-regulated entities to Generation is owning and operating U.S. generating facilities through vari reflect the effects of regulatory decisions in their financial statements.

ous subsidiaries. The principal business of PPL EnergyPlus is unregulated PPL Electnc discontinued application of SFAS 71 for the generation por wholesale and retail energy marketing. PPIL Global's principal businesses tion of its business, effective June 30, 1998. In connection with the are the acquisition and development of both U.S. and international energy corporate realignment, effective July 1, 2000, PPL Electric's generating projects, and the ownership and operation of international energy projects. and certain other related assets, along with associated liabilities, were PPL Electric is the principal regulated subsidiary of PPL PPL Electric's transferred to new unregulated subsidianes of PPL Generation. PPL pnncipal businesses are the transmission and distnbution of electncity Electnc's remaining regulated business, PPL Gas Utilities and certain to serve retail customers in its franchised terntory in eastern and central PPL Global affiliates continue to be subject to SFAS 71.

Pennsylvania, and the supply of electricity to retail customers in that ter Property, Plant and Equipment ntory as a PLR.

Following are the classes of electnc plant in service, with the associated PPL consolidates the financial statements of its affiliates when it has accumulated depreciation, at December 31:

control. All significant intercompany transactions have been eliminated.

Minority interests in operating results and equity ownership are reflected (Millions of dollars) 2001 2000 in the consolidated financial statements.

Generation $ 7,208 $ 6,801 The consolidated financial statements reflect the accounts of all Transmission and distribution 4,170 3,521 controlled affiliates on a current basis, with the exception of certain PPL General 491 459 Global investments. It is the policy of PPL Global to consolidate foreign 11,869 10,781 affiliates and record equity in earnings of foreign affiliates on a lag, Less: Accumulated depreciation 6,342 5,470 based on the availability of financial data on a U.S. GAAP basis:

$ 5,527 $ 5,311

"* 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 Property, plant and equipment is recorded at onginal cost, unless Global has 51% equity ownership interests in these entities but has joint control of these investments with Mirant. Earnings from all other 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 foreign equity method investments are recorded on a three-month lag.

cost includes material, labor, contractor costs, construction overheads

"* PPL Global consolidates the results of controlled subsidianes, Emel, and financing costs, where applicable. The cost of repairs and minor EC, the Bolivian subsidianes and other investments, on a one-month replacements are charged to expense as incurred. When a component lag. The results of CEMAR are consolidated on a three-month lag. The portion of the subsidianes' earnings owned by outside shareowners is of property, plant or equipment is retired that was depreciated under the included in "Minonty Interest" in the consolidated financial statements. composite or group method, the onginal cost is charged to accumulated depreciation. When all or a significant portion of an operating unit is PPL Global's 8.5% investment in CGE is accounted for using the cost retired or sold that was depreciated under the composite or group method. Dividends from CGE are recorded as income when received. method, the property and the related accumulated depreciation account is reduced and any gain or loss is included in income, unless otherwise Use of Estimates/Contingencies required by regulators.

The preparation of financial statements in conformity with U.S. GAAP AFUDC is capitalized as part of the construction costs for regulated requires management to make estimates and assumptions that affect projects. Interest is capitalized as part of construction costs for non the reported amounts of assets and liabilities, the disclosure of contin regulated projects.

gent liabilities at the date of the financial statements, and the reported Depreciation is computed over the estimated useful lives of property amounts of revenues and expenses dunng the reporting period. Actual using various methods including the straight-line, composite and group results could differ from those estimates.

methods. The annual provisions for depreciation have been computed PPL records loss contingencies in accordance with SFAS 5, "Accounting pnncipally in accordance with the following ranges of asset lives: genera for Contingencies."

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

Asset Impairment As of January 1, 2001, contracts that meet the definition of a Long-ived assets and identifiable intangibles held and used by PPL derivative were accounted for under SFAS 133, "Accounting for Denvative and its subsidianes are reviewed for impairment when events or circum Instruments and Hedging Activities." Certain energy contracts have stances indicate carrying amounts may not be recoverable. Such reviews been excluded from SFAS 133's requirements because they meet the are performed in accordance with SFAS 121. Impairment losses on such definition of a "normal sale or purchase" under DIG Issue C15, "Scope long-lived assets are recognized when book values exceed expected Exceptions: Normal Purchases and Normal Sales Exception for Certain undiscounted future cash flow with the impairment measured on a dis Option-Type Contracts and Forward Contracts in Electncity" These con counted future cash flows basis. Equrty investments are reviewed for tracts are reflected in the financial statements using the accrual method impairment in accordance with APB Opinion No. 18, "The Equity Method of accounting. See Note 19 for additional information on SFAS 133.

of Accounting for Investments in Common Stock." APB Opinion No. 18 Under SFAS 133, all derivatives are recognized on the balance sheet provides that "a loss in value of an investment which is other than a at their fair value. On the date the denvative contract is executed, PPL temporary decline should be recognized." PPL identifies and measures designates the derivative as a hedge of the fair value of a recognized loss in value of equity investments based upon a companson of fair asset or liability or of an unrecognized firm commitment ("fair value" value to carrying value. See Note 18 for the impact of SFAS 144 on hedge), a hedge of a forecasted transaction or of the vanabilrty of cash accounting for asset impairments. 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 Amortization of Goodwill

("foreign currency" hedge), a hedge of a net investment in a foreign oper Goodwill, which is included in 'Regulatory and Other Noncurrent Assets ation, or a non-hedge derivative. Changes in the fair value of a denvative Other" on the Balance Sheet, is amortized on a straight-line basis over that is highly effective as, and is designated and qualifies as, a fair value a period not to exceed 40 years The excess cost over fair value of PPL hedge, along with the loss or gain on the hedged asset or liability that is Global's investments in unconsolidated affiliates is amortized on a straight attributable to the hedged nsk, are recorded in current-period earnigs.

line basis over a period not in excess of 40 years. See Note 18 for the Changes in the fair value of a derivative that is highly effective as, and is impact of SFAS 142 on accounting for goodwill.

designated as and qualifies as, a cash flow hedge are recorded in other Recoverable Transition Costs comprehensive income, until earnings are affected by the variability of Based on the PUC Final Order, PPL Electnc was amortizing its competitive cash flows being hedged. Changes in the fair value of derivatives that transition (or stranded) costs over an 11-year transition penod effective are designated as and qualify as, foreign currency hedges are recorded January 1, 1999. In August 1999, competitive transition costs of $2.4 bil in either current-period earnings or other comprehensive income, depend lion were converted to intangible transition costs when secuntized by the ing on whether the hedge transaction is a fair value hedge or a cash flow issuance of transition bonds. The intangible transition costs are being hedge. If, however, a denvative is used as a hedge of a net investment in amortized over the life of the transition bonds, August 1999 through a foreign operation, its changes in fair value, to the extent effective as a December 2008, in accordance with an amortization schedule filed with hedge, are recorded in the cumulative translation adjustments account the PUC. The assets of PPL Transition Bond Company, including the within equity. Changes in the fair value of denvatives that are not desig intangible transition property, are not available to creditors of PPL or nated as hedging instruments are reported in current-penod earnings.

PPL Electnc. The transition bonds are obligations of PPL Transition Bond In addition, PPL has entered into non-denvative contracts that meet Company and are non-recourse to PPL and PPL Electric. The remaining the definition of energy trading activities as defined by EITF 98-10, competitive transition costs are also being amortized based on an amor "Accounting for Contracts Involved in Energy Trading and Risk Manage tization schedule previously filed with the PUC, adjusted for those compet ment Activities." In accordance with EITF 98-10, energy trading contract itive transition costs that were converted to Intangible transition costs gains and losses from changes in market pnces are marked to market As a result of the conversion of a significant portion of the competitive through earnings transition costs into intangible transition costs, amortization of substan For 1999 and 2000, PPL used EITF 98-10 to account for its commod tially all of the remaining competitive transition costs will occur in 2009. ity forward and financial contracts As such, contracts that did not meet the definition of energy trading contracts, as defined by EITF 98-10, Accounting for Price Risk Management were reflected in the financial statements using the accrual method of PPL enters into commodity contracts for the physical purchase and sale accounting. The gains or losses on interest rate denvative contracts of energy as well as energy contracts that can be settled financially. PPL that settled pnor to the adoption of SFAS 133 were deferred and are enters into interest rate derivative contracts to hedge its exposure to being recognized over the life of the debt Market gains and losses on changes in the fair value of its debt instruments, as well as its exposure foreign currency derivative contracts that settled pnor to the adoption to vanability In expected cash flows associated with existing debt instru of SEAS 133 were recognized in accordance with SFAS 52, "Foreign ments or forecasted transactions. PPL also enters into foreign currency Currency Translation," and are included in "Foreign currency translation derivative contracts to hedge foreign currency exposures, including firm adjustments," a component of "Accumulated other comprehensive commitments, recognized assets or liabilities, forecasted transactions income" on the Balance Sheet.

or net investments PPL CORPORATION 2001 ANNUAL REPORT (49'

GEME, CC.) W. AbWM4-,-G- CAYU&C-14t orcfOrkmire Gains and losses from changes in market prices of energy sales related to shareowners. Other comprehensive income consists of unreal contracts are accounted for in "Wholesale energy marketing and trading" ized gains or losses on available-for-sale securities and qualifying denva revenues; gains and losses from changes in market pnces of energy tives, the excess of additional pension liabilrty over unamortized prior purchase contracts are accounted for in "Energy purchases" on the service costs, and foreign currency translation adjustments recorded by Statement of Income. The amortized gains and losses from interest PPL Global. Comprehensive income is reflected on the Statement of Share rate derivative contracts are accounted for in "Interest Expense." owners' Common Equity and Comprehensive Income, and "Accumulated other comprehensive income" is presented on the Balance Sheet.

Revenue Recognition The accumulated other comprehensive income of PPL consisted of:

"Retail electnc and gas" and "Wholesale energy marketing and trading" revenues are recorded based on delivenes through the end of the calen (In millions) December31, 2001 2000 dar month. Unbilled retail revenues result because customers meters Foreign currency translation adjustments $(268) $(34) are read and bills are rendered throughout the month, rather than all Unrealized gains on qualifying denvatives 23 being read at the end of the month. Unbilled revenues for a month are Minimum pension habilrty (5) (5) calculated by multiplying an estimate of unbilled kWh by the estimated Unrealized gains (losses) on average cents per kWh. available-for-sale securities (1) 3 "Energy related businesses' revenue includes revenues from PPL $(251) $(36)

Global and the mechanical contracting and engineering subsidianes.

PPL Global's revenue reflects its proportionate share of affiliate earnings Treasury Stock under the equity method of accounting, as described in the "Business Treasury shares are reflected on the balance sheet as an offset to com and Consolidation" section of Note 1, and dividends received from its mon equity under the cost method of accounting. Management has no investments are accounted for using the cost method. The mechanical definitive plans for the future use of these shares. Treasury shares are contracting and engineenng subsidiaries record profits from construction not considered outstanding in calculating EPS.

contracts on the percentage-of-completion method of accounting. Income from time and material contracts is recognized currently as the work is Foreign Currency Translation performed. Costs include all direct material and labor costs and job-related Assets and liabilities of international operations, where the local currency overhead. Provisions for estimated loss on uncompleted contacts, if any, is the functional currency, are translated at year-end exchange rates, and are made in the penod in which such losses are determined. related revenues and expenses are translated at average exchange rates prevailing dunng the year. Adjustments resulting from translation are Income Taxes recorded in "Accumulated other comprehensive income." The effect of The income tax provision for PPL is calculated in accordance with translation adjustments on other comprehensive income, net of income SFAS 109, "Accounting for Income Taxes."

taxes, is disclosed in the Statement of Shareowners' Common Equity The provision for PPL Electric's deferred income taxes for regulated and Comprehensive Income. Gains or losses relating to foreign currency assets is based upon the ratemaking pnnciples reflected in rates estab transactions are recognized in income currently. The aggregate transac lished by the PUC and FERC. The difference in the provision for deferred tion gain was $8 million in 2001, and was not significant in 2000.

income taxes for regulated assets and the amount that otherwise would be recorded under U.S. GAAP is deferred and included in taxes recover Project Development Costs able through future rates in "Regulatory and Other Noncurrent Assets PPL Global expenses the costs of evaluating potential acquisition and Other" on the Balance Sheet. See Note 7 for additional information. development opportunities as incurred. Acquisition and development PPL Electric deferred investment tax credits when they were utilized, costs are capitalized upon approval of the investment by the PPL Global and is amortizing the deferrals over the average lives of the related assets. Board of Managers and the Finance Committee of PPL's Board of Directors PPL and its subsidiaries file a consolidated federal income tax return. or, if later, the achievement of sufficient project milestones such that the economic viability of the project is reasonably assured. The level of Leases assurance needed for capitalization of such costs requires that all major See Note 12 for a discussion on accounting for leases uncertainties be resolved and that there be a high probability that the Pension and Other Postretlrement Benefits project will proceed as planned, or that such costs will be recoverable See Note 14 for a discussion on accounting for pension and other through long-term operations, a financing or a sale.

postretirement benefits. The continued capitalization of project development and acquisition costs is subject to on-going risks related to successful completion. In the Cash Equivalents event that PPL Global determines that a particular project is no longer All highly liquid debt instruments purchased with onginal maturities of viable, previously capitalized costs are charged to expense in the period three months or less are considered to be cash equivalents.

that such determination is made.

Comprehensive Income Reclassification Comprehensive income consists of net income and other comprehensive Certain amounts in the 2000 and 1999 financial statements have been income, defined as changes in common equity from transactions not reclassified to conform to the current presentation.

50) PPL CORPORATION 2001 ANNUAL REPORT

(Millions of dollars) 2001 2000 1999 Income taxes PPL's reportable segments are Supply, Delivery and International. The Supply 153 221 103 Supply group primarily consists of the domestic energy marketing, gener Delivery 71 59 28 ation and domestic development operations of PPL Energy Supply. The International 37 14 43 Delivery group Includes the regulated electnc and gas delivery operations 261 294 174 of PPL Electric and PPL Gas Utilities. The Intemational group includes PPL Extraordinary items Global's responsibility for the acquisition, development, ownership and Delivery 11 (46) operation of intemational energy projects. The majority of PPL Global's 11 (46) international investments are located in the U.K., Chile, El Salvador and Net Income Brazil. Segments include direct charges, as well as an allocation of indirect Supply 368 325 199 corporate costs, for services provided by PPL Services. These service Delivery 126 113 177 costs include functions such as financial, legal, human resources and International (315) 60 56 information services $ 179 $ 498 $ 432 See Note 23 for a discussion of the contract between PPL Electric Cash Flow Data Expenditures for property, plant and PPL EnergyPlus.

and equipment Previously, there was a 'Development" group that included the activi Supply $ 290 $ 278 $ 173 ties now reflected in the "Intemational' group and the domestic develop Delivery 149 148 141 ment operations, currently part of the "Supply" group. Previously reported International 126 34 4 information has been restated to conform to the current presentation. 565 460 318 Financial data for PPL's business segments are as follows: Investment in generating assets and electric energy projects (Millions of dollars) 2001 2000 1999 Supply 176 97 870 Income Statement Data International 136 473 225 Revenues from external customers $ 312 $ 570 $1,095 Supply $2,283 $2,815 $1,731 Delivery 2,867 2,413 2,441 As of December 31, 2001 2000 International 575 455 418 Balance Sheet Data 5,725 5,683 4,590 Net investment in unconsolidated Equity in earnings of affiliates - at equity unconsolidated affiliates Supply $ 211 $ 165 Supply 12 2 2 International 375 635 International 113 78 57 586 800 125 80 59 Total assets Depreciation Supply 5,038 4,420 Supply 126 136 138 Delivery 6,097 6,062 Delivery 97 104 102 International 1,439 1,878 International 31 21 17

$12,574 $12,360 254 261 257 Amortizations - recoverable transition 2001 2000 1999 costs, nuclear fuel and other Supply (35) (48) 14 Geographic Data Delivery 259 236 201 Revenues from external customers 224 188 215 Domestic $ 5,150 $ 5,228 $4,172 Foreign 575 455 418 Interest and dividend income Supply 3 (28) 3 $ 5,725 $ 5,683 $4,590 Delivery 10 27 6 International 2 14 As of December31, 2001 2000 15 13 9 Property, plant and equipment Interest expense Domestic $ 5,548 $ 5,210 Supply 58 109 90 Foreign 587 738 Delivery 234 230 168 $ 6,135 $ 5,948 International 95 37 19 387 376 277 PPL CORPORATION 2001 ANNUAL REPORT (51

IMM, f--C-IEUWUM U f Q) NRCRAWx Cfjt%ýW,%

PPL2s investment in unconsolidated affiliates accounted for under the Basic EPS is calculated by dividing "Net Income" on the Statement of equity method was $586 million and $800 million at December 31, Income by the weighted average number of common shares outstanding 2001 and 2000. The most significant investment was PPL Global's dunng the penod. In the calculation of diluted EPS, weighted average investment in WPD 1953, which was $328 million at December 31, shares outstanding are increased for additional shares that would be out 2001 and $479 million at December 31, 2000. WPD 1953 owns WPD standing if potentially dilutive securities were converted to common stock.

(South West) and WPD (South Wales). See Note 22 for a discussion on Potentially dilutive secunties consist of stock options granted under the wnte-lown of international energy projects. At December 31, 2001, the incentive compensation plans (See Note 13), stock units represent PPL Global had a 51% equity ownership interest in WPD 1953, but ing common stock granted under directors compensation programs and shared joint control with Mirant. Accordingly, PPL Global accounts for its PEPS Units.

investment in WPD 1953 (and other investments where it has majonty Preferred dividends are included in net income in the computation ownership but lacks control) under the equity method of accounting. of basic and diluted EPS.

Investment in unconsolidated affiliates accounted for under the The basic and diluted EPS calculations, and the reconciliation of the equity method at December 31, 2001, and the effective equity owner shares used in the calculations, are shown below:

ship percentages, were as follows:

(Millions of dollars PPL Global: or thousands of shares) 2001 2000 1999 Aguaytia Energy, LLC 11.4% Income (Numerator)

Bolivian Generating Group, LLC 29.3% Net Income - before extraordinary Hidrocentrais Reunidas, LDA 50.0% items and cumulative effect of Hidro Ibenca, B V. 50.0% change in accounting pnnciple $169 $ 487 $ 478 Latin American Energy & Electricity Fund I, LP 16.6% - Extraordinary items (net of tax) 11 (46)

WPD 1953 51.0% - Cumulative effect of change in WPDL 51.0% accounting pnnciple (net of tax) 10 PPL Generation: Net Income $ 179 $498 $ 432 Safe Harbor Water Power Corporation 33.3% Shares (Denominator)

Bangor Pacific Hydro Associates 50.0% Shares for Basic EPS 145,974 144,350 152,287 Southwest Power Partners, LLC 50 0% Add: Incremental Shares Stock options 569 364 10 Summarized below is financial information from the financial state Stock units 71 67 59 ments of these affiliates, accounted for by the equity method: Shares for Diluted EPS 146,614 144,781 152,356 Basic Earnlngs Per Share (Millions of dollars) As of December31, 2001 2000 Net Income - before extraordinary Balance Sheet Data items and cumulative effect of Current Assets $ 612 $ 396 change in accounting pnnciple $1L16 $3 38 $ 3 14 Noncurrent Assets 5,517 4,904 - Extraordinary items (net of tax) 0 07 (0 30)

Current Liabilities 502 409 - Cumulative effect of change in Noncurrent Liabilities 3,955 3,365 accounting pnnciple 0.07 Net Income $1.23 $3 45 $ 2 84 2001 2000 1999 Diluted Earnings Per Share Income Statement Data Net Income - before extraordinary (

Revenues1(a) $ 647 $ 505 $1,130 items and cumulative effect of Operating Income 328 254 212 change in accounting pnnciple $1.15 $3.37 $ 3.14 Net Income (a) 248 131 427 - Extraordinary items (net of tax) 0 07 (0 30)

- Cumulative effect of change in (a)The decrease in revenues and net income in 2001 and 2000 from 1999 accounting pnnciple (net of tax) 0.07 were in part due to the sale of the supply business of WPD (South West),

formerly SWEB, in the fourth quarter of 1999. Net Income $1.22 $3.44 $ 284

52) PPL CORPORATION 2001 ANNUAL REPORT

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 Under FERC-approved interconnection and power supply agreements, PPL retroactive application of this change in accounting, from reported EnergyPlus supplied capacity and energy to UGI These agreements were results, is as follows:

terminated in February 2001.

1998 PPL EnergyPlus had a contract to provide BG&E with 129,000 kilowatts, and pnor or 6.6%, of PPL Susquehanna's share of capacity and related energy 2001 2000 1999 years from the Susquehanna station. PPL EnergyPlus provided 407 million kWh Increase (Decrease) to BG&E through May 2001, at which point the contract ended.

Net income ($ millions) $ (10) $ 7 $ 3 EPS $(.07) $ 05 $ 02 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 In May 2001, PPL issued 23 million PEPS Units that contain a pur for more information regarding a new power supply agreement beginning chase contract component for PPL's common stock. The purchase con in July 2002.

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. For 2001, 2000 and 1999, the corporate federal income tax rate was Stock options to purchase approximately 896,000 PPL common 35% The statutory corporate net income tax rates for Pennsylvania and shares for 2001 were not included in that penod's computation of Montana were 9.99% and 6.75%.

diluted EPS because the exercise pnce of the options was greater than The tax effects of significant temporary differences comprising PPL's the average market price of the common shares. Therefore, the effect net deferred Income tax liability were as follows:

would have been antidilutive.

(Millions of dollars) 2001 2000 Deferred Tax Assets Deferred investment tax credits $ 60 $ 66 NUG contracts & buybacks 272 326 In August 1999, PPL Transition Bond Company issued $2.4 billion Accrued pension costs 74 106 of transition bonds to securitize a portion of PPL Electnc's stranded Deferred foreign income taxes 109 86 costs. PPL Electric used a portion of the securitization proceeds to Cancellation of generation projects 60 repurchase $1.5 billion of its first mortgage bonds The premiums and Impairment write-down 61 Contribution in aid of construction 42 33 related expenses to reacquire these bonds were $59 million, net of tax.

Other 200 162 In August 1999, PPL Electric released approximately $78 million of Valuation allowance (172) (8) deferred income taxes associated with the CTC that was no longer 706 771 required because of secuntization. The net secuntization impact of the bond repurchase and the deferred tax change was a gain of $19 million Deferred Tax Uabilitles SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt," Electric plant - net 852 845 requires that a material aggregate gain or loss from the extinguishment Restructunng - CTC 861 949 of debt be classified as an extraordinary item, net of the related income Taxes recoverable through future rates 104 102 Reacquired debt costs 12 13 tax effect. The $59 million loss associated with the bond repurchase Foreign investments 14 15 was treated as an extraordinary item. Details were as follows:

Deferred foreign income taxes 42 52 Other 49 (27)

(Millions of dollars) 1,934 1,949 Reacquisition cost of debt $1,554 Net Deferred Tax Uablllty $1,228 $1,178 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 PPL CORPORATION 2001 ANNUAL REPORT (53

ccme,60 owm4afumiý antmEW-t wiwc:,M)-m Details of the components of income tax expense, a reconciliation of (Millions of dollars) 2001 2000 1999 federal income taxes derived from statutory tax rates applied to income Taxes, Other Than Income from continuing operations for accounting purposes, and details of taxes State gross receipts $112 $128 $108 other than income are as follows: State utilrty realty 4 6 13 State capital stock 20 23 13 (Millions of dollars) 2001 2000 1999 Property and other 19 19 3 Income Tax Expense $155 $176 $137 Current - Federal $270 $285 $178 Current - State 36 57 36 PPL Global does not pay or record U.S. income taxes on the undis Current - Foreign 8 11 10 tributed earnings of its foreign subsidiaries and its 20% to 50% owned 314 353 224 corporate joint ventures where management has determined that the Deferred - Federal (86) (52) 76 earnings are permanently reinvested in the companies that produced Deferred - State 4 12 (109) them. The cumulative undistributed earnings are included in "Earnings Deferred - Foreign 44 (4) reinvested" on the Balance Sheet. The amounts considered permanently (38) (44) (33) reinvested at December 31, 2001 and 2000 were $38 million and $27 Investment tax credit, net - Federal (15) (15) (17) million. It is not practical to estimate the amount of taxes that might be Total $261 $294 $174 payable on these foreign earnings if they were remitted to PPL Global.

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 $261 $294 $174 The cost to decommission the Susquehanna station is based on a site specific study to dismantle and decommission each unit immediately (Millions of dollars) 2001 2000 1999(a) following final shutdown. PPL Susquehanna's 90% share of the total Reconciliation of Income Tax Expense estimated cost of decommissioning the Susquehanna station was Indicated federal income tax on approximately $724 million in 1993 dollars. This estimate includes pre-tax income before extraordinary decommissioning the radiological portions of the station and the cost item and a cumulative effect of of removal of non-radiological structures and matenals.

a change in accounting pnnciple at Decommissioning costs are recorded as a component of depreciation statutory tax - 35% $168 $284 $ 242 expense. Beginning in January 1999, in accordance with the PUC Final Increase/(decrease) due to: Order, $130 million of decommissioning costs are being recovered from State income taxes 25 45 (50) customers through the CTC over the 11-year life of the CTC rather than Flow through of depreciation differences not previously normalized 2 3 the remaining life of Susquehanna. The recovery will include a return on Amortization of investment tax credit (11) (11) (12) unamortized decommissioning costs. Decommissioning charges were Write-down of international $24 million in 2001, $26 million in 2000 and $27 million in 1999.

energy projects 100 18 Amounts collected from PPL Electnc's customers for decommissioning, Difference related to income less applicable taxes, are deposited in external trust funds for invest recognition of foreign affiliates (17) (14) (22) ment and can be used only for future decommissioning costs. Accrued Foreign income taxes 52 7 10 nuclear decommissioning costs were $294 million and $280 million at Federal income tax credits (40)

(16) (6)

() ( 15 December 31, 2001 and 2000, and are included in "Deferred Credits Other and Other Noncurrent Liabilities - Other" on the Balance Sheet.

93 10 (68) In November 2001, PPL Susquehanna notified the NRC that it Total Income Tax Expense $261 $294 $1.74 intends to file for 20-year license renewals for each of the Susquehanna Effective Income Tax Rate 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.

(a)In August 1999, PPL Electnc released appre oximately $78 million of deferred See Note 18 for additional information on SFAS 143, which could income taxes associated wth the CTC that were no longer required because have a material impact on the accounting for the decommissioning of securrtization.

of the Susquehanna station.

54) PPL CORPORATION 2001 ANNUAL REPORT

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 5,579 5,724 4,784 4,804 Company-obligated mandatorily redeemable preferred secunties of subsidiary trusts holding solely company debentures (b) 825 705 250 250 Short-term debt (a) 118 118 902 902 Pnce nsk management liabilities - current Wd Energy 12 12 201(d)

Interest 4 4 Foreign exchange 2 2 Pnce nsk management liabilities - noncurrent: ic)

Energy 7 7 61(d)

Interest 3 3 Foreign exchange 1 1 Preferred stock witlh sinking requirements (bi 31 31 46 46 Other financial instruments included in other current liabilities (a) 12 12 (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.

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, Credit Arrangements PPL Electric entered into a new $400 million 364-day credit facility and In December 2000 and in January 2001, PPL Capital Funding entered PPL Energy Supply entered into two new credit facilities: a $600 million into two short-term credit facilities At March 31, 2001, PPL Capital 364-day facility and a $500 million three-year facility At December 31, Funding had borrowed $200 million under each facility at floating rates 2001, no borrowings were outstanding under any of these facilities and tied to either one-, two- or three-month LIBOR. These funds were used for

$26 million of letters of credit were issued under the $500 million three general corporate purposes, including making loans to PPL subsidiaries to year facility In addition, in June 2001, PPL Capital Funding entered into a reduce their debt balances In May 2001, PPL Capital Funding repaid its 364-day credit facility with PPL Energy Supply PPL had guaranteed PPL borrowings under both facilities and the credit facilities were terminated.

Capital Funding's obligations under this agreement. The credit facility and In order to enhance liquidity, and as a credit back-stop to their related guaranty were terminated in December 2001 when PPL Capital respective commercial paper programs, PPL Electric, PPL Capital Funding Funding terminated its commercial paper program and at that time no and PPL (as guarantor for PPL Capital Funding) shared a 364-day $750 borrowings were outstanding under this credit facility.

PPL CORPORATION 2001 ANNUAL REPORT (55

Mm- -ýWi. GW,"AA u W-C, w lkrx" c L,WMCIul M F.D PPL Montana has a $100 million three-year credit facility with certain down short-term debt The $17 million of issuance expenses were lenders which matures in November 2002. The matunty date may be charged to "Capital stock expense and other" on the Balance Sheet, as extended with the consent of the lenders. The credit facility provides well as $7 million for the present value of the estimated liability for con that up to $75 million of the commitment may be used to cause lenders tract adjustment payments.

to issue letters of credit. In the event that PPL Montana were to draw In July 2001, PPL Electric retired all of its outstanding First Mortgage upon this facility or cause lenders to issue letters of credit on its behalf, Bonds, 9%% Series due 2021, at $5 million aggregate par value through PPL Montana would be required to reimburse the issuing lenders. At the maintenance and replacement fund provisions of the 1945 First December 31, 2001, $44 million of loans were outstanding under this Mortgage Bond Indenture.

facility and $25 million of letters of credit were issued. In August 2001, PPL Electric issued $800 million of senior In April 2001, PPL Montana executed a new credit facility to allow secured bonds as part of a strategic initiative. See Note 23 for addi for incremental letter of credit capacity of $150 million. There were no tional information.

letters of credit outstanding under this facility at December 31, 2001. In September 2001, PPL Electric repurchased $15 million aggregate PPL has executed a commitment to the lenders under PPL Montana's par value of its First Mortgage Bonds, 6%% Series due 2005, at a

$150 million credit facilrty that PPL will provide (or cause PPL Energy market value that approximated par value.

Supply to provide) letters of credit at such times and in such amounts In October 2001, PPL Energy Supply sold $500 million aggregate as are necessary to permit PPL Montana to remain in compliance with principal amount of its 6.40% senior unsecured notes due 2011 in a pn its fixed-price forward energy contracts or its derivative financial instru vate placement, and agreed to make an exchange offer to exchange the ments entered into to manage energy pnce nsks, to the extent that privately placed senior notes for publicly registered senior notes. The PPL Montana cannot provide such letters of credit under its existing exchange was completed in February 2002. The new registered senior credit agreements. No such letters of credit had been issued as of notes have the same material financial terms as the old senior notes.

December 31, 2001. Proceeds of the senior note offering will be used to fund generation The subsidiaries of PPL are separate legal entities. PPL's subsidianes development and for general corporate purposes.

are not liable for the debts of PPL. Accordingly, creditors of PPL may not During November and December 2001, PPL Capital Funding rbpur satisfy their debts from the assets of the subsidiaries absent a specific chased $70 million, par value, of its medium-term notes, 7.75% Series contractual undertaking by a subsidiary to pay PPL's creditors or as due 2015, at a market value of $76 million.

required by applicable law or regulation. Similarly, PPL is not liable for the During December 2001, PPL Electnc repurchased $4 million par debts of its subsidianes. Accordingly, creditors of PPL's subsidiaries may value of its First Mortgage Bonds, 6 55% Series due 2006, at a market not satisfy their debts from the assets of PPL absent a specific contrac value that approximated par value. PPL Electnc also repurchased tual undertaking by PPL to pay the creditors of its subsidiaries or as 148,000 shares of its 6%% Senes Preferred Stock, also at a market required by applicable law or regulation. value that approximated par value.

During the year 2001, PPL Transition Bond Company made principal Financing Activities payments on bonds totaling $241 million.

Dunring December 2001:

In December 2000, PPL initiated a Structured Equity Shelf Program

"*PPL Electric terminated its existing commercial paper program and for the issuance of up to $100 million in PPL common stock in small established a new $400 million program.

amounts on a penodic basis. As of December 31, 2001, PPL had issued

"* PPL Capital Funding terminated its commercial paper program.

$16 million of common stock under this program.

"* PPL Energy Supply initiated a $1.1 billion commercial paper program.

In 2001, PPL Global subsidiaries Emel and CEMAR, issued $127 mil At December 31, 2001, there was no commercial paper outstanding lion and $99 million of long-term debt. A portion of CEMAR's debt was under either the PPL Electric or PPL Energy Supply programs. reclassified to short-term debt in conjunction with CEMAR's impairment.

In March 2001, PPL Electric bought back an option related to its (See Note 22.)

6%% Reset Put Secunties due 2006. The option would have permitted See Note 12 for a description of PPL's lease financings.

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 Domestic Generation Projects

$575 million. See the "Consolidated Statement of Company-obligated In January 2001, PPL Montour acquired an additional interest in the coal Mandatonly Redeemable Securities" for information regarding the PEPS fired Conemaugh Power Plant from Potomac Electnc Power Company.

Units. The $575 million of PEPS Units are included in "Company-obligated Under the terms of the acquisition agreement, PPL Montour and a sub Mandatonly Redeemable Preferred Securities of Subsidiary Trusts Holding sidiary of Allegheny Energ, Inc. jointly acquired a 9.72% interest in the Solely Company Debentures" on the Balance Sheet at December 31, 1,711 MW plant. PPL Montour paid $78 million for this additional 83 2001. Net proceeds of $558 million were received, after giving effect MW interest. The purchase increased PPL Montour's ownership interest to $17 million of issuance expenses. PPL used these proceeds to pay to 16.25% in the two-unit plant.

56) PPL CORPORATiON 2001 ANNUAL REPORT

1, In August 2001, construction began on the University Park Energy International Distribution Projects project, a 540 MW natural gas-fired facility located in University Park, In January 2001, PPL Global purchased an additional 5.6% direct and Illinois, and on the Sundance Energy project, a 450 MW natural gas-fired indirect equity interest in CGE from the Claro group, bnnging its total facility in Pinal County, Anzona. The projects are expected to be in service investment to $141 million, or about 8 5% CGE provides electricity deliv during the summer of 2002, at an estimated total project cost of approx ery service to 1.4 million customers throughout Chile and natural gas imately $675 million PPL Susquehanna also announced plans to increase delivery service to 200,000 customers in Santiago.

the capacity of its Susquehanna nuclear plant by 100 MW, with the instal In May 2001, WPDL successfully completed the sale of Hyder's water lation of more efficient steam turbines on each of the two units These business, Welsh Water, to the Welsh firm Glas Cymru Cyfyngedig for one improvements will be made in 2003 and 2004 and are expected to cost British pound sterling and the assumption of all of Welsh Water's debt.

approximately $120 million. In September 2001, PPL Global increased its capital investment by In December 2001, PPL Global and the Long Island Power Authority 4 9% in CEMAR by purchasing the 25 7 billion shares of CEMAR that entered into agreements to build two 80 MW combustion turbine power were held by CEMAR's employees at a price of $13 million. The increase facilities at sites in Shoreham and Edgewood on Long Island, New York. resulted in a total 89.6% ownership in CEMAR.

Both facilities are expected to be in service during the summer of 2002 In December 2001, PPL Global purchased an 80% interest in El at an estimated total project cost of approximately $180 million. Salvador Telecom, a small telecommunications company in El Salvador, In December 2001, a PPL Global subsidiary entered into a synthetic for an initial investment of $8 million lease financing transaction for the development, construction and opera In December 2001, PPL Global recorded impairment charges for its tion of its Lower Mt. Bethel combined cycle generating facility The Air investments in CEMAR, WPD 1953, and WPDL See Note 22 for addi Quality Plan Approval issued by the Pennsylvania DEP for construction of tional information 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 PPL applies the provisions of SFAS 13, "Accounting for Leases," to all approval has been appealed by a township resident as to the decibel leasing transactions. In addition, PPL applies the provisions of numerous levels allowed. An additional appeal was filed by the same resident to other accounting pronouncements that provide specific guidance and the township's issuance of a building permit pending the outcome of additional requirements related to accounting for leases.

the zoning appeal PPL Energy Supply and the PPL Global subsidiary In March 2000, PPL Electnc terminated its nuclear fuel lease and are aggressively opposing the zoning and building permit appeals. As a repurchased $154 million of nuclear fuel from the lessor energy trust. In result of these three appeals, substantial additional requirements could July 2000, all nuclear fuel was transferred to PPL Susquehanna in con be imposed on the construction and operation of the facility If, as a nection with the corporate realignment.

result of these appeals, the construction of the facility could not be com In July 2000, PPL Montana sold its interest in the Colstnp generating pleted by September 30, 2004, the PPL Global subsidiary, or PPL Energy plant to owner lessors who are leasing the assets back to PPL Montana Supply as guarantor, could be called upon to repay approximately 90%

under four 36-year operating leases. The proceeds from this sale approx of the then-outstanding facility costs, plus a make-whole premium on imated $410 million PPL Montana used the proceeds to reduce out the total amount of debt commitments. Alternatively, PPL Energy Supply standing debt and make distributions to its parent, PPL Generation. PPL could, subject to certain conditions, purchase the facility from the lessor, Montana leases a 50% interest in Colstnp Units 1 and 2 and a 30%

offer to assume 100% of the outstanding debt, and pay a reduced make interest in Unit 3, through four non-cancelable operating leases The whole premium to any debtholder that does not accept such offer.

leases provide two renewal options based on the economic useful life In light of continuing declines in wholesale energy prices in the east of the generation assets em and westem U.S. markets, PPL Global is scaling back its generation In November 2000, a PPL Global subsidiary entered into a $555 mil development program As a result, in December 2001, PPL Global made lion operating lease arrangement for turbine generator units and related a decision to cancel approximately 2,100 MW of previously planned gen equipment (SCRs, transformers and spare engines) Certain obligations eration development in Pennsylvania and Washington state. These projects of the PPL Global subsidiary under this lease financing, including pay were in the early stage of development and would have had an estimated ment obligations, have been guaranteed by PPL The units are expected capital cost of approximately $1.3 billion The charge for cancellation of to go into service as they are completed, beginning in 2002.

these generation projects, which was primarily due to cancellation fees In May 2001, a PPL Global subsidiary entered into an operating under turbine purchase contracts, was approximately $150 million, and lease arrangement, initially for $900 million and increased in July 2001 is reported on the Statement of Income as "Cancellation of generation to $1.06 billion upon syndication, for the development, construction projects," a component of "Other Charges."

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

U-sm VC.) W. LOC-14LIEwc. GMY-C)'O"i utscigulck In February 2002, the PPL Global subsidiary reduced the available com for 2001 was $6 million and less than $3 million in 2000 and 1999. At mitment under the lease to approximately $700 million. There is a resid December 31, 2001, there were 660,572 restricted shares outstanding.

ual value guarantee that is expected to be up to $545 million at the end These awards currently vest from three to 23 years from the date of grant of the lease.

Stock Options In December 2001, a PPL Global subsidiary entered into an operating Under the Plans, stock options may also be granted with an option exer lease arrangement for $455 million for the development, construction and cise pnce per share not less than the fair market value of PPL's common operation of a 600 MW gas-fired combined-cycle generation facility located stock on the date of grant The options are exercisable beginning one in Lower Mt. Bethel Township, Northampton County, Pennsylvania. The year after the date of grant, assuming the individual is still employed by facility is expected to be operational in 2004. Certain obligations of the PPL or a subsidiary, in installments as determined by the CCGC in the PPL Global subsidiary under this lease financing, including payment obli case of the ICI? and the CLC in the case of the ICPKE. The CCGC and gations, have been guaranteed by PPL Energy Supply. There is a residual CLC have discretion to accelerate the exercisability of the options. All value guarantee that is expected to be up to $321 million at the end of options expire no later than 10 years from the grant date. The options the lease.

become exercisable if control of PPL changes, as defined by the Plans.

In addition to the leasing arrangements discussed above, PPL also has PPL applies APB Opinion No. 25, 'Accounting for Stock Issued to leases for vehicles, office space, land, buildings, personal computers and Employees,' and related interpretations in accounting for stock options.

other equipment. Total future minimum lease payments for all operating Since stock options are granted at the then current market pnce, no leases are estimated as follows (millions of dollars): 2002, $368; 2003, compensation cost has been recognized. Compensation calculated in

$108; 2004, $147; 2005, $140; 2006, $106; and thereafter, $881.

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 Under the PPL Incentive Compensation Plan ('ICP") and the Incentive in 2001, and approximately 1 cent per share in 2000.

Compensation Plan for Key Employees ("ICPKE") (together, the "Plans"), A summary of stock option activity follows:

restricted shares of PPL common stock as well as stock options may be Weighted granted to officers and other key employees of PPL, PPL Electric and Number of Average other affiliated companies. Awards under the Plans are made in the com Stock Option Activity Options Exercise Pnce mon stock of PPL by the Compensation and Corporate Governance Balance at December 31, 1998 Committee ("CCGC") of the PPL Board of Directors in the case of the ICP, Options granted 704,800 $2685 and by the PPL Corporate Leadership Council ("CLC') in the case of the Options forfeited (78,780) $2684 ICPKE. Each Plan limits the number of shares available for awards to two Balance at December 31, 1999 626,020 $26.85 (13,570 options exercisable) percent of the outstanding common stock of PPL on the first day of each Options granted 1,501,110 $22 45 calendar year. The maximum number of options which can be awarded Options exercised (56,590) $2684 under each Plan to any single eligible employee in any calendar year is Options forfeited (101,239) $2402 1.5 million shares. Any portion of these options that has not been Balance at December 31,2000 1,969,301 $2364 granted may be carried over and used in any subsequent year. If any (215,158 options exercisable) award lapses or is forfeited or the rights to the participant terminate, any Options granted 922,860 $43.16 shares of common stock are again available for grant. Shares delivered Options exercised (548,424) $23.49 Options forfeited (88,686) $31.31 under the Plans may be in the form of authorized and unissued common Balance at December 31, 2001 2,255,051 $31.36 stock, common stock held in treasury by PPL or common stock pur (306,544 options exercisable) chased on the open market (including pnvate purchases) in accordance with applicable securities laws.

The weighted average fair values of options at their grant date during Restricted Stock 2001, 2000 and 1999 were $10 42, $3 35 and $2.37. The estimated Restricted shares of PPL common stock are outstanding shares with full fair value of each option granted was calculated using a modified Black voting and dividend rights. However, the shares are subject to forfeiture Scholes option-pricing model. The weighted average assumptions used or accelerated payout under Plan provisions for termination, retirement, in the model were as follows:

disability and death. Restricted shares vest fully if control of PPL changes, as defined by the Plans. 2001 2000 1999 Restncted stock awards of 202,590; 440,549; and 108,800 shares, Risk-free interest rate 5.46% 6.74% 5.61%

with per share weighted-average fair values of $43.09, $21.30, and Expected option term 10 yrs 10 yrs 10 yrs

$26.74, were granted in 2001, 2000 and 1999. Compensation expense Expected stock volatility 30.24% 19 79% 16.19%

Dividend yield 4.28% 5.70% 6.60%

58) PPL CORPORATION 2001 ANNUAL REPORT

Options Outstanding Options Exercisable Weighted Weighted Weighted Number Average Average Number Average Outstanding Remaining Exercise Exercisable Exercise Range of Exercise Pnces at 12/31/01 Contractual Life Prices at 12/31/01 Pnce

$19.00-$24 00 962,249 81 $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 tirementand87, 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 participants. The new method is preferable under SFAS 87 because it expense was $(47 million) in 2001, $(6 million) in 2000 and $9 million provides more current recognition of gains and losses, thereby lessening In 1999, excluding amounts charged or (credited) to construction and the accumulation of unrecognized gains and losses.

other non-expense accounts. Retiree health and welfare benefits costs charged to operating In 2001 PPL changed its method of amortizing unrecognized gains or expense were approximately $21 million in 2001, $25 million in 2000 losses in the annual pension expense/income determined under SFAS 87, and $20 million in 1999, excluding amounts charged to construction "Employers' Accounting for Pensions." This change resulted in a cumula and other non-expense accounts.

tive-effect credit of $10 million after-tax or $.07 per basic share, which Postretirement medical costs at December 31, 2001, were based Is reflected as a "Cumulative Effect of a Change in Accounting Principle" on the assumption that costs would increase 7.0% in 2001, then the on the Statement of Income. Under the old method, unrecognized gains rate of increase would decline gradually to 6% in 2006 and thereafter.

and losses in excess of 10% of the greater of the plan's projected bene A one-percentage-point change in the assumed health care cost trend fit obligation or market-related value of plan assets were amortized on assumption would have the following effects:

a straight-line basis over the estimated average future service period One Percentage Point of plan participants Under the new method, a second corridor will be (In millions) Increase Decrease utilized for unrecognized gains and losses in excess of 30% of the plan's projected benefit obligation Unrecognized gains and losses outside Effect on service cost and Interest cost components $ 1 $ (1)

Effect on postretirement benefit obligation $11 $(10) 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 PPL CORPORATION 2001 ANNUAL REPORT (59

WME, % GGJM&fý-) rIMMU ft.ý The following assumptions were used in the valuation of the The projected benefit obligation, accumulated benefit obligation, and benefit obligations: fair value of plan assets for pension plans with accumulated benefit obli gations in excess of plan assets, were $116 million, $96 million and 2001 2000 1999

$46 million, as of December 31, 2001 and $33 million, $29 million and Pension Benefits

$0 as of December 31, 2000.

Discount rate 7.25% 7.5% 7.0%

Expected return on plan assets 9.2% 9.2% 80% PPL Electric and its subsidiaries formerly engaged in coal mining Rate of compensation increase 4.25% 4.75% 5.0% 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 Postretirement Medical Benefits is the net of $52 million of estimated future benefit payments offset by Discount rate 7.25% 7.5% 7.0%

$30 million of available assets in a PPL Electric-funded VEBA trust.

Expected return on plan assets 7.60% 7.6% 6.35%

PPL subsidianes engaged in the mechanical contracting business Rate of compensation increase 4.25% 4.75% 5 0%

make contributions to various union-sponsored multiemployer pension and health and welfare plans. Contributions of $14 million, $10 million The funded status of the combined plans was as follows:

and $8 million were made in 2001, 2000 and 1999.

Postretirement Pension Benefits Medical Benefits Savings Plans (Millions of dollars) 2001 2000 2001 2000 Substantially all employees of PPL's subsidiaries are eligible to partici Change In Benefit Oblgation pate in deferred savings plans (401(k)s). Contributions to the plans Benefit Obligation, charged to operating expense approximated $10 million in 2001, January 1 $1,192 $1,206 $ 311 $ 317 $9 million in 2000 and $6 million in 1999.

Service cost 38 40 5 5 Interest cost 94 86 22 22 Employee Stock Ownership Plan Plan amendments 4 13 PPL sponsors a non-leveraged ESOP, in which substantially all employees Actuanal (gain)/loss 15 (98) 12 (17) excluding those of PPL Global, PPL Montana, PPL Gas Utilities and the Acquisition/divestitures 30 mechanical contractors are enrolled after one year of credited service.

Participant contnbutions I Dividends paid on ESOP shares are treated as ordinary dividends by PPL.

Actual expense paid (4) (4)

Under existing income tax laws, PPL is permitted to deduct the amount Net benefits paid (54) (51) (20) (16) of those dividends for income tax purposes and to contnbute the result Benefit Obligation, ing tax savings (dividend-based contnbution) to the ESOR December 31 1,316 1,192 330 311 The dividend-based contnbution is used to buy shares of PPL's com Change In Plan Assets mon stock and is expressly conditioned upon the deductibility of the con Plan assets at fair value, tribution for federal income tax purposes. Contnbutions to the ESOP are January 1 1,794 1,799 149 130 Actual retum on plan assets (108) 44 (6) 2 allocated to eligible participants' accounts as of the end of each year, Employer contnbutions 2 3 32 33 based 75% on shares held in existing participants' accounts and 25%

Acquisition/divestitures 23 3 on the eligible participants' compensation.

Participant contributions I Amounts charged as compensation expense for ESOP contnbutions Actual expense paid (4) (4) approximated $4 million in each of 2001, 2000 and 1999. These Net benefits paid (54) (51) (20) (16) amounts were offset by the dividend-based contribution tax savings Plan assets at fair value, and had no impact on PPL's earnings.

December 31 1,654 1,794 155 149 ESOP shares outstanding at December 31, 2001 totaled 5,140,869, Funded Status or 4% of total common shares outstanding, and are included in all Funded Status of Plan 338 601 (175) (162)

EPS calculations.

Unrecognized transition assets (36) (40) 96 104 Unrecognized pnor service cost 110 114 23 27 Postemployment Benefits Unrecognized net (gain)/loss (579) (911) 42 14 PPL subsidiaries provide health and life insurance benefits to disabled Uability recognized $ (167) $ (236) $ (14) $ (17) employees and income benefits to eligible spouses of deceased employ Amounts Recognized In the ees. Postemployment benefits charged to operating expenses were not Balance Sheet Consist of significant in 2001, 2000 or 1999.

Prepaid benefit cost $ 1 $ 1 Certain of PPL Global subsidiaries, including Emel, EC, Elfec and Accrued benefit liability (168) (237) $ (14) $ (17)

Integra, provide limited non-pension benefits to all current employees.

Intangible asset 5 All active employees are entitled to benefits in the event of termination Additional minimum liability (14) (9)

Accumulated other or retirement in accordance with government sponsored programs. These comprehensive income 9 9 plans generally obligate a company to pay one month's salary per year Net Amount Recognized $ (167) $ (236) $ (14) $ (17) of service to employees in the event of involuntary termination. Under

60) PPL CORPORATION 2001 ANNUAL REPORT

certain plans, employees with five or more years of service are entitled Benefit Pension Plan," using what is commonly referred to as the "shut to this payment in the event of voluntary or involuntary termination down" method, where a company records the undiscounted obligation as There is no limit on the number of years of service in calculation of the if it was payable at each balance sheet date. The combined liabilities for benefit obligation these plans at December 31, 2001 and 2000 were $6 million, and are The liabilities for these plans are accounted for under the guidance of recorded in "Deferred Credits and Noncurrent Liabilities - Other" on the EITF 88-1, "Determination of Vested Benefit Obligation for a Defined Balance Sheet.

At December 31, 2001, subsidiaries of PPL owned undivided interests in the following facilities:

Electnc Construction Ownership Plant in Other Accumulated 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 contract is for five years beginning July 1, 2002, which is the day after in Colstnp Units I and 2, and Colstnp Unit 3, respectively. the termination date of the last of the two existing contracts, pursuant Each PPL Generation subsidiary provided its own funding for its to which PPL Montana presently supplies energy to Montana Power for share of the facility. Each receives a portion of the total output of the its default supply.

generabtng stations equal to its percentage ownership. The share of fuel Under the agreement, PPL EnergyPlus will supply 300 MW of around and other operating costs associated with the stations is reflected on the-clock electricity and 150 MW of on-peak electricity In December 2001, the Statement of Income 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 PPL and its subsidiaries are involved in numerous legal proceedings, with NUGs of $854 million, when its generation business was deregu claims and litigation in the ordinary course of business. PPL and its lated Effective January 1999, PPL Electric began reducing this liability subsidiaries cannot predict the ultimate outcome of such matters, or as an offset to "Energy purchases" on the Statement of Income. This whether such matters may result in material liabilities. reduction is based on the estimated timing of the purchases from the NUGs and projected market prices for this generation. The final existing Wholesale Energy Commitments NUG contract expires in 2014. In connection with the corporate realign As part of the purchase of generation assets from Montana Power, PPL ment, effective July 1, 2000, the remaining balance of this liability was Montana agreed to supply electricity under two wholesale transition ser transferred to PPL EnergyPlus. The liabilities associated with these above vice agreements. In addition, PPL Montana assumed a power purchase market NUG contracts were $580 million at December 31, 2001 agreement and another power sales agreement. In accordance with purchase accounting guidelines, PPL Montana recorded a liability of Commitments - Acquisitions and Development Activities

$118 million as the estimated fair value of these agreements at the PPL Global and its subsidiaries have committed additional capital and acquisition date. The liabilrty is being amortized over the agreement extended loans to certain affiliates, joint ventures and partnerships in terms as adjustments to "Wholesale energy marketing and trading" which they have an interest. At December 31, 2001, PPL Global and revenues and "Energy purchases" on the Statement of Income. The its subsidianes had approximately $561 million of such commitments.

unamortized balance at December 31, 2001 was $78 million and is The majonty of these commitments were for the purchase of LM-6000 included in "Other" in the "Deferred Credits and Other Noncurrent turbine generators from General Electric The General Electnc commit Liabilities" section of the Balance Sheet. ments have been reduced due to the decision to cancel generation In October 2001, PPL announced that PPL EnergyPlus had reached projects as described in Note 11 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 PPL CORPORATION 2001. ANNUAL REPORT (61

VJNM FC.W&WUSEC. QCICRIOMý orcfaroxcl MPSC Order market-cleanng price above the competitive level dunng that period. PPL In June 2001, the MPSC issued an order (MPSC Order) in which it EnergyPlus does not agree with the Market Monitor's conclusions that it found that Montana Power must continue to provide electnc service to exercised market power; in addition, the Market Monitor acknowledged in its customers at tanffed rates until its transition plan under the Montana his report that PJM's standards and rules did not prohibit PPL EnergyPlus' Electricity Utility Industry Restructunng and Customer Choice Act is finally conduct. In November 2001, the PUC issued an Investigation Order approved, and that purchasers of generating assets from Montana Power directing its Law Bureau to conduct an investigation into the PJM capacity must provide electricity to meet Montana Power's full load requirements market and the allegations in the Market Monitor's report. In January at pnces to Montana Power that reflect costs calculated as if the gener 2002, PPL filed comments as requested by the Investigation Order. The ating assets had not been sold. PPL Montana purchased Montana Power's Order does not suggest what, if any, action the PUC may take as a result interests in two coal-fired plants and 11 hydroelectric units in 1999. of the investigation, other than considering possible changes to its com In July 2001, PPL Montana filed a complaint against the MPSC with petitive safeguards. While PPL EnergyPlus and PPL Electric have filed the U S. District Court in Helena, Montana, challenging the MPSC Order. comments with the PUC as part of the investigation, they have taken In its complaint, PPL Montana asserted, among other things, that the the position that the PUC does not have jurisdiction to regulate the PJM Federal Power Act preempts states from exercising regulatory authonty capacity markets as those markets are for wholesale electncity trans over the sale of electricity in wholesale markets, and requested the court actions and accordingly are within the exclusive junsdiction of the FERC.

to declare the MPSC action preempted, unconstitutional and void. In In addition, PPL EnergyPlus and PPL Electric believe that PPL EnergyPlus' addition, the complaint requested that the MPSC be enjoined from seek actions under review were at all times lawful and consistent with the ing to exercise any authonty, control or regulation of wholesale sales rules of the market. At this time, neither PPL EnergyPlus nor PPL Electric from PPL Montana's generating assets. can predict the outcome of the PUC investigation or what action the At this time, PPL Montana cannot predict the outcome of the proceed PUC may take in connection with the investigation.

ings related to the MPSC Order, what actions the MPSC, the Montana FERC Market-based Rates Legislature or any other govemmental authonty may take on these or In December 1998, the FERC issued an order authorizing PPL EnergyPlus related matters, or the ultimate impact on PPL, PPL Energy Supply and to make wholesale sales of electric power and related products at market PPL Montana of any of these matters.

based rates. In that order, the FERC directed PPL EnergyPlus to file an Montana Power Shareholders' Utlgation updated market analysis within three years of the date of the order, and In August 2001, a purported class-action lawsuit was filed by a group of every three years thereafter. PPL EnergyPlus filed its initial updated mar shareholders of Montana Power against Montana Power, the directors of ket analysis in December 2001. Several parties thereafter filed interven Montana Power, certain unnamed advisors and consultants of Montana tions and protests requesting that, in light of the PJM Market Monitor's Power, and PPL Montana. The plaintiffs allege, among other things, that report described above, PPL EnergyPlus be required to provide additional Montana Power was required to, and did not, obtain shareholder approval information demonstrating that it has met the FERC's market power tests of the sale of Montana Power's generation assets to PPL Montana in necessary for PPL EnergyPlus to continue its market-based rate authority.

1999. Although most of the claims in the complaint are against Montana PPL EnergyPlus has responded to those protests and interventions. PPL Power, its board of directors, and its consultants and advisors, two claims EnergyPlus has taken the position that the FERC does not require the are asserted against PPL Montana. In the first claim, plaintiffs seek a economic test suggested by the intervenors and that, in any event, it declaration that because Montana Power shareholders did not vote on would meet such economic test if required by the FERC. The matter is the 1999 sale of generating assets to PPL Montana, that sale "was null currently pending before the FERC.

and void ab initio." The second claim alleges that PPL Montana was privy Proposed Montana Hydroelectric Initiative to and participated in a strategy whereby Montana Power would sell its In January 2002, the Montana Secretary of State certified, in accordance generation assets to PPL Montana without first obtaining Montana Power with applicable statutes, that it had approved the form of a proposed shareholder approval, and that PPL Montana has made net profits in Montana "Hydroelectnc Security Act" initiative. The proposed initiative excess of $100 million as the result of this alleged illegal sale. In the may be placed on the November 2002 statewide ballot if sufficient signa second claim, plaintiffs request that the court impose a "resulting and/or tures are obtained pnor to June 21, 2002. Among the stated purposes constructive trust" on both the generation assets themselves and all of the proposed initiative is to create an elected Montana public power profits, plus interest on the amounts subject to the trust. PPL Montana commission to determine whether purchasing hydroelectric dams in is unable to predict the outcome of this matter.

Montana is in the public interest. Such a commission could decide to PUC Investigation Order acquire PPL Montana's hydroelectric dams either pursuant to a negoti In November 2001, the PJM Market Monitor publicly released a report ated purchase or an acquisition at fair market value through the power of prepared for the PUC entitled "Capacity Market Questions" relating to condemnation. At this time, PPL, PPL Energy Supply and PPL Montana the pricing of installed capacity in the PJM daily market during the first cannot predict whether the proposed initiative will garner enough signa quarter of 2001. The report concludes that PPL EnergyPlus (identified in tures for placement on the November 2002 statewide ballot, whether the report as "Entity 1") was able to exercise market power to raise the there will be a successful legal challenge to the initiative, whether it

62) PPL CORPORATION 2001 ANNUAL REPORT

would pass if on the ballot or what impact, if any, the measure might The EPA has also developed new standards for ambient levels of ultimately have upon PPL Montana or its hydroelectric operations. PPL ozone and fine particulates in the U.S. These standards were challenged Montana has declared its opposition to, and intends to vigorously and remanded to the EPA by the D.C. Circuit Court of Appeals in 1999.

oppose, the initiative. 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.

Nuclear Insurance The new particulates standard, if finalized, may require further reductions PPL Susquehanna is a member of certain insurance programs which in SO 2 for certain PPL subsidianes and year-round NOx reductions com provide coverage for property damage to members' nuclear generating mencing in 2010-2012 at SIP-call levels in Pennsylvania, and at slightly stations. Facilities at the Susquehanna station are insured against less stnngent levels in Montana. The revised ozone standard, if finalized, property damage losses up to $2.75 billion under these programs PPL is not expected to have a material effect on facilities of PPL subsidiaries.

Susquehanna is also a member of an insurance program which provides Under the Clean Air Act, the EPA has been studying the health effects insurance coverage for the cost of replacement power during prolonged of hazardous air emissions from power plants and other sources in order outages of nuclear units caused by certain specified conditions. Under the to determine what emissions should be regulated, and has determined property and replacement power insurance programs, PPL Susquehanna that mercury emissions must be regulated In this regard, EPA is could be assessed retroactive premiums in the event of the insurers' expected to develop regulations by 2004.

adverse loss expenence At December 31, 2001, this maximum assess In 1999, the EPA initiated enforcement actions against several utilities, ment was about $20 million.

asserting that older, coal-fired power plants operated by those utilities PPL Susquehanna's public liability for claims resulting from a nuclear have, over the years, been modified in ways that subject them to more incident at the Susquehanna station is limited to about $9.5 billion stringent "New Source" requirements under the Clean Air Act The EPA under provisions of The Price Anderson Amendments Act of 1988. PPL has since issued notices of violation and commenced enforcement activi Susquehanna is protected against this liability by a combination of com ties against other utilities. Although the EPA has threatened to continue mercial insurance and an industry assessment program. In the event of expanding its enforcement actions, the future direction of the "New a nuclear incident at any of the reactors covered by The Pnce Anderson Source" requirements is presently unclear. Therefore, at this time, PPL is Amendments Act of 1988, PPL Susquehanna could be assessed up to unable to predict whether such EPA enforcement actions will be brought

$176 million per incident, payable at $20 million per year.

with respect to any of its affiliates' plants. However, the EPA regional Environmental Matters offices that regulate plants in Pennsylvania (Region Ill) and Montana Air (Region VIII) have indicated an intention to issue information requests The Clean Air Act deals, in part, with acid rain, attainment of federal to all utilities in their junsdiction, and the Region VIII office has issued ambient ozone standards and toxic air emissions in the U.S. PPL sub such a request to PPL Montana's Corette plant. PPL has responded to sidiaries are in substantial compliance with the Clean Air Act. the information request. PPL cannot presently predict what, if any, action The Bush administration and certain members of Congress have the EPA might take in this regard. Should the EPA or any state initiate made proposals regarding possible amendments to the Clean Air Act. one or more enforcement actions against PPL, compliance with any such These amendments could require significant further reductions In NOx, enforcement actions could result in additional capital and operating S02 and mercury and could possibly require measures to limit C0 2 . expenses in amounts which are not now determinable, but which could The Pennsylvania DEP has finalized regulations requinng further sea be significant.

sonal (May-June) NOx reductions to 80% from 1990 levels starting in The EPA is also proposing to revise its regulations in a way that 2003. These further reductions are based on the requirements of the will require power plants to meet "New Source" performance standards Northeast Ozone Transport Region Memorandum of Understanding and and/or undergo "New Source" review for many maintenance and repair two EPA ambient ozone Initiatives: the September 1998 EPA State activities that are currently exempt Implementation Plan (SIP) call (i.e., EPA's requirement for states to revise The New Jersey DEP and some New Jersey residents have raised their SIPs) issued under Section 110 of the Clean Air Act, requinng environmental concerns with respect to the Martins Creek Plant, particu reductions from 22 eastern states, including Pennsylvania; and the EPA's larly with respect to SO2 emissions. PPL Martins Creek is discussing approval of petitions filed by northeastern states, requinng reductions these concerns with the New Jersey DER In addition, the plant experi from sources in 12 northeastern states and Washington D C., including enced several opacity violations in the first and second quarters of PPL sources. The EPA's SIP-call was substantially upheld by the D.C. 2001, for which it paid a civil penalty of $30,300 and funded an environ Circuit Court of Appeals in an appeals proceeding. Although the Court mental project for $90,000. The cost of addressing New Jersey's SO2 extended the implementation deadline to May 2004, the Pennsylvania concerns and the opacity issued is not now determinable but could be DEP has not changed its rules accordingly. PPL expects to achieve the significant See Note 11 for information on the Lower Mt. Bethel appeal 2003 NOx reductions with the recent installation of SCR technology on by the New Jersey DER the Montour units and the possible use of SCR or SNCR technology on a Brunner Island unit.

PPL CORPORATION 2001 ANNUAL REPORT (63

R U-U@ VC MOMUSAL QM-Iattl Crf.TCVUXCI Water/Waste Utilities are also investigating the potential for any mercury contamina The final NPDES permit for the Montour plant contains stringent limits tion from gas meters and regulators. Accordingly, PPL Gas Utilities and for iron discharges. The results of a toxic reduction study show that Pennsylvania DEP have agreed to add 72 meter/regulation sites to the additional water treatment facilities or operational changes are needed consent order.

at this station. A plan for these changes has been developed and was At December 31, 2001, PPL Electnc and PPL Gas Utilities had submitted to the Pennsylvania DEP in August 2001. accrued approximately $5 million and $12 million, representing the esti A final NPDES permit has been issued to the Brunner Island plant. mated amounts they will have to spend for site remediation, including The permit contains a provision requinng further studies on the thermal those sites covered by each company's consent orders mentioned above.

impact of the cooling water discharge from the plant. Depending on the In October 1999, the Montana Supreme Court held in favor of several outcome of these studies, the plant could be subject to capital and citizens' groups that the right to a clean and healthful environment is a operating costs that are not now determinable but could be significant. fundamental right guaranteed by the Montana Constitution. The court's The EPA has significantly tightened the water quality standard for ruling could result in significantly more stringent environmental laws and arsenic. The lowered standard may require PPL Generation to further regulations, as well as an increase in citizens' suits under Montana's treat wastewater and/or take abatement action at several of its sub environmental laws. The effect on PPL Montana of any such changes in sidianes' power plants, the cost of which is not now determinable but laws or regulations or any such increase in legal actions is not currently which could be significant. determinable, but it could be significant.

The EPA recently finalized requirements for new or modified water Under the Montana Power Asset Purchase Agreement, PPL Montana intake structures. These requirements will affect where generating facili is indemnified by Montana Power for any pre-acquisition environmental ties are built, will establish intake design standards, and could lead to liabilities. However, this indemnification is conditioned on certain circum requirements for cooling towers at new and modified power plants. stances that can result in PPL Montana and Montana Power shanng in Another new rule, expected to be finalized in 2003, will address existing certain costs within limits set forth in the agreement.

structures. Each of these rules could impose significant costs on PPL Future cleanup or remediation work at sites currently under review, Generation, which are not now determinable but which could be significant. or at sites not currently identified, may result in matenal additional oper Capital expenditures through the year 2003 to correct groundwater ating costs for PPL subsidiaries that cannot be estimated at this time.

degradation at fossil-fueled generating stations and to address wastewater General control at PPL Generation's facilities, are included inthe table of construc Certain of PPL's affiliates have electric distribution operations in the U.K.

tion expenditures in the section entitled "Financial Condition - Capital and Latin Amenca. PPL believes that these operations are in compliance Expenditure Requirements" in Management's Discussion and Analysis.

with all applicable laws and government regulations to protect the environ Additional capital expenditures could be required beyond the year 2006 ment PPL is not aware of any matenal administrative proceeding against in amounts which are not now determinable but which could be signifi these companies with respect to any environmental matter.

cant. Actions taken to correct groundwater degradation, to comply with Due to the environmental issues discussed above or other environ the environmental regulations and to address wastewater control, are mental matters, PPL subsidiaries may be required to modify, replace or also expected to result in increased operating costs in amounts which cease operating certain facilities to comply with statutes, regulations and are not now determinable but which could be significant.

actions by regulatory bodies or courts. Inthis regard, PPL subsidiaries also Superfund and Other Remediatton may incur capital expenditures, operating expenses and other costs in In 1995, PPL Electric entered into a consent order with the Pennsylvania amounts which are not now determinable but which could be significant.

DEP to address a number of sites where it may be liable for remediation.

Credit Support This may include potential PCB contamination at certain PPL Electric PPL and PPL Energy Supply provide certain guarantees for their sub substations and pole sites; potential contamination at a number of coal sidiaries. PPL has guaranteed all of the debt of PPL Capital Funding. As gas manufacturing facilities formerly owned or operated by PPL Electric; of December 31, 2001, PPL had guaranteed $1.3 billion of PPL Capital and oil or other contamination which may exist at some of PPL Electric's Funding medium-term notes. PPL had also guaranteed certain obligations former generating facilities. In connection with the July 1, 2000, corpo under power purchase and sales agreements of PPL EnergyPlus for up to rate realignment, PPL Electric's generation facilities were transferred

$1 billion and of PPL Montana for up to $138 million. As of December to subsidiaries of PPL Generation. As of December 31, 2001, work has 31, 2001, there were $31 million of guarantees outstanding under the been completed on approximately 80% of the sites included in the power purchase agreement and none under the sales agreement. In consent order.

addition, PPL had guaranteed certain obligations of other subsidiaries, In 1996, PPL Gas Utilities entered into a similar consent order with totaling $272 million at December 31, 2001. As of December 31, 2001, the Pennsylvania DEP to address a number of sites where subsidiaries PPL Energy Supply has also guaranteed certain obligations under power of PPL Gas Utilities may be liable for remediation. The sites primarily purchase and sales agreements of PPL EnergyPlus for up to $121 mil include former coal gas manufacturing facilities. Subsidianes of PPL Gas lion and certain obligations of other subsidianes totaling $600 million.

64) PPL CORPORATION 2001. ANNUAL REPORT

Source of Labor Supply quarter of 2002. The potential impairment relates to reporting units As of December 31, 2001, PPL and its subsidiaries had 12,496 full within the International segment.

time employees. This included 3,594 in PPL Electric and 425 in PPL Gas SFAS 143 Utilities, 2,550 in PPL Generation, 1,943 in PPL EnergyPlus, 44 in PPL In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retire Global, 2,765 in several Central and South Amencan electric companies ment Obligations," on the accounting for obligations associated with the controlled by PPL Global and 1,175 in PPL Services.

retirement of long-lived assets. SFAS 143 requires a liability to be recog Approximately 54%, or 5,243, of PPL's domestic workforce are mem nized in the financial statements for retirement obligations meeting spe bers of labor unions, with four IBEW locals representing nearly 4,200 cific criteria. Measurement of the initial obligation is to approximate fair employees. The other unions primarily represent small locals of gas util value, with an equivalent amount recorded as an increase in the value of ity employees in Pennsylvania. The bargaining agreement with the largest the capitalized asset The asset will be depreciated in accordance with union was negotiated in 1998 and expires in May 2002. Eight new three normal depreciation policy and the liability will be increased, with a year contracts with smaller gas utility locals in Pennsylvania were negoti charge to the income statement, until the obligation is settled. SFAS 143 ated in 2000 and five additional agreements with two-year terms were is effective for fiscal years beginning after June 15, 2002. The potential negotiated in 2001. New contracts were also concluded with two IBEW impact of adopting SFAS 143 is not yet determinable, but may be matenal.

locals in Montana PPL Montana is currently negotiating with the Teamsters Union for a new agreement. 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, PPL Global provided temporary financing to WPDL and WPD 1953 in SFAS 144 retains the requirements of SEAS 121 to (a) recognize an connection with the acquisition of Hyder The outstanding loan receiv impairment loss only if the carrying amount is not recoverable from ables and accrued interest, 154 5 million Bntish pounds sterling undiscounted cash flows and (b) measure an impairment loss as the (approximately $220 million), were repaid in May 2001.

difference between the carrying amount and fair value of the asset For At December 31, 2000, PPL Global had a $135 million note payable long-lived assets to be disposed of, SFAS 144 establishes a single to an affiliate of WPD 1953. The note was denominated in U.S. dollars, accounting model based on the framework established in SFAS 121 and provided for interest at market rates. PPL Global repaid this note The accounting model for long-lived assets to be disposed of by sale in January 2001 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 SFAS 141 and Transactions," for the disposal of segments of a business. SFAS In June 2001, the FASB issued SFAS 141, "Business Combinations," 144 also broadens the reporting of discontinued operations PPL which eliminates the pooling-of-interest method of accounting for busi adopted SFAS 144 on January 1, 2002, with no matenal impact on ness combinations and requires the use of the purchase method. In the financial statements 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 PPL adopted SFAS 133, "Accounting for Derivative Instruments and rial impact on the financial statements.

Hedging Activities," on January 1, 2001 Upon adoption and in accor SFAS 142 dance with the transition provisions of SFAS 133, PPL recorded a cumu In June 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible lative-effect credit of $11 million in earnings, included as an increase to Assets," which eliminates the amortization of goodwill and other acquired "Wholesale energy market and trading" revenues and a decrease to intangible assets with indefinite economic useful lives. SFAS 142 requires "Energy purchases" on the Statement of Income. PPL also recorded a an annual impairment test of goodwill and other intangible assets that are cumulative-effect charge of $182 million in "Accumulated other compre not subject to amortization PPL adopted SFAS 142 on January 1, 2002 hensive income," a component of Shareowners' Common Equity As In accordance with the provisions of SEAS 142, PPL ceased amortiza of December 31, 2001, the balance in "Accumulated other comprehen tion of goodwill and all intangible assets with indefinite useful lives The sive income" related to unrealized gains and losses on qualifying denva elimination of amortization will result in $18 million less expense (pre tives was a net gain of $23 million, as a result of reclassifying part of tax) in 2002. In addition, PPL is in the process of conducting the transi the transition adJustment into earnings, changes in market prices and tion impairment analysis and may record a goodwill impairment of up to the adoption of DIG Issue C15 (see discussion in "Implementation

$100 million (pre-tax) as a change in accounting principle in the first Issues" on the following page)

PPL CORPORATION 2001 ANNUAL REPORT (65

Ga WCI ýC. IW.A". UKE (ARfXjact CUSMIMC Management of Market Risk Exposures As a result of an unplanned outage, Enron's bankruptcy and changes PPL's market nsk exposure is the adverse effect on the value of a trans in other economic conditions, PPL discontinued certain cash flow hedges action that results from a change in commodity prices, interest rates which resulted in a net loss of $14 million, after-tax, for the 12 months or currency exchange rates. The market risk associated with commodity ended December 31, 2001 (reported in "Wholesale energy marketing pnce, interest rate and foreign exchange contracts is managed by the and trading" revenues and "Energy purchases' on the Statement of establishment and monitonng of parameters that limit the types and Income). The impact on the financial statements resulting from cash degree of market risk that may be undertaken. PPL actively manages flow hedge ineffectiveness for the 12 months ended December 31, the market risk inherent in its commodity, debt and foreign currency posi 2001 was immaterial.

tions. The PPL Board of Directors has adopted risk management policies As of December 31, 2001, the deferred net gain on denvative instru to manage the risk exposures related to energy prices, interest rates ments in "Accumulated other comprehensive income" expected to be and foreign currency exchange rates. These policies monitor and assist reclassified into earnings dunng the next 12 months was $6 million.

in controlling these market risks and use denvative instruments to man Implementation Issues age some associated commodity, debt, and foreign currency activities.

On June 29, 2001, the FASB issued definitive guidance on DIG Issue PPL's derivative activities are subject to the management, direction and C15: "Scope Exceptions: Normal Purchases and Normal Sales Exception control of the RMC. The RMC is composed of the chief financial officer for Option-Type Contracts and Forward Contracts in Electricity." Issue C15 and other officers of PPL. The RMC reports to the Finance Committee provides additional guidance on the classification and application of of the PPL Board of Directors on the scope of its derivative activities.

SFAS 133 relating to purchases and sales of electricity utilizing forward The RMC sets forth risk-management philosophy and objectives through contracts and options. This guidance became effective as of July 1, a corporate policy, provides guidelines for denvative-instrument usage, 2001. In December 2001, the FASB revised the guidance in Issue C15, and establishes procedures for control and valuation, counterparty credit pnncipally related to the eligibility of options for the normal purchases approval and the monitoring and reporting of denvative activity.

and normal sales exception. The revised guidance is effective as of PPL utilizes forward contracts, futures contracts, options and swaps January 1, 2002.

as part of its nsk-management strategy to minimize unanticipated fluctu Purchases and sales of forward electricity and option contracts that ations in eamings caused by commodity price, interest rate and foreign require physical delivery and which are expected to be used or sold by currency volatility. All denvatives are recognized on the balance sheet the reporting entity in the normal course of business would generally be at their fair value, unless they meet SFAS 133 criteria for exclusion considered "normal purchases and normal sales" under SFAS 133.

(see discussion in "Implementation Issues" below).

These transactions, while within the scope of SFAS 133, are not required Fair Value Hedges to be marked to fair value in the financial statements because they qual PPL enters into financial contracts to hedge a portion of the fair value ify for the normal purchases and sales exception. As of December 31, of firm commitments of forward electricity sales and to hedge fluctua 2001, "Accumulated other comprehensive income" included a net gain tions in market value of existing debt issuances. These contracts range of $11 million related to forward transactions classified as cash flow in maturity through 2006. For the 12 months ended December 31, hedges pnor to adoption of DIG Issue C15. This gain will be reversed 2001, PPL recognized a net gain of $7 million, after-tax, resulting from from "Accumulated other comprehensive income" and recognized in firm commitments that no longer qualified as fair value hedges (reported earnings as the contracts deliver through 2008.

in "Wholesale energy marketing and trading" revenues and "Energy pur Unrealized Galns/(Losses) on Qualifying Derivatives chases" on the Statement of Income). PPL did not recognize any gains or losses from the ineffective portion of fair value hedges. (Millions of dollars, after-tax) December 31, 2001 Cumulative unrealized gain on qualifying denvatives, Cash Row Hedges beginning of period: $ 0 PPL enters into physical and financial contracts, including forwards, Unrealized gains (losses) arising dunng period futures and swaps, to hedge the pnce risk associated with electric, gas Cumulative effect of change in accounting and oil commodities. Additionally, PPL enters into financial interest rate pnnciple at January 1, 2001 (182) swap contracts to hedge interest expense associated with both existing Net reclassification into eamings (16) and anticipated debt issuances. These contracts and swaps range in Net change associated with current penod hedging transactions 221 maturity through 2004. PPL also enters into foreign currency forward contracts to hedge exchange rates associated with firm commitments Unrealized gain on qualifying derivatives 23 denominated in foreign currencies and to hedge the net investment of Cumulative unrealized gain on qualifying denvatives, foreign operations. These forward contracts range in matunty through end of penod $ 23 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.

66) PPL CORPORATION 2001 ANNUAL REPORT

Credit Concentration Attorneys general in several western states, Including California, PPL enters into contracts with many entities for the purchase and sale have begun investigations related to the electricity supply situation in of energy. Most of these contracts are considered a normal part of doing California and other western states The FERC has determined that all business and, as such, the mark-to-market value of these contracts is sellers of energy in the California markets, including PPL Montana, not reflected in the financial statements. However, the mark-to-market should be subject to refund liability for the period beginning October 2, value of these contracts is considered when committing to new business 2000 through June 20, 2001, and has initiated an evidentiary hearing from a credit perspective. At year-end, PPL had a credit exposure of concerning refund amounts The FERC also Is considering whether to

$412 million to energy trading partners. The majonty of this amount order refunds for sales made in the Pacific Northwest, including sales was the mark-to-market value of multi-year contracts for energy sales. made by PPL Montana. The FERC Administrative Law Judge assigned Therefore, if the counterparties fail to perform their obligations, PPL to this proceeding has recommended that no refunds be ordered for would not expenence an Immediate financial loss, but would expenence sales into the Pacific Northwest. The FERC presently is considenng this lower revenues in future years to the extent that replacement sales recommendation. PPL cannot predict whether or the extent to which any could not be made at the same pnces as the defaulted contracts. Of of its subsidianes will be the target of any governmental investigation or the $412 million, four counterparties account for 81% of the exposure. named in these lawsuits, refund proceedings or other lawsuits, the out No other individual counterparty accounted for more than 3% of the expo come of any such proceedings or whether the ultimate impact on PPL sure. Each of the four pnmary counterparties has an "investment grade" of the electricrty supply situation in Califomia and other westem states credit rating with Standard & Poor's, with the exception of one counter will be material 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 In connection with the December 2, 2001 bankruptcy filings by Enron agreements with all of its counterparties to minimize credit exposure.

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 Through subsidianes, PPL has made approximately $18 million of sales of Income Additionally, certain of these contracts with Enron extended to the Califomia ISO, for which PPL has not yet been paid in full. Given through 2006, and were at prices more favorable to PPL than current the myriad of electricity supply problems presently faced by the Califomia market pnces. However, there is no further accounting charge to be electric utilities and the Califomia ISO, PPL cannot predict whether or recorded. PPL expects to make a claim in Enron's bankruptcy proceeding when it will receive payment As of December 31, 2001, PPL has fully with respect to all amounts payable by Enron resulting from the termina reserved for possible underrecoveries of payments for these sales. tion of these contracts.

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 PPL Global has a 51% economic interest in WPD 1953, a 15.4% equity trade practices and violations of state antitrust laws, among other things, investor in Teesside Power Limited, the owner of the 1,875 MW Teesside and seek price caps on wholesale sales in California and other western Power Station, located in northeast England. Through its European affil power markets, refunds of excess profits allegedly earned on these sales ates, Enron was an owner, operator and power purchaser of the station's of energy, and other relief, including treble damages and attorneys' fees.

output As a result of Enron being placed into receivership in the U.K.

Certain of PPL's subsidiaries have intervened in the FERC proceedings in and its default on obligations under the power purchase agreements, order to protect their Interests, but have not been named as defendants WPD 1953 wrote off its entire equity investment in Teesside Power in any of the court actions alleging abuses of market power, manipulation Limited. PPL Global's share of the impairment loss was $21 million of market pnces, unfair trade practices and violations of state antitrust and is included in "Wnte-down of international energy projects," a com laws. A PPL subsidiary has been named as a defendant in a declaratory ponent of "Other Charges" on the Statement of Income.

judgment action initiated by the State of Califomia to prevent certain In connection with the Enron bankruptcy and the probable resulting members of the California Power Exchange from seeking compensation loss of Teesside cash flows, PPL and its subsidianes evaluated the carry for the state's seizure of certain energy contracts. PPL Montana is a ing value of the investment in WPD 1953 and WPDL. Fair value, mea member of the California Power Exchange, but it has no energy contracts sured using discounted cash flows, was compared to the carrying value with or through the Califomia Power Exchange and has not sought com pensation in connection with the state's seizure.

PPL CORPORATION 2001 ANNUAL REPORT (67

QEBQC-- W.GMEWOUT-C. 0 11"JuilaW, U(xc:ca3ufD to determine whether impairment existed at December 31, 2001. Fair December 31, 2001, PPL Global recorded an impairment loss in the value was determined considenng the loss of the value of the future carrying value of its net assets in CEMAR of $179 million, reflected cash flows from the Teesside Power Station and a forecasted reduction in "Write-down of international energy projects." In addition, CEMAR in future operating cash flows at WPD 1953 and WPDL. The probability increased its valuation allowance in deferred tax assets, thereby record weighted impairment loss was $117 million, after-tax. The pre-tax charge ing $44 million in additional foreign deferred income taxes. A related was $134 million, and was recorded as a charge to "Wnte-down of inter $6 million credit to "Minority Interest" was also reflected on the State national energy projects." ment of Income. The net result of these transactions was a $217 mil PPL Global owns 89 6% of CEMAR, which distributes and sells elec lion charge to earnings. PPL Global currently anticipates writing off the tncity in Brazil, under a 30-year concession agreement with the govem remaining portion of its CEMAR investment, approximately $100 million, ment. The combined effects of growth in demand, decreased rainfall on in 2002.

the country's heavily hydroelectnc-dependent generating capacity and As a result of the financial difficulties discussed above, CEMAR has delays in the development of new non-hydroelectnc generation have led failed to pay certain of its creditors for obligations when due. CEMAR is to shortages of electricity in certain regions. As a result, the Brazilian currently in discussions with creditors, governmental officials, regulators government implemented countrywide electricity rationing in mid-2001. and other parties to address these problems.

In addition, the wholesale energy markets in Brazil have been substan In addition, CEMAR expects that it will not be in compliance with tially disrupted. CEMAR's results of operations, its cash flows, and its the financial covenants in its $150 million debenture indenture when it continued ability to meet its financial obligations have detenorated due closes its books for the quarter ended December 31, 2001. In that case, to the continuing impact of the electricity rationing, the disruption in the CEMAR will be required to notify the indenture agent. In accordance with energy markets, the failure of the electricity regulator to adequately the indenture, the agent will call a meeting of the holders of the deben address these problems, the resulting effects on the Brazilian capital tures within three business days of the notice to hold a vote regarding markets and related factors. the acceleration of the debentures. Unless three-fourths of the holders In December 2001 and January 2002, the Brazilian electricity regu vote against acceleration, the agent will be obligated under the indenture lator issued tariff rulings that CEMAR believes are inadequate to com to accelerate the debentures. CEMAR expects the required notice to the pensate for CEMAR's rationing-related losses and to meet its ongoing indenture agent to occur in the first quarter of 2002.

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 In August 2001, PPL completed a strategic initiative to confirm the rupted and recent actions by the electricity regulator indicate that ade structural separation of PPL Electric from PPL and PPL's other affiliated quate compensation to CEMAR for its transactions in that market may companies. This initiative enabled PPL Electnc to reduce business not be made. Finally, the continued problems in the Brazilian energy nsk by secunng a supply contract adequate to meet its PLR obligations, market and the lack of appropnate regulatory actions have significantly enabled PPL EnergyPlus to lock in an electric supply agreement at decreased the availability of local financing for CEMAR.

current favorable prices, and enabled PPL to raise capital at attractive As a result of the above events, PPL Global estimates that the rates for its unregulated businesses, while allowing PPL to retain valu long-term viability of the CEMAR operation is jeopardized and that there able advantages related to operating both energy supply and energy is minimal probability of positive future cash flows. Consequently, at delivery businesses.

68) PPL CORPORATION 2001 ANNUAL REPORT

In connection with this initiative, PPL Electnc: filing the articles of division and the plan of division with the Secretary

"*obtained a long-term electric supply contract to meet its PLR obliga of State of the Commonwealth of Pennsylvania. This filing was made tions, at pnces generally equal to the pre-determined "capped" rates it in August 2001.

is authorized to charge its PLR customers from 2002 through 2009 As part of the strategic initiative, PPL Electric solicited bids to con under the 1998 PUC settlement order; tract with energy suppliers to meet its obligation to deliver energy to

"* agreed to limit its businesses to electric transmission and distnbution its customers from 2002 through 2009. In June 2001, PPL Electnc and activities relating to or ansing out of those businesses; announced that PPL EnergyPlus was the low bidder, among six bids

"*adopted amendments to its Articles of Incorporation and Bylaws con examined, and was selected to provide the energy supply requirements taining corporate governance and operating provisions designed to of PPL Electric from 2002 through 2009. Under this contract, PPL reinforce its corporate separateness from affiliated companies; EnergyPlus will provide electricity at pre-determined capped pnces that

"*appointed an independent director to its Board of Directors and PPL Electnc is authorized to charge its PLR customers, and received required the unanimous consent of the Board of Directors, including a $90 million payment to offset differences between the revenues the consent of the independent director, to amendments to these cor expected under the capped pnces and projected market prices through porate governance and operating provisions or to the commencement the life of the supply agreement (as projected by PPL EnergyPlus at the of any insolvency proceeding, including any filing of a voluntary petition time of its bid). The contract resulted in PPL EnergyPlus having an eight in bankruptcy or other similar actions; year contract at current market prices. PPL has guaranteed the obliga

"* appointed an independent compliance administrator to review, on a tions of PPL EnergyPlus under the new contract.

semi-annual basis, its compliance with the new corporate governance In July 2001, the energy supply contract was approved by the PUC and operating requirements contained in its amended Articles of and accepted for filing by the FERC.

Incorporation and Bylaws; and Also in July 2001, PPL Electric filed a shelf registration statement

"* adopted a plan of division pursuant to the Pennsylvania Business with the SEC to issue up to $900 million in debt. In August 2001, PPL Corporation Law The plan of division resulted in two separate corpora Electnc sold $800 million of senior secured bonds under this registration tions. PPL Electnc was the surviving corporation and a new statement. The offenng consisted of two series of bonds. $300 million Pennsylvania corporation was created. Under the plan of division, $5 of 51/% Series due 2007 and $500 million of 6%% Senes due 2009 million of cash and certain of PPL Electric's potential liabilities were PPL Electric used a portion of the proceeds from these debt issuances to allocated to the new corporation. PPL has guaranteed the obligations make the $90 million up-front payment to PPL EnergyPlus, and $280 mil of the new corporation with respect to such liabilities. 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.

The enhancements to PPL Electnc's legal separation from its affil Taken collectively, the steps in the strategic initiative are intended ates are Intended to minimize the risk that a court would order PPL to protect the customers of PPL Electric from volatile energy prices and Electnc's assets and liabilities to be substantively consolidated with facilitate a significant increase in leverage at PPL Electric, while lowenng those of PPL or another affiliate of PPL in the event that PPL or another its cost of capital. PPL's shareowners also benefited from this initiative PPL affiliate were to become a debtor in a bankruptcy case because it provided low-cost capital to the higher-growth, unregulated At a special meeting of PPL Electric's shareowners held on July 17, side of PPL's business.

2001, the plan of division and the amendments to PPL Electric's Articles of Incorporation and Bylaws were approved, and became effective upon PPL CORPORATION 2001 ANNUAL REPORT (69

MEEM CTII ICUMM mm 3LW4)@M 1945 First Mortgage Bond Indenture PPL b. It requires no initial net investment or IBEW International Brotherhood of Electncal Electnc's Mortgage and Deed of Trust, dated an initial net investment that is smaller Workers.

as of October 1, 1945, to Bankers Trust than would be required for other types Company as trustee, as supplemented. ICP Incentive Compensation Plan.

of contracts that would be expected to have a similar response to changes in ICPKE Incentive Compensation Plan for Key 2001 Senior Secured Bond Indenture PPL market factors. Employees.

Electric's Indenture, dated as of August 1,

c. Its terms require or permit net settlement, 2001, to JPMorgan Chase Bank, as trustee, IRS Internal Revenue Service.

it can readily be settled net by a means as supplemented.

outside the contract, or it provides for ISO Independent System Operator.

AFUDC (Allowance for Funds Used During delivery of an asset that puts the recipient Construction) The cost of equity and debt ITC Intangible transition charge on customer in a position not substantially different funds used to finance construction projects of bills to recover intangible transition costs from net settlement.

regulated businesses that Is capitalized as associated with secuntizing stranded costs DIG Derivatives Implementation Group. under the Customer Choice Act.

part of construction cost.

APB Accounting Principles Board. DOE Department of Energy. JCP&L Jersey Central Power & Light Company.

Bangor Hydro Bangor Hydro-Electnc Company. DRIP Dividend Reinvestment Plan. kWh Kilowatt-hours.

EC Electricidad de Centroamenca, S A. kVA Kilovolt-amperes.

BG&E Baltimore Gas & Electric Company.

de C.V, an El Salvadoran holding company BGG Bolivian Generating Group, LLC, an MBOR London Interbank Offered Rate.

and the majority owner of Del Sur. PPL Global energy consortium with a 50% interest in an has 100% ownership of EC. MIrant Mirant Corporation, formerly electric generating company in Bolivia. Southern Energy Inc., a diversified energy EGS Electnc Generation Supplier.

CEMAR Companhia Energ6tica do Maranh~o, company based in Atlanta. PPL Global and a Brazilian electric distribution company in EITF (Emerging Issues Task Force) An organi Mirant jointly own WPD 1953.

zation that assists the FASB in improving which PPL Global has a majority ownership Montana Power The Montana Power financial reporting through the identification, interest. Company, a Montana-based company engaged discussion and resolution of financial issues CGE Compaiia General Electncidad, SA, a in diversified energy and communication within the framework of existing authoritative distributor of energy in Chile and Argentina in related businesses. Montana Power sold its literature.

which PPL Global has a minority ownership generating assets to PPL Montana in Emel Empresas Emel, S.A., a Chilean December 1999.

interest.

electnc distribution holding company of which Clean Air Act Federal legislation enacted to MPSC Montana Public Service Commission.

PPL Global has majority ownership.

address certain environmental issues related MW Megawatts.

EMF Electric and magnetic fields.

to air emissions including acid rain, ozone and toxic air emissions. NOx Nitrogen Oxide.

Enrichment The concentration of fissionable isotopes to produce a fuel suitable for use NPDES National Pollutant Discharge CO2 Carbon Dioxide.

in a nuclear reactor. Elimination System.

CTC Competitive transition charge on cus tomer bills to recover allowable transition EPA Environmental Protection Agency. NRC (Nuclear Regulatory Commission) Federal costs under the Customer Choice Act. agency that regulates operation of nuclear EPS Earnings per Share.

power facilities.

Customer Choice Act (Pennsylvania Electricity ESOP Employee Stock Ownership Plan.

NUGs (Non-Utility Generators) Generating Generation Customer Choice and Competition EWG Exempt Wholesale Generator. plants not owned by public utilities, whose Act) Legislation enacted to restructure the electrical output must be purchased by state's electric utility industry to create retail Fabrication The process that manufactures access to a competitive market for generation utilities under the PURPA if the plant meets nuclear fuel assemblies for insertion into of electricity certain cnteria.

the reactor.

DelSur Distribuidora Electricidad del Sur S.A., OSM United States Office of Surface Mining.

FASB (Financial Accounting Standards Board) an electric distnbutlon company in El Salvador, A rulemaking organization that establishes PCB (Polychlonnated Biphenyl) Additive a majority of which is owned by EC. financial accounting and reporting standards. to oil used in certain electrical equipment DEP Department of Environmental Protection. up to the late-1970s. Now classified as a FERC (Federal Energy Regulatory Commission) hazardous chemical.

Federal agency that regulates interstate trans Derivative A financial instrument or other mission and wholesale sales of electricity and PEPS Units (Premium Equity Participating contract with all three of the following related matters. Secunty Units) Securities issued by PPL characteristics:

a. It has (1) one or more underlyings and Capital Funding Trust I and PPL, consisting GAAP Generally Accepted Accounting of a Preferred Security and a forward contract (2) one or more notional amounts or pay Principles.

ment provisions or both. Those terms to purchase PPL Corporation common stock.

Hyder Hyder Limited, a subsidiary of WPDL determine the amount of the settlement PJM (PJM Interconnection, LLC) Operates the and previous owner of South Wales Electncity or settlements, and, in some cases, electric transmission network and electnc plc. In March 2001, South Wales Electncity plc whether or not a settlement is required. energy market in the mid-Atlantic regjon of the was acquired by WPD 1953 and renamed United States.

WPD (South Wales).

70) PPL CORPORATION 2001 ANNUAL REPORT

PLR Provider of Last Resort, refers to PPL PPL Global PPL Global, LLC, a subsidiary RMC Risk Management Committee Electnc providing electricity to retail customers of PPL Energy Supply that invests in and RTO Regional Transmission Organization.

within its delivery territory who have chosen develops domestic and intemational power not to shop for electricity under the Customer projects and owns and operates international SCR Selective Catalytic Reduction.

Choice Act. power projects SEC Securities and Exchange Commission PPL PPL Corporation, the parent holding com PPL Holtwood PPL Hottwood, LLC, a subsidiary SERP Supplemental Executive Retirement Plan.

pany of PPL Electric, PPL Energy Funding and of PPL Generation that owns PPL's hydroelec other subsidiaries tric generating operations in Pennsylvania. SFAS (Statement of Financial Accounting Standards) Accounting and financial reporting PPL Capital Funding PPL Capital Funding, Inc., PPL Maine PPL Maine, LLC, a subsidiary of rules issued by the FASB.

a PPL financing subsidiary. PPL Generation that owns generating opera tions in Maine SNCR Selective Non-Catalytic Reduction PPL Capital Funding Trust I A Delaware statutory business trust created to issue PPL Martins Creek PPL Martins Creek, LLC, a SO2 Sulfur Dioxide.

PEPS Units, whose common secunties are fossil generating subsidiary of PPL Generation Superfund Federal and state environmental held by PPL. legislation that addresses remediation of con PPL Montana PPL Montana, LLC, an indirect PPL Capital Trust A Delaware statutory subsidiary of PPL Generation that generates taminated sites.

business trust created to issue Preferred electricity for wholesale and retail sales in SWEB The trading name for South Western Secunties, whose common securities are Montana and the Northwest.

Electricity plc, a British regional electric utility held by PPL Electric PPL Montour PPL Montour, LLC, a fossil gen company. Following the sale of its supply PPL Capital Trust II A Delaware statutory erating subsidiary of PPL Generation. business in 1999, SWEB was renamed business trust created to issue Preferred Western Power Distnbution and then WPD PPL Services PPL Services Corporation, Securities, whose common securities are (South West). See WPD (South West), below a subsidiary of PPL that provides shared held by PPL Electric. Synfuel projects Production facilities that services for PPL and its subsidianes.

PPL Coal Supply A partnership between manufacture synthetic fuel from coal or coal PPL Susquehanna PPL Susquehanna, LLC, PPL Coal Holdings, LLC (a subsidiary of PPL by-products. Favorable federal tax credits the nuclear generating subsidiary of PPL are available on qualified synfuel products.

Generation) and Iris Energy, LLC. PPL Coal Generation.

Supply procures coal, which it sells to PPL Tolling agreement Agreement whereby PPL, Generation power plants and to Ins Energy PPL Transition Bond Company PPL Transition as owner of an electric generating facility, for purposes of producing synfuel Bond Company, LLC, a wholly owned subsidiary agrees to use that facility to convert ('toll")

of PPL Electric formed to issue transition PPL Electric PPL Electric Utilities Corporation, fuel provided by a third party into electric bonds under the Customer Choice Act.

a regulated utilrty subsidiary of PPL that trans energy for delivery back to the third party.

mits and distnbutes electricity in rts service Preferred Securities Company-obligated UF Inflation-indexed peso-denominated unit.

terntory and provides electnc supply to retail mandatonly redeemable preferred securities customers in this temtory as a PLR. issued by PPL Capital Trust, PPL Capital Trust II UGI UGI Corporation.

and PPL Capital Funding Trust I, holding solely PPL Energy Funding PPL Energy Funding VEBA (Voluntary Employee Benefit Association debentures of PPL Electric, in the case of PPL Corporation, which is a subsidiary of PPL and Trust) Trust accounts for health and welfare Capital Trust and PPL Capital Trust II, and the parent company of PPL Energy Supply. plans for future benefit payments for employ solely debentures of PPL Capital Funding, in ees, retirees or their beneficiaries.

PPL EnergyPlus PPL EnergyPlus, LLC, a the case of PPL Capital Funding Trust I.

subsidiary of PPL Energy Supply that markets WPD (South Wales) Western Power PRP Potentially Responsible Parties under wholesale and retail electricity and supplies Distnbution (South Wales) plc, a Welsh Superfund.

energy and energy services in newly deregu regional electric utility company.

lated markets. PUC (Pennsylvania Public Utilrty Commission)

WPD (South West) Western Power State agency that regulates certain ratemak PPL Energy Supply PPL Energy Supply, LLC, Distribution (South West) plc, a Bntish ing, services, accounting and operations of the parent company of PPL Generation, PPL regional electric utility company.

Pennsylvania utilities EnergyPlus, PPL Global and other subsidiaries. WPD 1953 WPD 1953 hmited, a jointly Formed in November 2000, PPL Energy Supply PUC Final Order Final order issued by the owned subsidiary of PPL Global and Mirant.

is a subsidiary of PPL Energy Funding PUC on August 27, 1998, approving the settle WPD 1953 owns WPD Holdings U K ,which ment of PPL Electric Utilities' restructuring PPL Gas Utilities PPL Gas Utilities owns WPD (South West) and WPD (South proceeding Corporation, a regulated utility subsidiary of Wales).

PPL specializing in natural gas distribution, PUHCA Public Utility Holding Company Act WPDL Western Power Distnbution Umited, a transmission and storage services, and the of 1935 wholly owned subsidiary of WPD Investment sale of propane. PURPA (Public Utility Regulatory Policies Act Holdings Limited, which is a jointiy owned sub PPL Generation PPL Generation, LLC, a of 1978) Legislation passed by Congress to sidiary of PPL Global and Mirant. WPDL owns subsidiary of PPL Energy Supply that, effective encourage energy conservation, efficient use 100% of the common shares of Hyder July 1, 2000, owns and operates U.S. generat of resources and equitable rates.

ing facilities through various subsidiaries PURTA Public Utility Realty Tax Act PPL CORPORATION 2001 ANNUAL REPORT (71

Mm-C.W-WX.-U-C."M pwafLQ 1Tfwx-cc UkGU Uaj M Frederick M. Bernthal h,. John R. Biggar William F. Hecht Washington, D.C. ,, Allentown, Pa. Chairman, President and President Executive Vice President and Chief Executive Officer Universities Research Association Chief Financial Officer PPL Corporation A not-for-profit consortium of PPL Corporation research universities, engaged in Age 57, Director since 2001 John R. Blggar the construction and operation Executive Vice President and of major research facilities Chief Financial Officer Age 59, Director since 1997 PPL Corporation Lawrence E. Do Slmone Executive Vice President-Supply I PPL Corporation John W. Conway E. Allen Deaver Philadelphia, Pa. Lancaster, Pa. Robert J. Grey Chairman of the Board, President Former Executive Vice President Senior Vice President, and Chief Executive Officer Armstrong World Industries, Inc. General Counsel and Secretary Crown, Cork & Seal Company, Inc. Manufacturer of intenor furnish PPL Corporation International manufacturer ings and specialty products of packaging products for Age 66, Director since 1991 Michael E. Bray consumer goods President Age 56, Director since 2000 PPL Electnc Utilities Paul T. Champagne President PPL EnergyPlus William J. Rood Elmer D. Gates James H. Miller Drums, Pa. Bethlehem, Pa. President Secretary-Treasurer Former Vice Chairman PPL Generation Highway Equipment & Supply Co. Fuller Co.

Supplier of heavy equipment Manufacturer of plants, machin Roger L. Petersen for highway construction ery and equipment for industry President and industry Age 72, Director since 1989 PPL Global Age 66, Director since 1990 William F. Hecht Stuart Heydt Allentown, Pa. Hershey, Pa.

Chairman, President and Former President and Chief Executive Officer Chief Executive Officer PPL Corporation Geisinger Health System Age 59, Director since 1990 A not-for-profit corporation involved in health care and related services Age 62, Director since 1991 W. Keith Smith Susan M. Stalnecker Pittsburgh, Pa Wilmington, Del.

Former Senior Vice Chairman Vice President- Finance Mellon Financial Corporation and Treasurer Age 67, Director since 2000 E I duPont de Nemours and Company Manufacturer of pharmaceuticals, spe cialty chemicals, biotechnology and high-performance materials Age 49, Director since 2001 i",

72) PPL CORPORATION 2001 ANNUAL REPORT I

aliama"Jzwl jvwrýý-D Annual Meeting Lost Dividend Checks Shareowners are invited to attend the annual meeting to be held Dividend checks lost by investors, or those that may be lost in the mail, on Friday, Apnl 26, 2002, at Lehigh University's Stabler Arena in will be replaced if the check has not been located by the 10th business Bethlehem, Pa. The meeting will begin at 10 a m. day following the payment date.

Stock Exchange Ustings Transfer of Stock PPL Corporation common stock is listed on the New York and Stock may be transferred from one name to another or to a new account Philadelphia stock exchanges. The symbol is PPL. in the name of another person. Please contact Investor Services regard ing transfer instructions.

Common Stock Prices Dividends Lost Stock Certificates 2001 High Low Declared Please call the Shareowner Information Line or write to Investor Services 1st quarter $46 75 $33 88 $.265 for an explanation of the procedure to replace lost stock certificates.

2nd quarter 62.36 44.03 .265 3rd quarter 56.50 30.99 .265 Duplicate Mailings 4th quarter 37.65 31.20 .265 Annual reports and other investor publications are mailed to each investor account. If you have more than one account, or if there is more Divdends than one investor in your household, you may contact Investor Services 2000 High Low Declared to request that only one publication be delivered to your address.

1st quarter $24.00 $18.38 $.265 2nd quarter 25.00 Form 10-K 20.38 .265 3rd quarter PPL Corporation's annual report on Form 10-K, filed with the Securities 44.44 21.94 .265 4th quarter and Exchange Commission, is available about mid-March. Investors may 46.13 37.56 .265 obtain a copy, at no cost, by calling the Shareowner Information Line.

The company has paid quarterly cash dividends on its common stock in every year since 1946. The dividends declared per share in 2001 and Investor Services 2000 were $1.06 The most recent regular quarterly dividend paid by For any questions you have or additional information you require about the company was 26.5 cents per share (equivalent to $1 06 per annum) PPL Corporation and its subsidianes, please call the Shareowner paid Jan. 1, 2002. On Jan. 29, 2002, the company increased its quarterly Information Line, or write to:

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 Manager - Investor Services record on March 8, 2002. Two North Ninth Street (GENTW14) 60 Allentown, PA 18101 S

Dividends a.w The dates for consideration of the declaration of dividends by the Internet Access u

board of directors or its Executive Committee for the balance of 2002 Registered shareowners can access their account information are May 24, Aug. 23 and Nov 22. Subject to the declaration, these by visiting www.shareowneronline.com. For other information, visit dividends would be paid on the first day of July, October and January. our Web site at www.pplweb com or contact Investor Services 00 Dividend checks are mailed in advance of those dates with the intention via e-mail at invserv@pplweb.com 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 Stock Transfer Agents and Registrars and Dec. 10. Wells Fargo Bank Minnesota, N A.

Shareowner Services Direct Deposit of Dividends 161 North Concord Exchange 0

0:03 Sharreowners may choose to have their dividend checks deposited South St. Paul, MN 55075-1139 directly into their checking or savings account. Quarterly dividend payments are electronically credited on the dividend date, or the first PPL Investor Services Department business day thereafter.

Vo Dividend Disbursing Office and o

Dividend Reinvestment Plan Dividend Reinvestment Plan Agent Shareowners may choose to have dividends on their PPL Corporation PPL Investor Services Department common stock or PPL Electric Utilities preferred stock reinvested Eo in PPL Corporation common stock instead of receiving the dividend Shareowner Information Une by check. 1.800.345.3085 Certificate Safekeeping Shareowners participating in the Dividend Reinvestment Plan may PPL, the PPI logo and PPL Project Earth are choose to have their common stock certificates forwarded to the trademarks of PPL Corporationor an affiliate company for safekeeping. @PPL Corporation All Rights Reserved

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