Text

Annual Financial Report
	ML031950554
Person / Time
Site:	Susquehanna
Issue date:	07/01/2003
From:	Shriver B; Susquehanna
To:	; Document Control Desk, Office of Nuclear Reactor Regulation
References
	PLA-5641
	Download: ML031950554 (155)
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%I Bryce L Shriver PPL Susquehanna, LLC ' II Senior Vice President and 769 Salem Boulevard Chief Nuclear Officer Berwick, PA 18603 Tel. 570.542.3120 Fax 570.542.1504 bishriverQpplweb.corn mm---

NTM JUL 0 12003 U. S. Nuclear Regulatory Commission Attn: Document Control Desk Mail Station OP1-17 Washington, DC 20555 SUSQUEHANNA STEAM ELECTRIC STATION ANNUAL FINANCIAL REPORT Docket Nos. 50-387 PLA-5641 and 50-388 In accordance with 10 CFR 50.71(b), enclosed is the 2002 Annual Report for PPL Corporation, the parent company of PPL Susquehanna, LLC. Also enclosed is the 2002 Annual Report for Allegheny Electric Cooperative, Inc.

Please contact Nancy J. Lannen at (610) 774-7835, if you have any questions concerning the reports.

Sincerely, JA- B. L. Shriver Enclosures (2) cc: NRC Region I Mr. S. L. Hansell, NRC Sr. Resident Inspector Mr. R. V. Guzman, NRC Project Manager Mr. R. Janati, DEPIBRP 0

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PPL Corporation 10 2002 Annual Report I :;' .. "7-

~Forthe years endedlDecember31l'. 2002 L .,2001

-Financial -:

flnpratinn rmvpniA5s frnillinnsl . -- . J $5,429 [5,077 Net income (millions) 208 LZ~~~i79~

'IIcome from core operations ITIllosTIM 541 Basic earningspeshe________I -1.37 Diluted earnings prsae _ _ _ _ _ 1.36 Basic earnings per share - core oprionsla).

3'5 Dltdearninqs per share m-core operationSfa) . . 7 Dividends declared per share 1.44 Total assets (MillionS)1b) 15,569 E7Th~~4.24 Book value per share("-' ______ 13.42

'Market price per shareibl $34.68 EZZI~12,56 Dividendyield lb) 4

~~EZZ~~..6 Di~vide nd aotrtoc ______________1060%

Dividend payout raio -croertnscf_____]7 414 ~~J~flZ'34.8 Market/book valu ratio7b7 1 2589 Ptrice/earnings ratoiboci .- 2 i.50 TZZIZ-25 Pr~ice/earnings ratio core operationslbHXQ~

- I fl84127%

Ratio of earnings tolfied charges* 1.9

.Return on averaqe common equity 7777ii 3.794 Return on average common equity- core operationsff). j 20.510/02880 0-Oprtng_____________________________________ ________________

Total retail electricity delivered (millions of kwh)' _____69,105 Toal retaIl electricityU sple(mlions of kwh)-J 406 43,470 Total wholesale electricity supplied (illions of kwh) j 37,060 Nget system caaiyleaat)b) 1148 0,023____

Number of customers (millions)1b)[d) . 5____________7___

Construction expenditures_(millionrs) 64 Income in2002 and 2001 were impacted by several unusual items, as described on page 24:lIncome from core- operations excludes the impact of these unusual items. Income from core operations should not be considered as an alternative to net income, which is determined inaccordance with GAAP, as an indicator of operating performance. PPL believes that income from core operations, although anon-GAAP measure, isalso useful and meaningful to investors because it provides themwith PP's underlying earnings performanceassanother criterion inmaking their investment decisions. PPL's management also uses income j

-from core operations inmeasuring certain corporate performnance goals. Other companies may use different measures to present financial performance.

b)End of period.

WBased on diluted earnings per share.

oner onrol CMAR adasnot included CEMAR's one million customers inthe year-end customer count above. See page 61for-

-~ d) PLGloalno additional information.

etElectricity deliveries for 2002include the deliveries of WPO for the full yearand the deliveries of CEMAR priorto deconsolidation.

Calculated using income from core operations.

PPL Corporation 11 2002 Annual Report

Dear shareowners:

Looking back over the past five years, a period that has humbled some of the biggest names in the electricity business, we find that PPL Corporation has done much more than weather the storm.

Since 1997, our earnings per share from core operations have increased by 77 per-cent. In the past five years, our total return to investors has outpaced the S&P 500' by 80 percent.

And we are projecting a long-term compound growth rate of 5 to 8 percent per year in earnings from core operations.

Five years ago, we had 1.3 million customers in Pennsylvania. Today, we have more than 4.8 million customers on three continents. Five years ago, we operated power plants at seven locations in Pennsylvania. Today, we operate power plants at more than 30 locations in Pennsylvania, Montana, Arizona, Connecticut, Maine, New York and Illinois. We have increased our generating capacity by 25 percent.

As I speak with investors and others, I'm often asked what has set PPL apart as the electricity business was transformed from a relatively stable, regulated environ-ment to one where competition and controversy have become commonplace.

PPL's success in this newly turbulent industry has its roots in our insight, a decade ago, that there would be fundamental changes to the structure of our industry. Certainly there were other companies that reached the same conclusion. But few took the approach that your company did.

We concluded that we would not simply sit back and watch change happen to our business. We decided to do something about it. As a result, PPL became one of the first electricity companies in the nation to support the move toward a competitive electricity marketplace. And, as a proponent of the concept, we were positioned to participate in shaping the transformation.

PPL Corporation 1J 2002 Annual Report Being there at the beginning, involved in the sculpting of the new industry, afforded us a unique perspective as we shaped our strategy to make the most of the opportunities that would be presented by the new marketplace.

The strategy that emerged also set PPL apart from the crowd. We decided to focus on long-term, steady growth and profitability. We decided to remain in both the electricity delivery and electricity generation and marketing businesses - unlike some other companies that sold off portions of their business to concentrate solely on either generation or delivery.

In concluding that we wanted to be in the electricity generation and marketing business, we understood that this meant more than simply expanding our fleet of power plants. In pursuing an expanded generation and marketing business, we devised a strategy that allowed us to produce strong returns while also reducing volatility. We did this by pursuing multi-year contracts, under favorable terms, for both the sale of electricity produced by our power plants and for the purchase of the fuel needed to operate those plants.

This managed-risk approach to electricity marketing, combined with the solid performance of an electricity delivery business that we have expanded to serve cus-tomers on three continents, has given us a solid - and sustainable - growth platform for the future.

As we were implementing our strategy, PPL also realized that doing things the way we had done things in the past would not be sufficient for success in the future.

We realized that we needed new business approaches and new skills to compete

PPL Corporation 13 2002 Annual Report PPL Corporation 14 2002 Annual Report

-A well-balanced generation p'ortfolio:::-,

PPL understands that there is strength in diversity, particularly ina commodity market. We have an excellent mix of power'plants that -

coal, oil, natural gas, uranium and water to produce electricity.

f use f _This diversity protects us against supply problems with any one fuel.

We also have geographic diversity with our power plants which are located inseven states.

PPL Corporation 15 2002 Annual Report in this new industry. So, even as we were developing this new strategy, we were building the new skills we needed inside our organization, both by hiring key people and by further developing the outstanding talent that we already had in the company.

We did not, however, turn our backs on what made PPL a successful company in the first seven decades of the electricity business. We recognized that our continued success remained absolutely dependent on superb execution of our strat-egy. Even as momentous business changes were occurring, PPL people remained focused on doing the job right, focused on what some may view as the details of the pre-competition electricity business. Losing sight of the fundamentals - superior customer service, excellent power plant operation, attention to quality in all func-tions - would not be allowed to happen at PPL.

PPL people have been acutely aware of potential opportunities presented by the vastly different electricity business, resulting in profitable new ventures like our energy services company, which now is providing energy management, design, con-struction and maintenance services to businesses throughout the Northeast.

Our emphasis on an external focus, combined with a questioning attitude among our employees, has created a business plan that not only is solid and sustainable, but also is responsive. We react quickly to opportunity, whether it be a major energy company's immediate need for millions of kilowatt-hours or a business customer's request for an innovative, on-site source of electricity. This responsiveness also means that we do not shy away from tough decisions, like the need to end our involvement in a project or to exit an investment when conditions unexpectedly change.

PPL Corporation 16 2002 Annual Report So, PPL's strategy for success is both deceptively simple and incredibly demand-ing. Every day, we challenge ourselves to anticipate and shape marketplace changes, to take a long-term view, to realistically assess our abilities, to remain focused on the fundamentals and to question assumptions.

The past year certainly was particularly challenging for your company and all of the electricity industry. It did not, however, shake our confidence in the path that we have chosen. In fact, when excluding unusual items, we earned $3.54 per share in 2002, beating the consensus estimate of the financial analysts who cover the company.

We did have a number of charges during the year, which lowered our reported earnings to $1.36 per share, but many of these charges actually strengthen the com-pany for the future. For example, while we booked a charge related to our workforce reduction, the reduction has resulted in improved productivity. And our capital expenses will be significantly lower going forward as the result of our decision to cancel development of a number of power plants.

As the financial community focuses on balance sheet and liquidity issues, we are improving our equity ratio and cash flows, and we expect our financial strength to continue to improve in 2003 and beyond.

Our confidence in our business strategy, in the strength and quality of our earn-ings and in our improving cash position allowed us to make an important decision in February to increase the common stock dividend by 6.9 percent, to $1.54 per share on an annualized basis.

PPL Corporation 17 2002 Annual Report Taking risk out of electricity sales PPL is not a speculative energy trader. First, we have power plants with a capacity of 11,500 megawatts. And, where possible, our energy marketing professionals seek long-term contracts that lock in . .

rmargins no matter how much the day-to-day market fluctuates. PPL doesn't roll the dice and hope for profit margins.

PPL Corporation 18 2002 Annual Report Electricity delivery customers on three continents PPL people - whether they work in Bristol, England; Melipilla, Chile; or Harrisburg, Pennsylvania - understand and anticipate the needs of 4.8 million electricity delivery customers. Our customers consistently rate us among the top service providers intheir country.

PPL Corporation 19 2002 Annual Report This dividend increase, combined with our proven performance and our prospects for sustained growth, further improves PPLMs reputation as one of a handful of U.S.

electricity companies that understand how to succeed in the new electricity business.

In 2003, PPL will continue to solidify its position in U.S. energy supply markets.

The people in our electricity delivery businesses will continue to improve service to customers while also improving efficiency and productivity. Our energy services operations also will continue to offer unique energy management options, including environmentally friendly fuel cells, to business customers.

PPL people are confident, but not complacent. We know that success is not earned on paper. We know it is earned in the marketplace, in power plants and in serving customers. And, success must be earned year after year.

We are ready for the continuing challenge.

On behalf of all the 12,500 employees of PPL, I pledge our continued dedication to live up to the confidence you have placed in us with your investment in our company.

William F Hecht Chairman, President and Chief Executive Officer March 17, 2003

PPL Corporation 20 2002 Annual Report PPL EnergyPlus Wholesale/retail energy marketing; energy management services PPL Global Operation of international electricity delivery businesses and new business development PPL Electric Utilities Operation of U.S. electricity delivery business PPL Proect Earth" rOur commitment to the environment, and to our communities Helping those in need, enhancing the environment, improving the quality of education -these are the things

[ we do around the world under the umbrella of PPL Project Earth".

It's our way of doing business, our way of providing energy responsibly.

Serving Our Communities

Operating neighborhood advisory committees at power plants

Supporting employees who volunteer

Sponsoring food drives for needy families in Chile

Coordinating earthquake aid in El Salvador

Supporting United Way with combined employee/company contributions of $1.8 million

Committing $23 million for recreation, fisheries, water quality and wildlife habitat development along rivers in Montana In Chile, PPL employees and members of their families perform native folk dances for audiences in the communities where we do business.

PPL Corporation 21 2002 Annual Report LOCATIONS CUSTOMERS EMPLOYEES PRESIDENT BUSINESS ADVANTAGE Pennsylvania Wholesale customers 2,000 Paul Champagne Superior understanding New York in key U.S. markets; of markets; ability to Massachusetts retail and energy services hedge risk; wide range Connecticut customers in eight states of energy services Montana New Jersey Maryland Maine Pennsylvania PPL EnergyPlus 2,200 James Miller More than eight decades F~f70 Montana of power plant operating Maine experience Connecticut Arizona New York Illinois Chile 3.5 million electricity 3,800 Roger Petersen Ability to deliver Bolivia delivery customers award-winning El Salvador customer service while England minimizing costs Wales Pennsylvania 1.3 million electricity 3,000 Michael Bray Ability to deliver delivery customers : award-winning

-customer service while minimizing costs Improving Education

Operating five environmental preserves

. Holding workshops for teachers

Awarding grants for environmental education

. Building a new environmental learning center at Lake Wallenpaupack in Pennsylvania

Donating computers to schools and organizations Enhancing the Environment

Promoting fuel cells and other clean energy technologies

Restoring endangered species in Montana Children enjoy learning at the PPL-supported Discovery Center in Bethlehem, Pa.

Preserving fish habitats in Maine

Reducing power plant emissions. Since 1990:

Sulfur dioxide emission rate down nearly 50 percent

. Nitrogen oxide emission rate down almost 65 percent I I I

Carbon dioxide emission rate down about 10 percent

. Building a 'green' office building at corporate headquarters 'R m lPROJECT EARTH VIP,'

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Maintaining a membership in CERES, a coalition of environmental, investor and advocacy groups

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PPL Corporation 22 2002 Annual Report SELECTED FINANCIAL AND OPERATING DATA PPL Corporation (a) 2002 2001 2000 1999 1998 Income Items - millions Operating revenues (bud S 5,429 $ 5,077 S 4,545 $ 3,697 $ 3,786 Operating income lb) 1,240 849 1,194 821 827 Net income (loss) 208 179 498 432 (569)

Balance Sheet Items - millions Id)

Property, plant and equipment, net 9,566 5,947 5,948 5,624 4,480 Recoverable transition costs 1,946 2,172 2,425 2,647 2,819 Total assets 15,569 12,562 12,360 11,174 9,607 Long-term debt 6,267 5,579 4,784 4,157 2,984 Company-obligated mandatorily redeemable preferred securities of subsidiarytrusts holding solely company debentures 661 825 250 250 250 Preferred stock:

With sinking fund requirements 31 31 46 46 46 Without sinking fund requirements 51 51 51 51 51 Common equity 2,224 1,857 2,012 1,613 1,790 Short-term debt 943 118 1,037 857 636 Total capital provided by investors 10,177 8,461 8,180 6,974 5,757 Capital lease obligations Cel 125 168 Financial Ratios Return on average common equity-% 10.27 8.41 27.49 24.70 (24.60)

Embedded cost rates Id\

Long-term debt- % 7.04 6.84 6.98 6.95 7.40 Preferred stock-% 5.81 5.81 5.87 5.87 5.87 Preferred securities - % 8.02 8.13 8.44 8.44 8.44 Times interest earned before income taxes 1.97 2.19 3.05 3.37 3.69 Ratio of earningstofixed charges-total enterprise basis t 1.9 1.7 2.5 2.7 3.1 Common Stock Data Number of shares outstanding -thousands:

Year-end 165,736 146,580 145,041 143,697 157,412 Average 152,492 145,974 144,350 152,287 164,651 Number of record shareowners Id) 85,002 87,796 91,777 91,553 100,458 Basic EPS (loss) S 1.37 $ 1.23 $ 3.45 $ 2.84 $ (3.46)

Diluted EPS (loss) S 1.36 $ 1.22 S 3.44 $ 2.84 $ (3.46)

Dividends declared per share S 1.44 $ 1.06 S 1.06 $ 1.00 $ 1.335 Book value per share (dl S 13.42 $ 12.67 S 13.87 $ 11.23 $ 11.37 Market price per share (di S 34.68 $ 34.85 $45.188 $22.875 $27.875 Dividend payout rate - %Cal 106 87 31 35 (39)

Dividend yield - %lh) 4.15 3.04 2.35 4.37 4.79 Price earnings ratio Cal 25.50 28.57 13.14 8.05 (8.06)

Sales Data - millions of kWh Electric energy supplied - retail 42,065 43,470 41,493 36,637 31,651 Electric energy supplied -wholesale 37,060 27,683 40,925 32,045 36,708 Electric energy delivered 0il 69,105 41,453 37,642 35,987 32,144 Ca) The earnings for each year were affected by unusual items. These adjustments affected net income. See 'Earnings' in Managemenfs Discussion and Analysis for a description of unusual items in20O2, 2001and 2000.

(bh Operating revenues and operating income of certain years are restated to conform to the current presentation.

(c0 Operating revenues for 1998 have not been adjusted to report revenues from energy trading on a net basis because 1998 precedes the application of mark-to-market accounting for energy trading activities.

Cd) At year-end.

Ce) PPL Electric terminated its capital lease in 2000. See Note 10to the Financial Statements for additional information.

n 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.

In) Based on diluted EPS.

(hI Based on year-end market prices.

Xi) Deliveries for 2002 include the electricity deliveries of WPD for the full year and of CEMAR prior to deconsolidation.

PPL Corporation 23 2002 Annual Report MANAGEMENT'S DISCUSSION AND ANALYSIS Terms and abbreviations appearing here are explained in the glossary on pages 83-85. Dollars in millions, except pershare data, unless otherwise noted.

FORWARD-LOOKING INFORMATION RESULTS OF OPERATIONS Certain statements contained in this report concerning expectations, beliefs, Earnings in 2002 were impacted bythe acquisition of a controlling interest plans, objectives, goals, strategies, future events or performance and underly- in WPD on September 6,2002, and the resulting consolidation, as described ing assumptions and other statements which are other than statements of his- in Note 9 to the Financial Statements. Therefore, the comparison of reported torical facts are 'forward-looking statements" within the meaning of the federal income statement line items is not meaningful without eliminating the impact securities laws. Although PPL believes thatthe expectations and assumptions of the WPD consolidation. The following table shows the 2002 Statement of reflected in these statements are reasonable, there can be no assurance that Income as reported, the adjustments to eliminate the impact of the WPD con-these expectations will prove to be correct These forward-looking statements solidation (by reflecting WPD on the equity method), and as adjusted to exclude involve a number of risks and uncertainties, and actual results may differ mate- the WPD consolidation. The following discussion, that explains significant rially from the results discussed in the forward-looking statements. In addition annual changes in principal items on the Statement of Income, compares 2002, to the specific factors discussed herein, the following are among the important as adjusted, to 2001.

factors that could cause actual results to differ materially from the forward-PPL Corporation and Subsidiaries looking statements:

Consolidated Statement of Income

market demand and prices for energy, capacity and fuel; Adjusted to Eliminate WPD Consolidation

weather variations affecting customer energy usage;

competition in retail and wholesale power markets; 2002

the effect of any business or industry restructuring; As Reported Adjustment As Adjusted

the profitability and liquidity of PPL and its subsidiaries; Operating Revenues

new accounting requirements or new interpretations or applications Utility $3,576 $579 $3,097 Unregulated retail electric and gas 182 182 of existing requirements; Wholesale energy marketing 993 993

. operation of existing facilities and operating costs; Net energy trading margins 19 19

environmental conditions and requirements; Energy related businesses 559 (60) 619

transmission and distribution system conditions and operating costs; Total 5,429 519 4,910

development of new projects, markets and technologies; Operating Expenses

performance of new ventures; Operation

political, regulatory or economic conditions in states, regions or countries Fuel 584 584 where PPL or its subsidiaries conduct business; Energy purchases 873 873

receipt and renewals of necessary governmental permits and approvals; Other 818 6 812

impact of state or federal investigations applicable to PPL and its Amortization of recoverable transition costs 226 226 subsidiaries and the energy industry; Maintenance 314 36 278 Depreciation 367 112 255

the outcome of litigation against PPL and its subsidiaries; Taxes, otherthan income 232 42 190

capital market conditions and decisions regarding capital structure; Energy related businesses 543 29 514

stock price performance; Other charges

. securities and credit ratings; Write-down of international energy projects 113 113

foreign exchange rates; Workforce reduction 75 75

new state or federal legislation; Write-down of generation assets 44 44

national or regional economic conditions, including any potential Total 4,189 225 3,964 effects arising from the September 11, 2001 terrorist attacks in the U.S. Operating Income 1,240 294 946 and any consequential hostilities or other hostilities; and Other Income-net 33 20 13

the commitments and liabilities of PPL and its subsidiaries. Interest Expense 560 127 433 Income Taxes 210 105 105 Any such forward-looking statements should be considered in light of such Minority Interest 78 73 5 important factors and in conjunction with other documents of PPL on file with Cumulative Effect of a Change in the SEC. Accounting Principle (150) (150)

New factors that could cause actual results to differ materially from those Dividends and Distributions-Preferred Securities 67 9 58 described in forward-looking statements emerge from fime to time, and it is not possible for PPL to predict all of such factors, or the extent to which any such Net Income S 208 $ S 208 factor or combination of factors may cause actual results to differ from those contained in any forward-looking statement Any forward-looking statement The comparability of certain items on the Statement of Income has also speaks only as of the date on which such statement is made, and PPL under- been impacted by PPL Global's investment in CEMAR in 2000. The consolidated takes no obligations to update the information contained in such statement to results of CEMAR are included for periods during which PPL had a controlling reflect subsequent developments or information. interest from June 2000 to August 2002. See Note 9 to the Financial Statements for more information.

PPL Corporation 24 2002 Annual Report MANAGEMENT'S DISCUSSION AND ANALYSIS Earnings The changes in net income from year to yearwere, in part, attributable Net income, and the related EPS, were as follows: to several unusual items with significant earnings impacts as shown below.

2002 2001 2000 The table below reconciles net income to income from core operations in dol-lars and EPS, after eliminating the impact of unusual items. Income from core Net income $ 208 $ 179 $498 EPS - basic $1.37 $1.23 $3.45 operations should not be considered as an alternative to net income, which is EPS - diluted $1.36 $1.22 $3.44 an indicator of operating performance determined in accordance with GAAR PPL believes that income from core operations, although a non-GAAP measure, is also useful and meaningful to investors because it provides them with PPL's Income from core operations, and the related EPS, were as follows:

underlying earnings performance as another criterion in making their invest-2002 2001 2000 ment decisions. PPLs management also uses income from core operations in Income from core operations $541 $620 $ 474 measuring certain corporate performance goals. Other companies may use dif-EPS - basic $3.55 $4.24 $3.29 ferent measures to present financial performance.

EPS - diluted S3.54 $4.22 $3.28 Net Income EPS - Diluted 2002 2001 2000 2002 2001 2000 Net income - actual S208 $ 179 $498 S 1.36 $ 1.22 $3.44 Unusual items Inet of tax):

Goodwill impairment (Note 181 (150) (0.99)

CEMAR impairment (Note 9) (98) 1217) (0.64) (1.48)

CEMAR operating losses (Note 91 (23) (0.15)

Write-down of generation assets (Note 9) (26) (0.17)

Workforce reduction (Note 211 (44) (0.29)

Tax benefit-Teesside (Note 9) 8 0.06 Cancellation of generation projects (Note 9) (88) (0.60)

WPD impairment (Note 9) (1171 (0.80)

Enron impact on trading (Note 17) (8) (0.05)

Enron impact - write-down investment in Teesside (Note 9) (21) (0.14)

Accounting method change - pensions (Note 12) 10 0.07 Environmental insurance recoveries 24 0.16 Income from core operations $ 541 $ 620 $474 $ 3.54 $ 4.22 $3.28 The after-tax changes in core earnings were primarily due to: The year-to-year changes in earnings components are discussed in the 2002 vs. 2001 2001 vs. 2000 balance of the discussion in "Results of Operations."

PPL expects that the low level of wholesale energy prices will adversely Wholesale energy margins $(81) $ 96 Lower net energy trading margins (11) (61 impact margins in 2003 and beyond. Based upon current energy price levels, Lower unregulated retail energy margins (33) (661 there is a risk that PPL may be unable to recover its investment in new gas-Higher regulated retail energy margins 59 46 fired generation facilities. Under GAAP, PPL does not believe that there is an Delivery revenues (net of CTC/ITC amortization impairment charge to be recorded at this time. PPL is unable to predict the and interest expense on transition bonds) (10) (2) ultimate earnings impact of this issue, based upon energy price levels, appli-PPL Global earnings(-) 50 (4) cable accounting rules and other factors, but such impact may be material.

Higher synfuel tax credits 10 34 See "Asset Impairment" in Application of Critical Accounting Policies for Operating and maintenance costs (34) 4 Higher financing costs (29) (41 additional information.

Mechanical contractors earnings (4) 5 Future earnings will also be impacted by the consolidation of variable Lower taxes other than income interest entities and the implementation of accounting for asset retirement (excluding gross receipts tax) 5 6 obligations (as discussed in Note 22to the Financial Statements).

Lower depreciation 4 10 Other- net (5) 27

$179) $146 (a)The increase in 2002 compared with 2001 was primarily due to higher earnings of WPD and also from FPL's complete ownership of WPD, lower spending on devel-opment projects and the discontinuance of goodwill amortization, offset by lower earnings from Latin America.

PPL Corporation 25 2002 Annual Report Domestic Energy Margins Wholesale - Western U.S.

The following tables provide summary data regarding changes in the compo- Western wholesale margins consist of margins in the Northwest and in the nents of domestic gross margins of wholesale and retail energy for 2002 com- Southwest pared to 2001 and 2001 compared to 2000: In the Northwest margins were $74 million lower in 2002 compared to 2001, 2002 vs. 2001 2001 vs. 2000 primarily due to a decrease in average realized wholesale prices by $45/MWh, partially offset by a 9% increase in volumes. Margins were $19 million lower in Utility revenues S 63 $(638)

Unregulated retail electric and gas revenues 77 2001 compared to 2000, primarily due to a 16% decline in volumes caused by (174)

Wholesale energy marketing revenues 4 879 the energy supply shortage in the western U.S. primarily due to the impact of Net energy trading margins 118) (10) a drought on hydro availability. Partially offsetting this decrease were higher Other revenue adjustments W 42 (102) average prices in 2001 compared to 2000.

Total revenues 183) 206 In the Southwest region, margins were $9 million lower in 2002 compared Fuel 118) 63 to 2001, primarily due to a decrease in average wholesale prices by $40/MWh.

Purchased power 90 These lower prices were offset by increased sales, which were three times Other cost adjustments (a) 32 153) higherthan the prior period, as a result of the Griffith Energy and Sundance Total costof sales 14 100 facilities coming on-line in 2002. Margins were $27 million higher in 2001 com-Domestic gross energy margins S 197) $ 106 pared to 2000, primarily due to purchasing power in late 2001 to satisfy the sales commitments entered into earlier in the year at higher prices. These sales la)Adjusted to exclude the impact of any revenues and costs not associated with were originally expected to be supplied bythe generation outputfrom Griffith.

domestic energy margins, in particular, revenues and energy costs related to the The above explanation is exclusive of the 2001 charge for the Enron international operations of PPL Global and the domestic delivery operations of bankruptcy which is discussed in further detail in Note 17 to the Financial PPL Electric and PPL Gas Utilities.

Statements.

Changes in Gross Domestic EnergyMargins ByActivity Net Energy Trading Gross margin calculations are dependent on the allocation of fuel and pur-PPL enters into certain contractual arrangements that meet the criteria of chased power costs to the activities. That allocation is based on monthly energy trading derivatives as defined by EITF02-3. These physical and financial MWh consumption levels compared to monthly MWh supply costs. Any costs contracts cover trading activity associated with electricity, gas and oil. The specific to an activity are charged to that activity.

$18 million decrease in 2002 compared to 2001 was primarily due to unrealized, 2002 vs. 2001 2001 vs. 2000 mark-to-market gains in 2001 and lower energy margins in 2002. The $10 million Wholesale - Eastern U.S. $153) S 155 decrease in 2001 compared to 2000 was primarily due to lower energy margins Wholesale-Western U.S. 171) 14) partially offset by unrealized, mark-to-market losses in 2000. The physical vol-Netenergytrading 118) (10) umes associated with energy trading were 10,500 GWh and 12.4 Bcf in 2002; Unregulated retail 156) (113)

Regulated retail 101 78 7,700 GWh and 22.4 Bcf in 2001; and 19,900 GWh and 2.9 Bcf in 2000.

Domestic gross energy margins (197) $ 106 Unregulated Retail Unregulated retail margins declined in 2002 compared to 2001 primarily due to Wholesale - Eastem U.S. lower revenues resulting from the expiration of contracts which were not renewed Generally, Eastern wholesale margins were lower in 2002 compared to 2001, in the East and due to significantly lower retail prices in the West somewhat despite a buyout of a NUG contract in February 2002 that reduced purchased offset by an increase in the number of customers in the West The decline in power costs by $25 million. The decline in margins was primarily attributable to 2001 from 2000 was also primarily due to the expiration of contracts which were the decline in wholesale prices for energy and capacity. In PJM, where the not renewed in the East somewhat offset by higher sales in the West majority of PPL's Eastern wholesale activity occurs, on-peak prices averaged Regulated Retail

$6/MWh less, a decline of 14%, for 2002 compared to 2001. Additionally, Regulated retail margins in the East for 2002 were 15% higher than in 2001.

because new generating capability has come on-line within PJM in 2002, the Higher sales volumes and higher average prices, caused by changes in usage prices for the PJM monthly auctions for unforced capa city credits have also among customer classes, provided the improved margins. In addition, lower sup-fallen from an average of $100/MW-month in 2001 to an average of $38/MW- ply costs in 2002, due to lower fuel costs and increased generating unit availabil-month in 2002. However, higher volumes of energy sales partially offset the ity, further improved margins. Regulated retail margins in the East for 2001 were decline in prices, as wholesale transactions in 2002 increased by about 33%

13% higher than 2000. Sales volumes increased 21% primarily due to the return over 2001 due to better generation availability.

of customers who previously had an alternative electric power supplier.

Eastern wholesale margins were higher in 2001 compared to 2000 primarily due to an increase in wholesale prices for energy and capacity. In PJM, on-peak prices averaged S6/MWh more in 2001, an increase of 13% from 2000.

Additionally, prices for the PJM monthly auctions for unforced capacity credits increased from an average of $53/MW-month in 2000 to an average of

$100/MW-month in 2001.

PPL Corporation 26 2002 Annual Report MANAGEMENT'S DISCUSSION AND ANALYSIS Utility Revenues Energy Related Businesses The increase (decrease) in utility revenues was attributable to the following: Energy related businesses (when adjusted to include WPD on an equity basis) 2002 vs. 2001 2001 vs. 2010 contributed $21 million less to operating income in 2002 compared with 2001.

This was primarily due to:

Retail electric revenue PPL Electric:

a $28 million increase in PPL Southwest Generation Holdings, LLC's expenses Electric delivery s (3) S 12 of Griffith Energy due to a full year of operations in 2002. Also, 2001 benefited PLR electric generation supply Sa 102 284 from margins on forward electricity contracts executed priorto commercial Other (9) (11) operation; PPL EnergyPlus:

a $9 million decline from the mechanical contracting and engineering sub-Electric generation supply (261) sidiaries, primarily due to cost overruns experienced at two major projects; PPL Global:

Electric delivery (7) 88

an S8 million operating loss on start-up telecommunications operations; and

$4million of pre-tax operating losses from synfuel projects; partially offset by

. a $23 million decrease in PPL Global's expenses due to lower spending on Wholesale electric revenue PPL Electric (5) (772) development projects, including a favorable settlement on the cancellation Gas revenue of a generation project in Washington state.

PPL Gas Utilities 115) 22 Although operating income from synfuel operations declined in 2002 com-S 63 S1538) pared to 2001, the synfuel projects contributed $7 million more to net income i) See the "Regulated Retail' section in "Domestic Energy Margins" for a discussion after recording tax credits.

of PPL Electric generation supply revenues as a PLR. Energy related businesses contributed $126 million to the 2001 operating income of PPL, an increase of $62 million from 2000. The increase reflects PPL The increase in utility revenues in 2002 compared with 2001 was primarily due to: Global's higher equity earnings of $83 million from its U.K. investments, and

higher revenues of $102 million from providing electric generation supply as higher pre-tax operating income of $8million from the mechanical contracting a PLR, see "Regulated Retail" for additional information; partially offset by and engineering subsidiaries (as a result of additional acquisitions in the north-

lower PPL Global international electric delivery revenues, primarily due eastern U.S.) These gains were partially offset by a $13 million increase in PPL to the deconsolidation of CEMAR. PPL Global stopped recording operating Global's domestic project development expenses and by$19 million of pre-tax results of CEMAR upon relinquishing control to ANEEL. As a result, revenues operating losses from synfuel projects. However, after the recording of tax from electricity deliveries in Brazil were $17 million lower in 2002 compared credits associated with synfuel operations, the synfuel projects contributed with 2001. This decrease was partially offset by higher sales volumes in Chile approximately $19 million to net income in 2001.

and El Salvador, which resulted in increased revenues of $9 million compared Other Operation Expenses with 2001; and Other operation expenses increased by $15 million in 2002 compared to 2001.

lower PPL Gas Utlities' revenues of $15 million, primarily due to lower sales In conjunction with the workforce reduction (see Note 21 to the Financial volumes, due in partto milder winter weather experienced in the first quarter Statements), PPL increased its estimated vacation liability by $15 million. The of 2002, and a decrease in the fuel cost component of customer rates.

increase in operating expense also includes a $17 million decrease in pension Prior to the July 2000 corporate realignment wholesale revenues were income. Additionally, there were $9 million of expenses relating to the operating recorded by PPL Electric. Subsequentto the realignment, these revenues were lease on the University Park and Sundance facilities, which began commercial recorded by PPL EnergyPlus. As such, wholesale revenues were included in operation in July 2002. These increases were offset by a decrease of $19 million utility revenues for the first half of 2000. Also, prior to the July 2000 corporate in PPL Global's operating costs due to $10 million of lower administrative and realignment PPL EnergyPlus was a subsidiary of PPL Electric and recorded general expenses, and a $9million decrease in CEMAR operating expenses.

unregulated retail electric revenues on PPL Electric's books that are included in CEMAR is no longer consolidated as of August 21, 2002.

utility revenues for the first half of 2000. After eliminating these revenues trans- The $17 million decrease in pension income was attributable to PPL's pri-ferred in the corporate realignment from the results for the first half of 2000, util- mary domestic pension plan. During the second quarter of 2002, the workforce ity revenues increased by $395 million in 2001 compared with 2000. The increase reduction and union-negotiated benefit enhancements had a significant impact in utility revenues was primarily due to: on PPrs primary domestic pension plan requiring remeasurement of the benefit

higher PLR revenues of S284 million from providing electric generation supply, obligation and decreasing the net pension income recorded for that plan. In primarily due to fewer retail customers shopping for electricity under addition, pension income was also decreased due to the recognition of signifi-Pennsylvania's Customer Choice Act cant asset losses caused by weakened financial markets. Through December

higher PPL Global international electric delivery revenues of S88 million, pri- 31, 2002, PPL recorded approximately $31 million of pension income. As a result marily due to a full year of CEMAR revenues in 2001, compared with three of the events and remeasurements previously discussed, PPL expects to con-months of revenues in 2000; tinue to record pension income in 2003, but at lower levels due to the above

higher PPL Gas Utilities revenues of $22 million due to a base rate increase events and continued weakness in the financial markets. See Note 12 for effective January 1,2001, and higher gas commodity prices; and details of the funded status of PPUs domestic pension plans.

higher PPL Electric delivery revenues of 312 million, reflecting a 2%increase in deliveries of electricity.

PPL Corporation 27 2002 Annual Report Other operation expenses increased by $80 million in 2001 compared to Other Income - Net 2000. This increase was primarily due to a $45 million gain on the sale of emis- See Note 16 to the Financial Statements for details of other income and deductions.

sion allowances and a $40 million insurance settlement for environmental liabil-Financing Costs ity coverage (both recorded in 2000 as reductions of expense). The increase Interest expense increased by $47 million in 2002 compared with 2001 primarily also reflects $29 million of additional operating expenses due to the CEMAR due to:

acquisition. These increases were offset by$41 million of additional net pension

a $24 million charge to cancel the remarketing agreement on the 7.7% Reset income credited to expense in 2001. The increase in pension income was pri-Put Securities (see Note 8 to the Financial Statements);

marily due to pension investment performance, a higher discount rate and a

a $19 million net increase in long-term debt interest related to a full year of change in accounting principle that accelerates recognition of gains and losses.

interest in 2002 from the issuances in 2001 of $800 million of senior secured Amortization of Recoverable Transition Costs bonds by PPL Electric, $500 million of senior unsecured notes by PPL Energy Amortization of recoverable transition costs decreased by $25 million in 2002 Supply and debt by PPL Global's consolidated subsidiaries, partially offset compared to 2001. This decrease was primarily due to $19 million of lower ITC by bond retirements; amortization in 2002 as a result of lower billed ITC revenues. Billed ITC revenues

a $23 million charge due to interest rate hedge contract termination asso-were lower as a result of lower ITC rates, reflecting the decrease in interest ciated with changes in debt issuance plans; and expense on the transition bonds.

a $7 million decrease in capitalized interest offset by Amortization of recoverable transition costs increased by$24 million in 2001

a $24 million decrease in short-term debt interest as a portion of the proceeds compared to 2000. This increase was primarily due to the collection of $33 million from the issuance of long-term debt was used to pay down commercial paper.

of CTC revenues related to prior year CTC deferrals of amounts in excess of the Interest expense increased by $10 million in 2001 compared with 2000.

Pennsylvania rate cap.

This increase was the net effect of a $28 million increase in interest on long-Maintenance Expenses term debt offset by a $19 million decrease in interest on short-term debt The Maintenance expenses increased by$15 million in 2002comparedto2001.This increase in interest on long-term debt reflects the issuance in 2001 of $800 mil-was primarily due to a $5million increase in maintenance costs for customers' lion of senior secured bonds by PPL Electric, $500 million of senior unsecured lighting and power service problems and $4 million in additional costs to restore notes by PPL Energy Supply and debt by PPL Global's consolidated affiliates.

service to customers during a winter storm. A portion of these proceeds was used to pay down commercial paper balances, which decreased short-term debt interest expense.

Taxes, Other Than Income Dividends and distributions on preferred securities increased byS6 million Taxes, other than income, increased by $35 million in 2002 compared with 2001, in 2002 compared with 2001. This increase was due to:

primarily due to a $42 million increase in gross receipts tax, partially offset by

a $15 million increase related to a full year of distributions in 2002 on the a $12 million decrease in capital stock tax.

PEPS Units, which were issued in the second quarter of 2001; offset by The gross receipts tax increase in 2002 was due to an increase in the rev-

a $10 million decrease in dividends and distributions due to retirements and enue-neutral reconciliation (RNR) tax component of the effective Pennsylvania redemptions of other preferred securities and preferred stock.

gross receipts tax rate in January 2002. The RNR, which adjusts the base gross receipts tax rate of 4.4%, was enacted as part of the Customer Choice Act as a Dividends on preferred securities increased by $26 million in 2001 compared tax revenue replacement componentto recoup losses to the Commonwealth of with 2000 due to the issuance of the PEPS Units in the second quarter of 2001.

Pennsylvania or return benefits to customers that may result from the restruc-Income Taxes turing of the electric industry. This increase was partially offset by the settle-Income tax expense decreased by $156 million in 2002 compared with 2001.

ment of prior years' capital stock tax refund claims and a lower capital stock This decrease was due to:

tax rate in 2002.

lower pre-tax domestic book income, resulting in a $75 million reduction Taxes, other than income, decreased by $21 million in 2001 compared with in income taxes; 2000 primarily due to lower gross receipts tax. The gross receipts tax change

lower impairment charges on PPL's investment in Brazil resulting in a $30 mil-was primarily the result of the decrease in the RNR tax component effective lion decrease in the amount of income tax valuation allowances recorded; in January 2001.

a $27 million reduction in income taxes due to losses recognized on foreign Changes in taxes, otherthan income taxes, do not significantly affect earnings investments; and as they are substantially recovered or returned through customer rate revenues.

a $10 million decrease related to additional federal synfuel tax credits Other Charges recognized.

Other charges of $232 million in 2002 consisted of the write-down of PPL Income tax expense decreased by $33 million in 2001 compared with 2000.

Global's investment in CEMAR and several smaller impairment charges on other This decrease was primarily due to decreases related to a change in pre-tax international investments (see Note 9 to the Financial Statements), the write-domestic book income, resulting in a $63 million reduction in income taxes, and down of generation assets (see Note 9) and a charge for a workforce reduction

$34 million of additional federal synfuel tax credits recognized. These decreases program (see Note 21).

were offset by $61 million of deferred income tax valuation allowances recorded

Other charges of $486 million in 2001 consisted of the write-down of inter-on PPUs investment in Brazil and the U.K (see Note 9 to the Financial Statements).

national energy projects and the cancellation of generation development projects (see Note 9).

PPL Corporation 28 2002 Annual Report MANAGEMENT'S DISCUSSION AND ANALYSIS Change in Accounting Principle IS&P) lowered its corporate credit rating on PPL from BBB+ to BBB, lowered PPL adopted SFAS 142, "Goodwill and Other Intangible Assets," on January 1, the senior unsecured debt rating on PPL Capital Funding from BBB+ to BEB and 2002. SFAS 142 requires an annual impairment test of goodwill and other intan- lowered the rating on the trust preferred securities issued by PPL Capital Funding gible assets that are not subject to amortization. PPL conducted a transition Trust I as part of the PEPS Units from BBB- to BB+. The BBB corporate credit impairment analysis in the first quarter of 2002 and recorded a transition good- rating of PPL Energy Supply and the BBB senior secured debt rating of PPL will impairment charge of $150 million. See Note 18 to the Financial Statements Montana were affirmed. The A-2 short-term credit ratings on PPL Energy Supply for additional information. and PPL Electric remained unchanged. The outlook on all ratings was stable.

In 2001, PPL changed its method of amortizing unrecognized gains or losses S&P indicated that the rating action was based on the consolidated credit in the annual pension expense or income determined under SFAS 87, profile of PPL after PPUs strategic initiative designed to confirm the legal sepa-

"Employers' Accounting for Pensions." This change resulted in a cumulative- ration of PPL Electric from PPL and reflected a weakening in PPUs credit profile effect credit of $10 million. Under the old method, the net unrecognized gain or due to setbacks faced in international operations. S&P noted that PPL Electric, loss in excess of 10% of the greater of the plan's projected benefit obligation or which has a senior secured debt rating atA-, is structurally insulated from the market-related value of plan assets was amortized on a straight-line basis over rest of PPL (see Note 20 for additional information) and that PPL ratings reflect the estimated average future service period of plan participants. Under the new only the amount of dividend distributions expected to be made by PPL Electric method, a second corridor is utilized for the net unrecognized gain or loss in to PPL excess of 30% of the plan's projected benefit obligation. The net unrecognized In September 2002, S&P revised its outlook on PPL and all of its rated sub-gain or loss outside the second corridor is amortized on a straight-line basis sidiaries, except PPL Electric, from a stable outlook to a negative outlook. PPL over a period equal to one-half of the average future service period of the plan Electric's outlook remains at stable. S&P stated that this action reflects its view participants. See Note 12 to the Financial Statements for additional information. of a weakened credit profile that has resulted primarily from declining whole-These items are reported as "Cumulative Effect of a Change in Accounting sale electricity prices and also from setbacks in PPUs international operations, Principle" on the Statement of Income. particularly in Brazil. As part of its September 2002 review, S&P affirmed its rat-During 2002, PPL also adopted SFAS 144, "Accounting forthe Impairment ings on PPL and PPL Energy Supply following the acquisition of a controlling or Disposal of Long-Lived Assets," SFAS 145, "Rescission of FASB Statements interest in WPD.

No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Correc- In February 2003, Moody's confirmed the ratings of WPOH Limited and WPD tions," and EITF 02-3, "Issues Involved in Accounting for Derivative Contracts (South Wales) at Baa2 and Baal, and downgraded WPD LLP from Baal to Baa2 Held for Trading Purposes and Contracts Involved in Energy Trading and Risk and SIUK Capital Trust I from Baa2 to Baa3. The outlook on all ratings was stable.

Management Activities." See Note 22to the Financial Statements for a discus- Also in January, S&P completed a review of WPD and affirmed its BBB+ long-sion of the adoption of SFAS 144 and SFAS 145 and see Note 17 for a discussion term and A-2 short-term corporate credit ratings on WPD Holdings U.K. and of the adoption of EITF 02-3. related entities, SIUK Limited, WPD (South West) and WPD (South Wales). The outlook remains negative.

New Accounting Standards PPL expects to access both the capital and commercial paper markets See Note 22 to the Financial Statements for information on new accounting during 2003. PPL cannot provide assurances that any of these funding sources standards.

will be available to PPL on acceptable terms.

Cash and cash equivalents are derived from cash from operations, cash from FINANCIAL CONDITION financing activities and cash from investing activities. Net cash from operations Liquidity in 2002 was $796 million, compared to S891 million in2001. The $95 million decrease At December 31, 2002, PPL had $245 million in cash and cash equivalents and in cash provided by operating activities was primarily due to SI 52 million of tur-

$943 million of short-term debt. The $825 million increase in short-term debt bine cancellation payments, and an $89 million decrease in dividends from from December 31, 2001 to December 31, 2002 resulted primarily from the unconsolidated affiliates, partially offset by increases in net income adjusted to consolidation of WPD's short-term debt as a result of the acquisition of the a cash basis. As an asset-backed provider of electricity, the stability of PPus controlling interest in WPD and the issuance of PPL Energy Supply commercial cash from operations as it relates to the supply of electricity is influenced by paper in the fourth quarter (see Note 8 to the Financial Statements for addi-the market prices of electricity, the cost of fuel used in the production of elec-tional information). PPL plans to refinance S389 million of short-term debt at a tricity and the operational availability of generating units, among other factors.

WPD entity during the first half of 2003 with a debt offering in the U.K.

An important element supporting the stability of PPUs cash from operations PPL believes that its cash and cash equivalents, operating cash flows, is its continuing effortto secure long-term commitments from wholesale and access to debt and equity capital markets and borrowing capacity, taken as a retail customers and long-term fuel supply contracts. Two significant long-term whole, provide sufficient resources to fund ongoing operating requirements and wholesale contracts maintained by PPL EnergyPlus are: a full requirements, estimated future capital expenditures. PPUs operating cash flow and access to eight-year agreement to supply PPL Electric with estimated peak demand the capital markets can be impacted by economic factors outside of its control.

between 6,700 and 7,000 MW for PPL Electric's PLR load and a five-year con-In addition, PPUs borrowing costs can be impacted by short-term and long-term tract with NorthWestern for 300 MW of around-the-clock electricity supply debt ratings assigned by independent rating agencies, which are based, in sig-and 150 MW of on-peak supply. Over 85% of PPUs projected energy margins nificant part on PPUs performance as measured by certain credit measures in 2003 and about 70% of margins through 2007 are expected to come from such as interest coverage and leverage ratios. In May 2002, Standard & Poor's these long-term contracts.

PPL Corporation 29 2002 Annual Report In 2002, PPL also entered into multi-year tolling agreements with the Long of not less than 2.0 times consolidated earnings before income taxes, deprecia-Island Power Authority for about 159 MW of generation PPL constructed at two tion and amortization, in each case as calculated in accordance with the credit Long Island sites. Under these tolling agreements, PPL will convert fuel supplied lines. At December 31, 2002 and December 31, 2001, PPL Energy Supply's con-bythe Long Island Power Authority to electricity and will receive payments for solidated debt to capitalization percentages, as calculated in accordance with use of its facilities. PPL also continues to provide up to 200 MW of supply, for its credit lines, were 35% and 28%. At December 31, 2002 and December 31, various terms, to large industrial customers in Montana. 2001, PPL Energy Supply's interest coverage ratios, as calculated in accordance PPL EnergyPlus enters into contracts underwhich it agrees to sell and with its credit lines, were 7.4 and 13.9. Under its credit line, PPL Electric must purchase electricity, natural gas, oil and coal. PPL also enters into contracts maintain a consolidated debt to capitalization percentage not greater than 70%.

designed to lock-in interest rates for future financings or effect changes in PPL's At December 31, 2002 and December 31, 2001, PPL Electric's consolidated debt exposure to fixed or floating interest rates. These contracts often provide for to capitalization percentages, as calculated in accordance with its credit line, cash collateral or other credit enhancement, or reductions or terminations of a were 58% and 57%. At this time, PPL believes that these covenants and other portion orthe entire contractthrough cash settlementin the event of a down- borrowing conditions will not limit access to these funding sources.

grade of PPL or the respective subsidiary's credit ratings or adverse changes in In October 2002, WPD (South West)'s 416 million British pounds sterling market prices. For example, in addition to limiting its trading ability, if PPL or its short-term facilities were replaced by a 250 million British pounds sterling respective subsidiary's ratings were lowered to below 'investment grade' and bridge facility and two revolving creditfacilities: a one-year 100 million British energy prices increased by more than 10%, PPL estimates that based on its pounds sterling creditfacility and a five-year 150 million British pounds sterling December 31, 2002 position, it would have to post collateral of approximately credit facility. At December 31,2002, WPD (South West) had outstanding bor-

$121 million as compared to $150 million at December 31,2001. PPL has in place rowings of $389 million under its bridge facility and $55 million under its credit risk management programs that, among other things, are designed to monitor facilities based on year-end currency exchange rates. The bridge facility is and manage its exposure to volatility of cash flows related to changes in energy expected to be refinanced with long-term bonds in the first half of 2003.

prices, interest rates, foreign currency exchange rates, counterparty credit Under its credit lines, WPD (South West) must maintain an interest cover-quality and the operational performance of its generating units. age ratio of not less than 3.0 times consolidated earnings before income taxes, Net cash used in financing activities was $357 million in 2002, compared depreciation and amortization, and the regulatory asset base must be 150 mil-to net cash provided by financing activities of $267 million in 2001. In 2001, PPL lion British pounds sterling greater than total gross debt in each case as calcu-had net issuances of $563 million of debt, preferred securities and equity, com- lated in accordance with the credit lines. At December 31, 2002, WPD (South pared to net retirements of $70 million in 2002. PPL has $352 million of securities West)'s interest coverage ratio, as calculated in accordance with its credit lines, registered for issuance under a "universal" shelf registration statementwith was 10.3 and its regulatory asset base exceeded its total gross debt by 491 mil-the SEC as of January 31, 2003. Additionally, commercial paper programs at PPL lion British pounds sterling. At this time, PPL believes that these covenants and Energy Supply and PPL Electric, providing for the issuance of up to $1.1 billion other borrowing conditions will not limit access to these funding sources.

and $400 million, respectively, are maintained to meet short-term cash needs. PPL, PPL Energy Supply and their subsidiaries also have available funding If the existing credit ratings on these commercial paper programs of each com- sources that are provided through operating leases that are not recorded on pany were lowered, it is unlikely that there would be sufficient investor demand the balance sheet. These operating leases provide funds for developing, con-for the commercial paper. In addition, the amount of commercial paper that structing and operating generation facilities and equipment Failure to meet the could be outstanding under either PPL Energy Supply or PPL Electric's program financial and other covenants contained in these operating leases could limit is generally limited to the amount of their respective unused credit lines. or restrict access to these funds or require early payment of obligations. Atthis PPL Energy Supply and PPL Electric maintain unsecured credit lines of time, PPL and PPL Energy Supply believe thatthese covenants will not limit

$1.1 billion and $400 million that are available as backstops for their respective access to these funding sources.

commercial paper programs or for direct borrowings. PPL Energy Supply's and Under the operating leases entered into to manufacture and construct the PPL Electric's credit lines are also available to issue up to $800 million and $300 natural gas-fired simple-cycle generation facilities, PPL Energy Supply's sub-million, respectively, in letters of credit that may be needed for general corpo- sidiaries act as construction agents for the lessor to manufacture the equip-rate purposes, including margin requirements resulting from energy contracts. ment and for construction of the facilities. Upon commercial operation, PPL PPL Electric had $15 million of commercial paper outstanding and no borrow- Energy Supply subsidiaries will operate the facilities, be responsible for all of ings under its credit line at December 31, 2002, as compared to no commercial the costs associated with the operation and maintenance of the facilities and paper outstanding or borrowings under its credit line at December 31, 2001. PPL will make rental payments to the lessor trusts.

Energy Supply had $374 million of commercial paper outstanding and no borrow- In May 2006, underthe terms of the $660 million operating lease for ings outstanding under its credit line at December 31, 2002, as compared to no University Park and Sundance which terminates in April 2008, one of PPL Energy commercial paper outstanding or borrowings under its credit line at December31, Supply's subsidiaries is required to deposit in a cash collateral account an 2001. At December 31, 2002, the lenders under the credit line had issued $40 mil- amount equal in cash to approximately 83% of all funded asset costs. Also, PPL lion of letters of credit on behalf of PPL Electric and $47 million of letters of Energy Supply guarantees the payment obligations under this operating lease.

credit on behalf of PPL Energy Supply or its subsidiaries and affiliates. Accordingly, as guarantor, PPL Energy Supply must meet similar covenanttests Under its credit lines, PPL Energy Supply must maintain a consolidated debt as those applied to its credit lines. At December 31, 2002 and December 31,2001, to capitalization percentage not greater than 65%, and an interest coverage ratio the outstanding lease balance was $657 million and $454 million.

PPL Corporation 30 2002 Annual Report MANAGEMENT'S DISCUSSION AND ANALYSIS Under the terms of the S455 million Lower Mt. Bethel operating lease, which The PPL Montana Colstrip leases provide two renewal options based on the terminates no later than September 30, 2014, the PPL Energy Supply subsidiary economic useful life of the generation assets at the end of the 36-year lease lessee could be obligated to make payments equal to up to 100% of the lessor's term that terminates in 2036. In addition, the lease places certain restriction on investment and other obligations associated with the facility if the financing is PPL Montana's ability to incur additional debt, sell assets and declare dividends.

terminated early as a result of loss, destruction or condemnation of the project At December 31, 2002 and December 31, 2001, the outstanding debt balance or upon the event of default In addition, during the lease term, the PPL Energy within the lease was S314 million and $334 million.

Supply subsidiary could, subjectto certain conditions, purchase the facility from In addition to the leasing arrangements discussed above, PPL and its sub-the lessor, offer to assume the outstanding lessor debt associated with the sidiaries lease vehicles, office space, land, buildings, personal computers and lease or purchase such debt at a premium. Also, PPL Energy Supply guarantees other equipment under separate lease arrangements. See Note 10 to the the payment obligations under this operating lease. Accordingly, as guarantor, Financial Statements for a further discussion of the operating leases.

PPL Energy Supply must meet similar covenant tests as those applied to its At December 31, 2002, the estimated contractual cash obligations of PPL credit lines. At December 31, 2002 and December 31, 2001, the outstanding were as follows:

lease balance was $345 million and $116 million.

Less than Contractual Cash Obligations Total 1year 1-3 years 4-5 years After 5years Long-term Debt tal S6,252 $366 $1,306 S1,921 $2,659 Capital Lease Obligations Operating Leases 4bW 1,420 99 266 260 795 Purchase Obligations Wci 2,797 448 877 567 905 Other Long-term Obligations {d) 694 21 12 575 86 Total Contractual Cash Obligations S11,163 $934 $2,461 S3,323 $4,445 Ca Includes principal maturities only.

Nbi Includes current amounts for operating leases in effect and projected amounts for projects under construction.

Ccl The payments reflected herein are subject to change as certain purchase obligations included are estimates based on projected obligated quantities and/or projected pricing under the contracts.

(dl Includes redemptions of preferred securities.

PPL, PPL Energy Supply and PPL Electric provide guarantees for certain require early maturity of such arrangements or limit PPUs ability to enter into affiliate financing arrangements that enable certain transactions. Some of the certain transactions. At this time, PPL believes that these covenants will not guarantees contain financial and other covenants that if not met, would limit limit access to the relevant funding sources. At December 31, 2002, the esti-or restrict the affiliates' access to funds under these financing arrangements, mated commercial commitments of PPL were as follows:

Amount of Commitment Expiration per Period Total Amounts Less than Other Commercial Commitments Committed 1year 1-3 years 4-5 years Over 5years Lines of Credit Standby Letters of Credit $ 89 S 85 $4 Draws Under Lines of Credit 55 55 Guarantees Debt 'a 1,028 112 36 S550 $330 Performance Standby Repurchase Obligations Other Commercial Commitments Total Commercial Commitments $1,172 $252 S40 S550 $330 la) Includes guarantees on certain operating lease obligations.

The terms governing the securities, guarantees, lease obligations and other that it and its subsidiaries will be able to meet these covenant requirements. In commitments issued by PPL and its subsidiaries contain financial and other order to meet its maturing obligations in future years, PPL expects that it and its covenants that require compliance in order to avoid defaults and accelerations subsidiaries will have to continue to access both the bank and capital markets.

of payments. Further, a change in control under certain of these arrangements The long-term debt and similar securities of PPL and its subsidiaries and their would constitute a default and could result in early maturity of such arrange- maturities are set forth in the table of Contractual Cash Obligations above.

ments. In addition, certain of these arrangements restrictthe ability of PPUs Net cash used in investing activities in 2002 was $1.1 billion, compared to subsidiaries to pay or declare dividends, issue additional debt sell assets, or $702 million in 2001. The primary reasons for the $427 million increase in cash take other actions if certain conditions are not met. At this time, PPL believes used in investing activities was due to the acquisition of the controlling interest

PPL Corporation 31 2002 Annual Report in WPD for $211 million, net of cash acquired, and no repayments of loans by risk policies and detailed programs include, but are not limited to, credit review non-consolidated affiliated companies in 2002. Capital expenditures have histor- and approval, validation of transactions and market prices, verification of risk ically been for acquisitions and to support both existing and construction of and transaction limits, sensitivity analyses, and daily portfolio reporting, includ-new generation, transmission and distribution facilities. PPL's capital investment ing open positions, mark-to-market valuations and other risk measurement needs are currently expected to decrease significantly in 2003 due to the sub- metrics. In addition, efforts are on-going to develop systems to improve the stantial completion of its generation construction program. The majority of PPL's timeliness, quality and breadth of market and credit risk information.

2003 capital requirements will be funded from cash and cash equivalents on The forward-looking information presented below provides estimates of hand at December 31, 2002, cash from operations in 2003 and lease commit- what may occur in the future, assuming certain adverse market conditions, due ments previously funded. Any additional capital requirements will be obtained to reliance on model assumptions. Actual future results may differ materially either in the capital or commercial paper markets. (See "Capital Expenditure from those presented. These disclosures are not precise indicators of expected Requirements" for additional information.) future losses, but only indicators of reasonably possible losses.

SUBSEQUENT MATTERS Contract Valuation In February 2003, on behalf of PPL Electric, the Lehigh County Industrial PPL utilizes forwards contracts, futures contracts, options, swaps and tolling Development Authority (LCIDA) issued $90 million aggregate principal amount agreements as part of its risk management strategy to minimize unanticipated of 3.125% Pollution Control Revenue Refunding Bonds due 2008. These tax- fluctuations in earnings caused by price, interest rate and foreign currency exempt bonds were issued to refund the outstanding $90 million aggregate volatility. When available, quoted market prices are used to determine the fair principal amount of the 6.40% Pollution Control Revenue Refunding Bonds value of a commodity or financial instrument This may include exchange issued bythe LCIDA on PPL Electric's behalf in 1992. The bonds are insured by prices, the average mid-point bid/ask spreads obtained from brokers, or an a financial guaranty insurance policy issued by Ambac Assurance Corporation independent valuation by an external source, such as a bank. However, market and have the highest investment grade ratings, Aaa by Moody's and AAA by prices for energy or energy-related contracts may not be readily determinable Standard & Poor's. In connection with the issuance of the bonds, PPL Electric because of market illiquidity. If no active trading market exists, contracts are issued to the LCIDA a promissory note with principal, interest and prepayment valued using internally developed models. If the contracts are not accounted for provisions corresponding to the bonds. In addition, PPL Electric issued a like under the accrual method of accounting, the valuations are reviewed by an amount of Senior Secured Bonds under the 2001 Senior Secured Bond independent internal group. Although PPL believes that its valuation methods Indenture to secure its obligations under the promissory note. are reasonable, changes in the underlying assumptions could result in signifi-In February 2003, PPL announced an increase to its quarterly common stock cantly different values and realization in future periods.

dividend, payable April 1,2003, from 36 cents per share to 38.5 cents per share To record derivatives at theirfair value, PPL discounts the forward values (equivalent to $1.54 per annum). Future dividends, declared at the discretion of using LIBOR. Additionally, PPL reduces derivative assets' carrying value to the Board of Directors, will be dependent upon future earnings, financial recognize differences in counterparty credit quality and potential illiquidity in requirements and other factors. the market

The credit adjustment takes into account the bond ratings (and the implied Risk Management - Energy Marketing & Trading and Other default rates) of the counterparties that have an out-of-the-money position MARKET RISK with PPL. The more counterparties that have, for example, a BBB rating

Background

instead of an A rating, the largerthe adjustment Market risk is the potential loss PPL may incur as a result of price changes

The liquidity adjustmenttakes into account the fact that it may not be appro-associated with a particular financial or commodity instrument PPL is exposed priate to value contracts at the midpoint of the bid/ask spread. PPL might to market risk from:

have to accept the "bid" price if PPL wanted to close an open sales position

commodity price risk for energy and energy-related products associated with or PPL might have to acceptthe "ask" price if PPL wanted to close an open the sale of electricity from generating assets, the purchase of fuel for the purchase position.

generating assets, and energy trading activities;

interest rate risk associated with variable-rate debt and the fair value of Accounting and Reporting fixed-rate debt used to finance operations, as well as the fair value of debt PPL follows the provisions of SFAS 133, "Accounting for Derivative Instruments securities invested in by PPL's nuclear decommissioning fund; and Hedging Activities," as amended by SFAS 138, "Accounting for Certain

foreign currency exchange rate risk associated with investments in affiliates Derivative Instruments and Certain Hedging Activities," and interpreted by DIG in Latin America and Europe, as well as purchases of equipment in curren- issues (together, "SFAS 133") and EITF 02-3, "Issues Involved in Accounting cies otherthan U.S. dollars; and for Derivative Contracts Held for Trading Purposes and Contracts Involved in

equity securities price risk associated with the fair value of equity securities Energy Trading and Risk ManagementActivities," to account for contracts invested in by PPL's nuclear decommissioning fund. entered into to manage market risk. SFAS 133 requires that all derivative instru-ments be recorded at fair value on the balance sheet as an asset or liability PPL has a comprehensive risk management policy approved by the Board (unless they meet SFAS 133's criteria for exclusion) and that changes in the of Directors to manage the market risk described above and counterparty credit derivative's fair value be recognized currently in earnings unless specific risk. (Credit risk is discussed below.) The RMC, comprised of senior management hedge accounting criteria are met and chaired by the Vice President-Risk Management, oversees the risk manage-ment function. Key risk control activities designed to monitor compliance with

PPL Corporation 32 2002 Annual Report MANAGEMENT'S DISCUSSION AND ANALYSIS PPUs short-term derivative contracts are recorded as "Price risk manage- . Physical electricity purchases that increase PPLs long position and any ment assets" and "Price risk management liabilities" on the Balance Sheet. energy sale or purchase considered a "market call" are speculative, with Long-term derivative contracts are included in "Regulatory and Other unrealized gains or losses recorded immediately through earnings.

Noncurrent Assets - Other" and "Deferred Credits and Other Noncurrent *Financial electricity transactions, which can be settled in cash, cannot be Liabilities - Other." considered "normal" because they do not require physical delivery. These PPL adopted the final provisions of EITF 02-3 during the fourth quarter transactions receive cash flow hedge treatment if they lock in the price PPL of 2002. As such, PPL now reflects its net realized and unrealized gains and will receive or pay for energy expected to be generated or purchased in losses associated with all derivatives that are held for trading purposes in the the spot market. Any unrealized gains or losses on transactions that receive "Net energy trading margins" line on the Statement of Income. Non-derivative cash flow hedge treatment are recorded in other comprehensive income.

contracts that met the definition of energy trading activities as defined by *Physical and financial transactions for gas and oil to meet fuel and retail EITF 98-10, "Accounting for Energy Trading and Risk Management Activities," requirements can receive cash flow hedge treatment if they lock in the price are reflected in the financial statements using the accrual method of account- PPLwill pay in the spot market. Any unrealized gains or losses on transac-ing. Under the accrual method of accounting, unrealized gains and losses are tions receiving cash flow hedge treatment are recorded in other comprehen-not reflected in the financial statements. Prior periods have been reclassified. sive income.

PPL did not need to record a cumulative effect of this change in accounting

Option contractsthatdo notmeetthe requirements of DIG Issue C15, "Scope principle, because all non-derivative energy-related trading contracts had been Exceptions: Interpreting the Normal Purchases and Normal Sales Exception shown in the financial statements at their amortized cost This reflected model- as an Election," do not receive hedge accounting treatment and are marked ing reserves that incorporated the lack of independence in valuing contracts to market through earnings.

for which there were no external market prices.

In addition to energy-related transactions, PPL enters into financial interest Accounting Designation rate and foreign currency swap contracts to hedge interest expense associated Energy contracts that do not qualify as derivatives receive accrual accounting. with both existing and anticipated debt issuances. PPL also enters into foreign For energy contracts that meetthe definition of a derivative, the circumstances currency swap contracts to hedge the fair value of firm commitments denomi-and intent existing at the time that energy transactions are entered into deter- nated in foreign currency and net investments in foreign operations. As with mine their accounting designation. These designations are verified by PPL's risk energy transactions, the circumstances and intent existing atthe time of the control group on a daily basis. The following is a summary of the guidelines that transaction determine a contract's accounting designation, which is subse-have been provided to the traders who are responsible for contract designation quently verified by PPL's risk control group on a daily basis. The following is a for derivative energy contracts: summary of certain guidelines that have been provided to the treasury depart-

Any wholesale and retail contracts to sell electricity that are expected to be ment which is responsible for contract designation:

delivered from PPL's generation are considered "normal." These transactions

Transactions to lock in an interest rate prior to a debt issuance are consid-are not recorded in the financial statements and have no earnings impact ered cash flow hedges. Any unrealized gains or losses on transactions until delivery. Most wholesale electricity sales contracts in the eastern and receiving cash flow hedge treatment are recorded in other comprehensive western U.S. markets receive "normal" treatment. The methodology utilized income and are amortized as a component of interest expense over the life in determining the amount of sales that can be delivered from PPL's genera- of the debt tion has been reviewed by the RMC. This calculation predicts the probability . Transactions entered into to hedge fluctuations in the value of existing debt that generating units will run based on current market prices, expected price are considered fair value hedges with no earnings impact until the debt is volatilities and dispatch rates, as well as planned and forced outage rates by terminated because the hedged debt is also marked to market plant by month. See discussion below about the assumptions used to calcu- . Transactions which do not qualify for hedge accounting treatment are late how much energy is expected from, or required for, generation assets. marked to market through earnings.

"Trading around the assets" means that PPL EnergyPlus matches a contract Commodity Price Risk to sell electricity, previously to be delivered from PPL's generation, with a Commodity price risk is one of PPL's most significant risks due to the level of physical or financial contract to purchase electricity. These contracts can investment that PPL maintains in its generation assets, coupled with the volatil-qualify for fair value hedge treatment When the contracts' terms are identi-ity of prices for energy and energy-related products. Several factors influence cal, there is no earnings impact until delivery. The realized revenues and price levels and volatilities. These factors include, but are not limited to, sea-expenses associated with these contracts are currently recorded gross on the sonal changes in demand, weather conditions, available generating assets Statement of Income. EITF 02-L, "Reporting Gains and Losses on Derivative within regions, transportation availability and reliability within and between Instruments That are Subjectto FASB Statement No. 133 and Not Held for regions, market liquidity, and the nature and extent of current and potential fed-Trading Purposes," may, in the future, require that hedges that result in eral and state regulations. To hedge the impact of market price fluctuations physical delivery be recorded on a net basis.

on PPL's energy-related assets, liabilities and other contractual arrangements,

Physical electricity purchases needed to meet obligations due to a change PPL EnergyPlus sells and purchases physical energy atthe wholesale level in the physical load or generation forecasts are considered "normal."

PPL Corporation 33 2002 Annual Report under FERC market-based tariffs throughout the U.S. and enters into financial As of December 31,2002, PPL estimated that a 10% adverse movement exchange-traded and over-the-counter contracts. Because of the generating in market prices across all geographic areas and time periods would have assets PPL owns or controls, the majority of FPL's energy transactions qualify decreased the value of the commodity contracts in its non-trading portfolio for accrual or hedge accounting. by approximately$146 million, as compared to an $34 millionidecrease at Within PPUs hedge portfolio, the decision to enter into energy contracts December 31, 2001. However, the change in the value of the non-trading port-hinges on the expected value of PPLs generation. To address this risk, PPL folio would have been substantially offset by an increase in the value of the takes a conservative approach in determining the number of MWhs that are underlying commodity, the electricity generated, because these contracts serve available to be sold forward. In this regard, PPL reduces the maximum potential to reduce the market risk inherent in the generation of electricity. Additionally, output that a plant may produce bythree factors - planned maintenance, the value of PPL's unsold generation would be improved. Because PPUs elec-forced outage and economic conditions. The potential output of a plant is first tricity portfolio is generally in a net sales position, the adverse movement in reduced bythe amount of unavailable generation due to planned maintenance prices is usually an increase in prices. Conversely, because PPL's commodity on a particular unit Another reduction, representing the unforced outage rate, fuels portfolio is generally in a net purchase position, the adverse movement in is the amount of MWhs that historically is not produced by a plant due to such prices is usually a decrease in prices. If both of these scenarios happened, the factors as equipment breakage. Finally, the potential output of certain plants implied margins for the unsold generation would increase.

(like peaking units) are reduced because their higher cost of production will PPL also executes energy contracts to take advantage of market opportu-not allowthem to economically run during all hours. nities. As a result PPL may at times create a net open position in its portfolio PPLs non-trading portfolio also includes full requirements energy contracts. that could result in significant losses if prices do not move in the manner or The obligation to serve these contracts changes minute by minute. PPL analyzes direction anticipated. The margins from these trading activities are shown in historical on-peak and off-peak usage patterns, as well as spot prices and the Statement of Income as "Net energy trading margins."

weather patterns, to determine a monthly level of block electricity that best fits PPL's trading contracts mature at various times through 2006. The usage patterns in order to minimize earnings volatility. On a forward basis, PPL following chart sets forth PPL's net fair market value of trading contracts as reserves a block amount of generation for full requirements energy contracts of December 31, 2002.

that is expected to be the best match with their anticipated usage patterns and Gains/(Losses) energy peaks. Anticipated usage patterns and peaks are affected by load Fair value of contracts outstanding at the beginning of the year $ (5) growth, regional economic drivers and seasonality. Contracts realized or otherwise settled during the year 5 Because of PPUs efforts to hedge the value of the energy from its genera- Fair value of new contracts at inception (131 tion assets, PPL has open contractual positions. If PPLwere unable to deliver Other changes in fair values 7 firm capacity and energy under its agreements, under certain circumstances it Fair value of contracts outstanding at the end of the year $ (61 would be required to pay damages. These damages would be based on the dif-ference between the market price to acquire replacement capacity or energy During 2002, PPL reversed net losses of approximately $5million related and the contract price of the undelivered capacity or energy. Depending on to contracts entered into prior to January 1, 2002. This amount does not reflect price volatility in the wholesale energy markets, such damages could be signifi-intra-year contracts that were entered into and settled during the period.

cant. Extreme weather conditions, unplanned power plant outages, transmis-The fair value of new contracts at inception is usually zero, because they sion disruptions, non-performance by counterparties (or their counterparties) are entered into at current market prices. However, when PPL enters into an with which it has power contracts and other factors could affect PPL's ability to option contract a premium is paid or received. PPL paid $13 million during meet its firm capacity or energy obligations, or cause significant increases in 2002 for these option contracts.

the market price of replacement capacity and energy. Although PPL attempts to "Other changes in fair values," a gain of approximately $7 million, represent mitigate these risks, there can be no assurance that itwill be able to fully meet changes in the marketvalue of contracts outstanding atthe end of 2002.

itsfirm obligations,thatitwill not be required to paydamagesforfailureto per- As of December 31, 2002, the net loss on PPL's trading activities expected form, or that it will not experience counterparty non-performance in the future. to be recognized in earnings during the next three months is approximately

$2 million.

The following chart segregates estimated fair values of PPFLs trading portfo-lio at December 31, 2002 based on whetherthe fairvalues are determined by quoted market prices or other more subjective means.

Maturity in Maturity Less Maturity Maturity Excess of Total Fair Value of Contracts at Period-End GainsALosses) Than 1 year 1-3 years 4-5 years 5 years Fair Value Source of Fair Value Prices actively quoted S 1 $ 1 Prices provided by other external sources 3 3 Prices based on models and other valuation methods (10) (10)

Fair value of contracts outstanding at the end of the period S 16) $ (6)

PPL Corporation 34 2002 Annual Report MANAGEMENT'S DISCUSSION AND ANALYSIS The "Prices actively quoted" category includes the fair value of exchange- PPL has adopted a foreign currency risk management program designed traded natural gas futures contracts quoted on the New York Mercantile Exchange to hedge certain foreign currency exposures, including firm commitments, (NYMEX). The NYMEX has currently quoted prices through February 2009. recognized assets or liabilities and net investments.

The "Prices provided by other external sources" category includes PPus for- During the first quarter of 2001, PPL entered into contracts for the forward ward positions and options in natural gas and power and natural gas basis swaps purchase of 51 million euros to pay for certain equipment in 2002 and 2003. The at points for which over-the-counter (OTC) broker quotes are available. The fair estimated value of these forward purchases as of December 31, 2002, being value of electricity positions recorded above use the midpoint of the bid/ask the amount PPLwould receive to terminate them, was $4 million.

spreads obtained through OTC brokers. On average, OTC quotes for forwards During the second and third quarters of 2002, PPL executed forward sale and swaps of natural gas and power extend one and two years into the future. transactions, maturing in March 2003, for 50 million British pounds sterling to The "Prices based on models and other valuation methods" category hedge a portion of its net investment in WPDH Limited. The estimated value includes the value of transactions for which an internally developed price curve of these agreements as of December 31, 2002, being the amount PPL would was constructed as a result of the long-dated nature of the transaction orthe have to pay to terminate them, was $1million.

illiquidity of the market point, or the value of options not quoted by an exchange Nuclear Decommissioning Fund - Securities Price Risk or OTC broker. Additionally, this category includes "strip" transactions whose In connection with certain Nuclear Regulatory Commission requirements, PPL prices are obtained from external sources and then modeled to monthly prices Susquehanna maintains trust funds to fund certain costs of decommissioning as appropriate.

the Susquehanna station. As of December 31, 2002, these funds were invested As of December 31, 2002, PPL estimated that a 10% adverse movement in primarily in domestic equity securities and fixed-rate, fixed-income securities market prices across all geographic areas and time periods would have and are reflected at fair value on PPUs Balance Sheet. The mix of securities decreased the value of the commodity contracts in its trading portfolio by $7mil-is designed to provide returns to be used to fund Susquehanna's decommission-lion, compared to an insignificant amount at December 31, 2001.

ing and to compensate for inflationary increases in decommissioning costs.

Interest Rate Risk However, the equity securities included in the trusts are exposed to price fluc-PPL and its subsidiaries have issued debt to finance their operations. PPL uti- tuation in equity markets, and the values of fixed-rate, fixed-income securities lizes various financial derivative products to adjust the mix of fixed and floating- are exposed to changes in interest rates. PPL Susquehanna actively monitors rate interest rates in its debt portfolios, adjusting the duration of its debt the investment performance and periodically reviews asset allocation in accor-portfolios and locking in U.S. Treasury rates (and interest rate spreads over dance with its nuclear decommissioning trust policy statement At December 31, treasuries) in anticipation of future financing, when appropriate. Risk limits 2002, a hypothetical 10% increase in interest rates and a 10% decrease in equity under the risk management program are designed to balance risk exposure to prices would have resulted in an estimated $16 million reduction in the fair value volatility in interest expense and losses in the fair value of PPLs debt portfolio of the trust assets, as compared to a $17 million reduction at December 31, 2001.

due to changes in the absolute level of interest rates. PPL Electric's 1998 restructuring settlement agreement provides for the At December 31, 2002, PPUs potential annual exposure to increased interest collection of authorized nuclear decommissioning costs through the CTC.

expense, based on a 10% increase in interest rates, was estimated at 53 million, Additionally, PPL Electric is permitted to seek recovery from customers of up to compared to a $6 million increase at December 31, 2001. 96% of certain increases in these costs. Under the power supply agreements PPL is also exposed to changes in the fair value of its debt portfolio. At between PPL Electric and PPL EnergyPlus, these revenues are passed on to December 31, 2002, PPL estimated that its potential exposure to a change in the PPL EnergyPlus. Similarly, these revenues are passed on to PPL Susquehanna fair value of its debt portfolio, through a 10% adverse movement in interest under a power supply agreement between PPL EnergyPlus and PPL rates, was $219 million, compared to S111 million at December 31,2001. Susquehanna. These revenues are used to fund the trusts.

PPL utilizes various risk management instruments to reduce its exposure to CREDIT RISK adverse interest rate movements for future anticipated financings. While PPL is Credit risk relates to the risk of loss that PPL would incur as a result of non-exposed to changes in the fair value of these instruments, they are designed performance by counterparties of their contractual obligations. PPL maintains such that an economic loss in value should generally be offset by interest rate credit policies and procedures with respect to counterparties (including savings atthe time the future anticipated financing is completed. At December 31, requirements that counterparties maintain certain credit ratings criteria) and 2002, PPL estimated that its potential exposure to a change in the fair value of these requires other assurances in the form of credit support or collateral in certain instruments, through a 10% adverse movement in interest rates, was approxi-circumstances in orderto limit counterparty credit risk. However, PPL has con-mately S18 million, compared to a $13 million exposure at December 31, 2001.

centrations of suppliers and customers among electric utilities, natural gas dis-Foreign Currency Risk tribution companies and other energy marketing and trading companies. These PPL is exposed to foreign currency risk, primarily through investments in concentrations of counterparties may impact PPL's overall exposure to credit affiliates in Latin America and Europe. In addition, PPL may make purchases risk, either positively or negatively, in that counterparties may be similarly of equipment in currencies other than U.S. dollars. affected by changes in economic, regulatory or other conditions. As discussed above under "Accounting and Reporting," PPL records certain non-performance reserves to reflect the probability that a counterparty with contracts that

PPL Corporation 35 2002 Annual Report are out of the money (from the counterparty's standpoint) will default in its Related Party Transactions performance, in which case PPL would have to sell into a lower-priced market PPL is not aware of any material ownership interests or operating responsibility or purchase from a higher-priced market. These reserves are reflected in the by senior management of PPL or its subsidiaries in outside partnerships, includ-fair value of assets recorded in "Price risk management assets" on the Balance ing leasing transactions with variable interest entities, or other entities doing Sheet PPL has also established a reserve with respect to certain sales to the business with PPL.

California ISO for which PPL has not yet been paid, as well as a reserve related Capital Expenditure Requirements to PPL's exposure as a result of the Enron bankruptcy, which is reflected in The schedule below shows PPL's current capital expenditure projections for the "Accounts receivable" on the Balance Sheet See Notes 14 and 17 to the years 2003-2007 and actual spending for the year 2002:

Financial Statements.

I Actual Projected I 2002 2003 2004 2005 2006 2007 i I

Construction expenditures Walb) I Generating facilities 10 $897 $311 $175 $251 $128 $142 Transmission and distribution facilities 333 423 361 357 353 367 Environmental 20 5 5 12 50 96 Other 89 96 76 70 69 65 Total Construction Expenditures 1,339 835 617 690 600 670 Nuclear fuel 52 54 56 58 60 60 Total Capital Expenditures $1,391 $889 $673 $748 $660 $730 la) Construction expenditures include AFUDC and capitalized interest, which are expected to be less than $10 million in each of the years 2003-2007.

lb)This information excludes any equity investments by PPL Global for new projects.

(ci Generating facilities include assets financed through off-balance sheet synthetic leases as follows: 2002, $494 million; 2003, $109 million; and 2004,$7 million.

Financing for these facilities is already secured.

PPL's capital expenditure projections for the years 2003-2007 total about Environmental Matters

$3.7 billion. Capital expenditure plans are revised periodically to reflect changes See Note 14 to the Financial Statements for a discussion of environmental matters.

in conditions.

Competition Acquisitions and Development The electric utility industry has experienced, and may continue to experience, From time-to-time, PPL and its subsidiaries are involved in negotiations with third an increase in the level of competition in the energy supply market at both the parties regarding acquisitions, jointventures and other arrangements which may state and federal levels. PPL Electric's PLR supply business will be affected by or may not result in definitive agreements. See Note 9 to the Financial Statements customers who select alternate suppliers under the Customer Choice Act.

for information regarding recent acquisitions and development activities. In July 2001, the FERC issued orders calling for the formation of one RTO At December 31, 2002, PPL Global had investments in foreign facilities, throughout the Mid-Atlantic region (PJM), New York and New England. In including consolidated investments in WPD, Emel, EC and others. See Note 3 response, PPL Electric is taking the position that a single northeastern RTO is to the Financial Statements for information on unconsolidated investments a significant step forward in establishing a reliable and properly functioning accounted for under the equity method. wholesale electricity market in the region. PPL Electric strongly supports the At December 31, 2002, PPL had domestic generation projects under devel- most comprehensive amalgamation of the existing and proposed northeast opment which would provide 690 MW of additional generation. power pools, including the establishment of a single RTO as well as the elimi-PPL is continuously reexamining development projects based on market nation of marketplace distinctions and control area boundaries. The FERC's conditions and other factors to determine whether to proceed with these northeastern RTO proceeding is continuing.

projects, sell them, cancel them, expand them, execute tolling agreements See Note 14 to the Financial Statements for information on the FERC Notice or pursue other opportunities. of Proposed Rulemaking entitled "Remedying Undue Discrimination through Open Access Transmission Service and Standard Electricity Market Design."

PPL Corporation 36 2002 Annual Report MANAGEMENT'S DISCUSSION AND ANALYSIS APPLICATION OF CRITICAL ACCOUNTING POLICIES During 2002, PPL made changes to its assumptions related to the discount PPL's financial condition and results of operations are impacted by the methods, rate, the expected return on plan assets, the rate of compensation increase and assumptions and estimates used in the application of critical accounting poli- the health care cost trend rate. Management consults with its actuaries when cies. The following accounting policies are particularly important to the finan- selecting each of these assumptions.

cial condition or results of operations of PPL, and require estimates or other In selecting discount rates, PPL considers fixed-income security yield rates.

judgments of matters inherently uncertain. Changes in the estimates or other At December 31, 2002, PPL decreased the discount rate for its domestic plans judgments included within these accounting policies could result in a significant from 7.25% to 6.75% as a result of decreased fixed-income security returns. For change to the information presented in the financial statements. (These account- its international plans, PPL used a discount rate of 5.75% at December 31, 2002.

ing policies are also discussed in Note 1to the Financial Statements.) PPL's In selecting an expected return on plan assets, PPL considers past perfor-senior management has reviewed these critical accounting policies, and the mance and economic forecasts for the types of investments held by the plan.

estimates and assumptions regarding them, with its Audit Committee. In addition, At December 31, 2002, PPL decreased the expected return on plan assets for PPL's senior management has reviewed the following disclosures regarding the its domestic pension plans from 9.2% to 9.0% as a result of continued declines application of these critical accounting policies with the Audit Committee. in equity and fixed-income security returns. For its international plans, PPL used a weighted average of 8.31% as the expected return on plan assets at

1) Price Risk Management December 31, 2002.

See "Risk Management - Energy Marketing & Trading and Other" in Financial In selecting a rate of compensation increase, PPL considers past experience Condition.

in light of movements in inflation rates. At December 31, 2002, PPL decreased

2) Pension and Other Postretirement Benefits the rate of compensation increase from 4.25% to 4.0% for its domestic plans.

PPL follows the guidance of SFAS 87, "Employers' Accounting for Pensions," For its international plans, PPL used 3.75% as the rate of compensation increase and SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than at December 31, 2002.

Pensions," when accounting for these benefits. Under these accounting stan- In selecting health care cost trend rates, PPL considers past performance dards, assumptions are made regarding the valuation of benefit obligations and and forecasts of health care costs. At December 31, 2002, PPL increased its the performance of plan assets. Delayed recognition of differences between previous health care cost trend rates. The previous rates were 7.0% for 2002, actual results and expected or estimated results is a guiding principle of these gradually declining to 6%in 2005. The new rates are 12% for 2003, gradually standards. This delayed recognition of actual results allows for a smoothed declining to 5.0% for 2010. These changes are based upon continued increases recognition of changes in benefit obligations and plan performance over the in health care costs.

working lives of the employees who benefit under the plans. The primary A variance in the assumptions listed above could have a significant impact assumptions are as follows: on projected benefit obligations, accrued pension and other postretirement

Discount Rate -The discount rate is used in calculating the present value benefit liabilities, reported annual net periodic pension and other postretire-of benefits, which are based on projections of benefit payments to be made ment benefit cost and other comprehensive income (OCI). The following chart in the future. reflects the sensitivities associated with a change in certain assumptions.

Expected Return on Plan Assets - Management projects the future return on While the chart below reflects either an increase or decrease in each assump-plan assets based principally on prior performance. These projected returns tion, PPL and its actuaries expect that the inverse of this change would impact reduce the net benefit costs the company will record currently. the projected benefit obligation, accrued pension and other postretirement

Rate of Compensation Increase - Management projects employees' annual benefit liabilities, reported annual net periodic pension and other postretirement pay increases, which are used to project employees' pension benefits at benefit cost and OCI by a similar amount in the opposite direction. Each sensi-retirement tivity below reflects an evaluation of the change based solely on a change in

Health Care Cost Trend Rate - Management projects the expected increases that assumption.

in the cost of health care.

Increasel(Decrease)

Change in Impact on Impact on Impact on Impact on Actuarial Assumption Assumption Obligation Liabilities la) Cost OCI Discount Rate 10.25)% $125 $8 S8 $63 Expected Return on Plan Assets (0.251% N/A 10 10 Rate of Compensation Increase 0.25 % 22 4 4 Health Care Cost Trend Rate (b) 1.0% 19 2 2 N/A (a} Excludes the impact of additional minimum liability.

ib)Only impacts other postretirement benefits.

PPL Corporation 37 2002 Annual Report At December 31, 2002, PPL had recognized accrued pension and other During 2002, PPL and its subsidiaries evaluated certain international invest-postretirement benefit liabilities totaling S484 million, included in "Deferred ments and gas-fired generation assets for impairment as events and circum-Credits and Other Noncurrent Liabilities - Other" on the Balance Sheet The stances indicated that the carrying value of these investments may not be

$484 million liability represented a $289 million increase over the $195 million recoverable. The events that led to these impairment reviews were as follows:

liability that was recorded at December 31, 2001. The increased liability was

CEMAR: A prolonged drought that caused electricity rationing, an unfavor-primarily due to the liabilities recorded for the WPD pension plans acquired able regulatory environment and disruption of Brazil's electricity markets all in 2002. PPUs total projected obligation for these benefits was approximately indicated that the future cash flow stream would be adversely impacted. In

$4.1 billion, which was offset by $3.3 billion of assets held in various trusts. addition, CEMAR failed to pay certain of its creditors for obligations when However, these amounts are notfully reflected in the current financial state- due, and ANEEL denied CEMAR's request for a rate-increase review and ments due to the deferred recognition criteria. denied the request for transfer of PPL's equity interest in CEMAR to Franklin In 2002, PPL recognized net periodic pension and other postretirement Park Energy.

income credited to operating expenses of $61 million. This amount represents

New gas-fired generation assets: Current wholesale energy prices have a S36 million increase over the credit recognized during 2001. This increase adversely impacted margins for 2002 and could continue to do so beyond was primarily due to pension income recognized from the WPD pension plans, 2002. Based upon current energy price levels, there is a risk that PPL may be partially offset by the reduction of pension earnings associated with the remea- unable to recover its investment in new gas-fired generation facilities.

surement of the projected benefit obligation and recognition of a decline in PPL recorded an impairment charge of $100 million in 2002, for the remain-asset value for PPL's primary domestic pension plan during 2002.

ing value of its investment in CEMAR. PPL had already recorded an impairment As a result of the plans' asset return experience and decreases in the charge of $179 million for Rtsinvestment in CEMAR in 2001. The most significant assumed discount rate at December 31, 2002, PPL was required to recognize assumption used in assessing the CEMAR impairment was the estimated future additional minimum pension liabilities totaling $482 million, as prescribed by cash flow. Due to the significant financial and political difficulties facing CEMAR SFAS 87. Recording these liabilities resulted in a reduction in common equity and PPL's commitment to exit the business, the determination was made that through charges to OCI, net of taxes and unrecognized prior service costs, there was no value remaining in the investment Based on the circumstances of $306 million, with no effect on net income. The charges to OCI will reverse surrounding this investment PPL does not believe there is any variability in in future periods if the fair value of trust assets exceeds the accumulated this assumption.

benefit obligation.

PPL did not record an impairment of its new gas-fired generation assets Refer to Note 12 to the Financial Statements for additional information that were in-service in 2002. For these impairment analyses, the most significant regarding pension and other postretirement benefits.

assumption was the estimate of future cash flows. For the impairment analyses 3)Asset Impairment of its in-service gas-fired generation assets, PPL estimates future cash flow PPL and its subsidiaries review long-lived assets for impairment when events using information from its corporate business plan adjusted for any recent sales or circumstances indicate carrying amounts may not be recoverable. Assets or purchase commitments. Key factors that impact cash flows include projected subject to this review, for which impairments have been recorded in 2002 or prices for electricity and gas as well as firm sales and purchase commitments.

prior years, include international equity investments, new generation assets, A 10% change in estimated future cash flow for any of PPLs in-service gas-fired consolidated international energy projects and goodwill. generation assets would not result in an impairment charge.

PPL performs impairment analyses for tangible long-lived assets in accor- In November 2002, due to low energy price curves, the absence of a tolling dance with SFAS 144, 'Accounting for the Impairment or Disposal of Long-Lived agreement for the site, and delays in obtaining permits, the completion of the Assets." For long-lived assets to be held and used, SFAS 144 requires companies Kings Park project became uncertain. Due to this uncertainty and the absence to (a)recognize an impairment loss only if the carrying amount is not recover- of other viable projects, the costs of the turbines and SCRs thatwere planned able from undiscounted cash flows and (b)measure an impairment loss as the for deployment at Kings Park were determined to not be recoverable from difference between the carrying amount and fair value of the asset. Refer to expected undiscounted cash flows. To determine the amount of the impairment Note 22 to the Financial Statements for additional information on SFAS 144. PPL estimated the fair value of the turbines and SCRs based upon replacement In determining asset impairments, management must make significant judg- costs of similar assets. This resulted in the recognition of a $26 million, after-tax, ments and estimates to calculate the fair value of an investment Fair value is impairment charge. The most significant assumption related to the asset impair-developed through consideration of several valuation methods including com- ment was the estimate of replacement costs. A 10% change in the estimate of parison to market multiples, comparison of similar recent sales transactions, replacement costs would have increased or decreased the impairment charge comparison to replacement cost and discounted cash flow. Discounted cash by $3million after-tax.

flow is calculated by estimating future cash flow streams, applying appropriate In January 2003, PPL decided to seek a buyer and not proceed with the discount rates to determine the present value of the cash flow streams, and development of the Kings Park project.

then assessing the probability of the various cash flow scenarios. The impair- In 2001, the FASB issued SFAS 142, 'Goodwill and Other Intangible Assets,'

ment is then recorded based on the excess of the carrying value of the invest- which eliminates the amortization of goodwill and other acquired intangible ment over fair value. Changes in assumptions and estimates included within the assets with indefinite economic useful lives. SFAS 142 requires an annual impairment reviews could result in significantly different results than those impairmenttest of goodwill and other intangible assets that are not subject identified and recorded in the financial statements. to amortization. PPL adopted SFAS 142 on January 1,2002.

PPL Corporation 38 2002 Annual Report MANAGEMENT'S DISCUSSION AND ANALYSIS A transition impairment test was completed in the first quarter of 2002. As a transactions has been accounted for as an operating lease. In accordance with result of this impairment test, PPL recognized a goodwill impairment charge of current GAAP, these SPEs were not consolidated by PPL because the equity

$150 million related to the Latin American reporting unit which is reported as a owners (entities unrelated to PPL and its subsidiaries) contributed and maintain "Cumulative Effect of a Change in Accounting Principle' on the Statement of a minimum of 3% equity interest throughoutthe life of the SPEs.

Income. PPL completed its annual goodwill impairment test in the fourth quarter Sale/Leaseback of 2002. This test did not result in an additional impairment. PPUs most signifi-In July 2000, PPL Montana sold its interest in the Colstrip generating plantto cant assumptions surrounding the goodwill impairment relate to the determina-owner lessors who are leasing the assets back to PPL Montana under four 36-tion of fair value. PPL determined fair value based upon discounted cash flow. A year operating leases. This transaction is accounted for as an operating lease variance in the forecasted cash flow or discount rate could have a significant in accordance with current rules related to sale/leaseback arrangements. If for impact on the amount of the impairment charge recorded. The following chart any reason this transaction did not meet the requirements for off-balance sheet reflects the sensitivities associated with a change in these assumptions. Each operating lease treatment as a sale/leaseback, PPL would have approximately sensitivity below reflects an evaluation of the change based solely on a change

$343 million of additional assets and liabilities recorded on its balance sheet in that assumption.

at December 31, 2002 and would have recorded additional expenses currently Increase / (Decrease) estimated at$10 million, after-tax, in 2002.

Impact on Impact on Change in Transition Annual Synthetic Leases Assumption Impairment Impairment In May 2001, a PPL Global subsidiary entered into a lease arrangement, as Forecasted Cash Flow 10/110o% S(48)/48 $0/15 lessee, for the development, construction and operation of commercial power Discount Rate I1(11% $331(36) No Impact generation facilities. This arrangement covers the 540 MW gas-powered University Park project near University Park, Illinois, and the 450 MW gas-

4) Leasing powered Sundance project near Coolidge, Arizona. In July 2002, these facilities PPL applies the provisions of SFAS 13, "Accounting for Leases," to all leasing were substantially complete and the initial lease term commenced.

transactions. In addition, PPL applies the provisions of numerous other In December 2001, a PPL Global subsidiary entered into a lease arrange-accounting pronouncements issued by the FASB and the EITF that provide ment as lessee, for the development, construction and operation of a 600 MW specific guidance and additional requirements related to accounting for various gas-fired combined-cycle generation facility located in Lower Mt Bethel leasing arrangements. In general, there are two types of leases from a lessee's Township, Northampton County, Pennsylvania. The initial lease term is approxi-perspective: operating leases - leases accounted for off-balance sheet and mately 10 years, beginning on the date of commercial operation, which is capital leases - leases capitalized on the balance sheet. expected to occur in late 2003.

In accounting for leases, management makes various assumptions, Both of these leases are accounted for as operating leases in accordance including the discount rate, the fair market value of the leased assets and the with current accounting requirements. If for any reason these transactions estimated useful life, in determining whether a lease should be classified as did not meet the requirements for off-balance sheet operating lease treatment, operating or capital. Changes in these assumptions could result in the differ- PPLwould have approximately $1.1 billion of additional assets and liabilities ence between whether a lease is determined to be an operating lease or a recorded on its balance sheet at December 31, 2002 and would have recorded capital lease, thus significantly impacting the amounts to be recognized in the additional expenses currently estimated at $5million, after-tax, in 2002.

financial statements. In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest In addition to uncertainty inherent in managements assumptions, leasing Entities, an interpretation of ARB No. 51." FIN 46 clarifies that variable interest transactions and the related accounting rules become increasingly complex entities (VIEs), as defined therein, that do not disperse risks among the parties when they involve: sale/leaseback accounting (leasing transactions where the involved should be consolidated by the entity that is determined to be the pri-lessee previously owned the leased assets), synthetic leases (leases that qual- mary beneficiary. PPL currently believes that the lessors involved in its leases ify for operating lease treatment for book accounting purposes and financing for the Sundance, University Park and Lower Mt. Bethel generating facilities, treatment for tax accounting purposes), lessee involvement in the construction discussed above, will be considered VIEs under FIN 46 and that PPL would be of leased assets and/or special purpose entities (SPEs) (entities created for the primary beneficiary. PPL is currently evaluating whether these leasing the specific purpose of owning the property, plant and equipment and incurring arrangements can be restructured such thatthey would still qualify as off-bal-the related financing obligation). Current GAAP requires that SPEs be consoli- ance sheet operating leases under the new rules. If PPL does not restructure dated if several conditions exist, including if the owners of the SPEs have not these leases, PPL believes that it will be required to consolidate the financial made an initial substantive residual equity capital investment that is at risk statements of the lessors. The principal impact from such consolidation would during the entire lease term. The consolidation of an SPE lessor by the lessee be the inclusion of the generating facilities as assets and the lease financing has a very similar financial result as a lease that is accounted for as a capital as liabilities in the consolidated balance sheet of PPL PPL does not currently lease, that is, the leased assets and the related financing obligations are believe that the lessors in the PPL Montana sale/leaseback will be determined recorded on the lessee's balance sheet to be VlEs in which PPL will be the primary beneficiary. Therefore, PPL does At December 31, 2002, PPL subsidiaries participated in one significant not expect to consolidate the financial statements of these lessors. PPL sale/leaseback transaction involving unconsolidated SPEs and two significant must adopt FIN 46 for all of these leases no later than the first interim period synthetic lease transactions involving unconsolidated SPEs. Each of these beginning after June 15, 2003.

PPL Corporation 39 2002 Annual Report See Note 10 to the Financial Statements for additional information related recorded the above-market cost of the purchases from NUGs as part of its pur-to operating leases and Note 22 for additional information related to FIN 46. chased power costs on an as-incurred basis, since these costs were recovered in regulated rates. When the generation business was deregulated, the loss

5) Loss Accruals contingency associated with the commitment to make above-market NUG pur-PPL periodically records the estimated impacts of various conditions, situations chases was recorded. This loss accrual for the above-market portion of NUG or circumstances involving uncertain outcomes. These events are called "con-purchase commitments was recorded because it was probable that the loss fingencies," and FPL's accounting for such events is prescribed by SFAS 5, had been incurred and the estimate of future energy prices could be reasonably "Accounting for Contingencies." SFAS 5 defines a contingency as "an existing determined, using the then forward prices of electricity and capacity. This loss condition, situation, or set of circumstances involving uncertainty as to possible accrual was transferred to PPL EnergyPlus in the July 1, 2000 corporate realign-gain or loss to an enterprise that will ultimately be resolved when one or more ment The above-market loss accrual was $427 million at December 31, 2002.

future events occur or fail to occur."

When the loss accrual related to NUG purchases was recorded in 1998, PPL For loss contingencies, the loss must be accrued if I1) information is avail-Electric established the triggering events for when the loss accrual would be able that indicates it is "probable" that the loss has been incurred, given the reduced. A schedule was established to reduce the liability based on projected likelihood of the uncertain future events and (2)the amount of the loss can be purchases over the lives of the NUG contracts. All but one of the NUG contracts reasonably estimated. FASB defines "probable" as cases in which "the future expire by 2009, with the last one ending in 2014. PPL EnergyPlus reduces the event or events are likely to occur." SFAS 5 does not permit the accrual of gain above-market NUG liability based on the aforementioned schedule. As PPL contingencies under any circumstances.

EnergyPlus reduces the liability for the above-market NUG purchases, it offsets The accrual of a loss contingency involves considerable judgment on the the actual cost of NUG purchases, thereby bringing the net power purchase part of management. The accounting aspects of loss accruals include: (1)the expense more in line with market prices.

initial identification and recording of the loss accrual and (2)the determination PPL EnergyPlus assessed the remaining $427 million above-market liability of a triggering event for reducing a recorded loss accrual and the on-going at December 31, 2002, comparing the projected electricity purchases under the assessment as to whether a recorded loss accrual is reasonable.

terms of the NUG contracts, with the purchases assuming projected market Initial Identification and Recording of the Loss Accrual prices for the energy. This assessment was based on projected PJM market PPL uses its internal expertise and outside experts (such as lawyers, tax prices, including capacity, through 2014, as comprehended in the current busi-specialists and engineersl, as necessary, to help estimate the probability that ness plan of PPL EnergyPlus. The assessment also used sensitivities around the a loss has been incurred and the amount (or range) of the loss. market prices, adjusting such prices upwards and downwards by 10%.

Throughout 2002, PPL assessed potential loss accruals for environmental The assessment is dependent on the market prices of energy and the esti-remediation, litigation claims, regulatory penalties and other events. There were mated output levels of the NUGs. Market prices of energy are dependent on no material events identified for which a loss was probable and for which the many variables, including growth in electricity demand in PJM, available gener-loss could be reasonably estimated. Therefore, there were no material loss ation, and changes in regulatory and economic conditions. Accordingly, market accruals recorded in 2002 using the SFAS 5 criteria. price sensitivities were used in the assessment If estimated market prices However, PPL has identified certain events which could give rise to a loss, were adjusted upwards by 10% in each of the years from 2003 through 2014, the but which do not meet the conditions for accrual under SFAS 5. SFAS 5 requires accrual forthe above-market NUG purchase commitments would be approxi-disclosure, but not a recording, of potential losses when it is"reasonably possi- mately $401 million. Conversely, if estimated market prices were adjusted down-ble' that a loss has been incurred. FASB defines "reasonably possible' as wards by 10% during the remaining term of the NUG contracts,the accrual for cases in which "the chance of the future event or events occurring is more the above-market NUG purchase commitments would be approximately$501 than remote but less than likely.' million. The recorded above-market liability of $427 million at December 31, 2002 See Note 14 to the Financial Statements for disclosure of potential loss falls within the range calculated in the year-end assessment. As noted above, it accruals, most of which have not met the criteria for accrual under SFAS 5. is very difficultto estimate future electricity prices, which are dependent on Such disclosures include, among others, the Montana Power shareholders' liti- many variables and subject to significant volatility. PPUs management believes gation, a lawsuit regarding the Colstrip transmission system and any potential thatthe current recorded NUG above-market liability was fairly stated at adverse outcome related to the PJM Market Monitor report December 31,2002.

Reducing Recorded Loss Accruals and On-Going Assessment OTHER INFORMATION When a loss accrual is recorded, PPL identifies the triggering eventfor subse-PPUs Audit Committee has approved the independent auditor to provide the quently reducing the loss accrual. Also, PPL periodically reviews the loss following services:

accrual to assure that the recorded potential loss exposure is reasonable.

Audit and audit-related services (including services in connection with The largest contingency currently on PPL's balance sheet is the loss accrual statutory and regulatory filings, reviews of offering documents and registra-for above-market NUG purchase commitments, being the difference between tion statements, employee benefit plan audits and internal control reviews);

the above-market contract terms and the fair value of electricity. This loss

Certain tax consulting and advisory services for projects commenced prior accrual was originally recorded at$854 million in 1998, when PPL Electric's gen-to December 31, 2002; and, eration business was deregulated. Under regulatory accounting, PPL Electric

Other services permitted bythe Sarbanes-Oxley Act of 2002 and SEC rules.

PPL Corporation 40 2002 Annual Report REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareowners of PPL Corporation: As discussed in Note 17 to the consolidated financial statements, PPL changed its method of accounting for derivative and hedging activities pursuant In our opinion, the accompanying consolidated balance sheet and the related to Statement of Financial Accounting Standards No. 133, Accounting for Derivative consolidated statements of preferred stock, of company-obligated mandatorily Instruments and Hedging Activities, as amended by Statement of Financial redeemable securities and of long-term debt and the related consolidated Accounting Standards No. 138, Accounting for Certain Derivative Instruments statements of income, of cash flows and of shareowners' common equity and and Certain Hedging Activities (an amendment of FASB Statement 133), in 2001.

comprehensive income present fairly, in all material respects, the financial PPL also changed its method of accounting for amortizing unrecognized gains position of PPL Corporation and its subsidiaries ("PPLi at December 31, 2002 or losses in the annual pension expense/income determined under Statement and 2001, and the results of their operations and their cash flows for each of Financial Accounting Standards No. 87, Employers' Accounting for Pensions, of the three years in the period ended December 31, 2002 in conformity with as discussed in Note 12 to the consolidated financial statements, in 2001. In accounting principles generally accepted in the United States of America. addition, as discussed in Note 18 to the consolidated financial statements, PPL These financial statements are the responsibility of PPL's management; our adopted Statement of Financial Accounting Standards No. 142, Goodwill and responsibility is to express an opinion on these financial statements based on Other Intangible Assets, in 2002.

our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles PricewaterhouseCoopers LLP used and significant estimates made by management and evaluating the overall Philadelphia, PA financial statement presentation. We believe that our audits provide a reason- February 3, 2003 able basis for our opinion.

PPL Corporation 41 2002 Annual Report MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL STATEMENTS PPL management is responsible for the preparation, integrity and objectivity of auditors. The independent accountants and the internal auditors have free the consolidated financial statements and all other information in this annual access to the Audit Committee, without management present, to discuss report The financial statements were prepared in accordance with accounting internal accounting control, auditing and financial reporting matters.

principles generally accepted in the United States of America and include PricewaterhouseCoopers LLP, the independent certified public accountants, amounts based on managements best estimates and judgments where neces- audited PPL's consolidated financial statements and issued their opinion above.

sary. Management believes thatthe financial statements are free of material PPL management also recognizes its responsibility for fostering a strong misstatements and present fairly the financial position, results of operations and ethical climate so that it conducts its business affairs according to the highest cash flows of PPL standards of personal and corporate conduct PPL management is responsible for establishing and maintaining an effec-tive internal control structure and effective disclosure controls and procedures for financial reporting. PPL maintains a system of internal control that is designed to provide reasonable assurance that PPL assets are safeguarded from loss or unauthorized use or disposition and that transactions are executed in accordance with management's authorization and are properly recorded to William F Hecht permit the preparation of financial statements in accordance with generally Chairman, President and Chief Executive Officer accepted accounting principles. This system is augmented by a careful selec-tion and training of qualified personnel, specific delegations of authority, a proper division of responsibilities, and utilization of written policies and proce-dures. An internal audit program monitors the effectiveness of this control sys-tem. Management believes that its internal control structure and its disclosure controls and procedures for financial reporting are adequate and effective. John R.Biggar The Audit Committee of the Board of Directors consists entirely of indepen- Executive Vice President and Chief Financial Officer dent directors who are not employees of PPL The Audit Committee reviews audit plans, internal controls, financial reports and related matters and meets regularly with management as well as the independent accountants and internal

PPL Corporation 42 2002 Annual Report CONSOLIDATED STATEMENT OF INCOME (Millions of dollars, except per share data) For the years ended December 31, 2D02 2001 2000 Operating Revenues Utility $3,676 S3,034 S3,672 Unregulated retail electric and gas 182 356 279 Wholesale energy marketing 993 989 110 Net energy trading margins 19 37 47 Energy related businesses 559 661 437 Total 5,429 5,077 4,545 Operating Expenses Operation Fuel 584 602 539 Energy purchases 873 873 783 Other 818 797 717 Amortization of recoverable transition costs 226 251 227 Maintenance 314 263 265 Depreciation (Note 1) 367 266 271 Taxes, other than income (Note5) 232 155 176 Energy related businesses 543 535 373 Other charges Write-down of international energy projects (Note 9) 113 336 Cancellation of generation projects (Note 9) 150 Workforce reduction (Note 21( 75 Write-down of generation assets (Note 9) 44 Total 4,189 4,228 3,351 Operating Income _ 1,240 849 1,194 Other income - net (Note 16) 33 17 (71 Interest expense _ _ 560 386 376 Income Before Income Taxes and Minority Interest 713 480 811 Income taxes (Note 5) 210 261 294 Minority interest (Note 1) 78 (2) 4 Income Before Extraordinary Item 425 221 513 Extraordinary item (net of income taxes) (Note 1( 11 Income Before Cumulative Effect of a Change in Accounting Principle 425 221 524 Cumulative effect of a change inaccounting principle (net of income taxes) (Notes 12 and 18) (150) 10 Income Before Dividends and Distributions on Preferred Securities 275 231 524 Dividends and distributions - preferred securities 67 52 26 Net income $ 208 $ 179 S 498 Basic Earnings per Share of Common Stock (Note 4) S 1.37 $ 1.23 S 3.45 Diluted Earnings per Share of Common Stock (Note 4) S 1.36 $ 1.22 $ 3.44 Dividends Declared per Share of Common Stock S 1.44 S 1.06 S 1.06 The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.

PPL Corporation 43 2002 Annual Report CONSOLIDATED STATEMENT OF CASH FLOWS (Millions of dollars) For the years ended December31, 2002 2001 2000 Cash Flows From Operating Activities Net income $ 208 $ 179 S 498 Extraordinary item (net of income taxes) 11 Net income before extraordinary item 208 179 487 Adjustments to reconcile net income before extraordinary item to net cash provided by operating activities Depreciation 289 266 271 Amortizations-recoverable transition costs and other 198 224 188 Charge for cancellation of generation projects 150 Payments to cancel generation projects (152)

Dividends received from unconsolidated affiliates 14 103 6 Pension income (42) (47) (6)

Cumulative effect of change inaccounting principle 150 (10)

Write-down of international energy projects 113 336 Write-down of generation assets 44 Dividend and distribution requirements - preferred securities 60 52 26 Equity in earnings of unconsolidated affiliates 9 (125) (80)

Equity in earnings of WPD prior to acquiring controlling interest in2002 (75)

Deferred income taxes and investment tax credits 85 (47) (59)

Workforce reduction - net of cash paid 67 Unrealized (gain) loss on derivative hedging activities 24 (16)

Gain on NUG contract termination (25)

NUG contract termination payment (50)

Change incurrent assets and current liabilities Accounts receivable (48) 35 (151)

Accounts payable 173) (101) 82 Other- net (6) (36) 147 Other operating activities - net Other assets 3 (69) 43 Other liabilities 3 (3) (83)

Net cash provided by operating activities 796 891 '871 Cash Flows From Investing Activities Expenditures for property, plant and equipment (648) 1565) (460)

Proceeds from PPL Montana sale/leaseback 410 Investment ingenerating assets and electric energy projects (261) (312) (570)

Acquisition of controlling interest inWPD, net of cash acquired (211)

Net (increase) decrease in notes receivable from affiliates 210 (114)

Other investing activities - net (9) (35) (231 Net cash used ininvesting activities 1,129) (702) (757)

Cash Flows From Financing Activities Issuance of company-obligated mandatorily redeemable preferred securities 575 Retirement of company-obligated mandatorily redeemable preferred securities (250)

Issuance of long-term debt 1,529 1,000 Retirement of long-term debt (823) (616) (532)

Issuance of common stock 592 56 35 Payment of common and preferred dividends (261) (201) (177)

Termination of nuclear fuel lease (154)

Net increase (decrease) in short-term debt 411 (981) 45 Other financing activities -net 126) (95) 16 Net cash provided by (used in)financing activities (357) 267 233 Effect of Exchange Rates on Cash and Cash Equivalents 2 (3)

Net Increase (Decrease) in Cash and Cash Equivalents (688) 453 347 Cash and cash equivalents at beginning of period 933 480 133 Cash and cash equivalents at end of period $ 245 $ 933 $ 480 Supplemental Disclosures of Cash Flow Information Cash paid during the period for:

Interest (net of amount capitalized) S 412 $ 373 $ 363 Income taxes S 100 $ 328 $ 266 The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.

PPL Corporation 44 2002 Annual Report CONSOLIDATED BALANCE SHEET (Millions of dollars) AtDecember31, 2002 2001 ASSETS Current Assets Cash and cash equivalents (Note 11 S 245 $ 933 Accounts receivable {less reserve: 2002, $112; 2001, $125) 633 552 Unbilled revenues 281 248 Fuel, materials and supplies - at average cost 242 251 Prepayments 122 33 Deferred income taxes (Note 5( 99 77 Price risk management assets (Notes 1 and 17) 103 123 Other _ 135 109 1,860 2,326 Investments Investment in unconsolidated affiliates - at equity (Notes 1 and 3) 234 586 Investment in unconsolidated affiliates - at cost (Note 1) 107 114 Nuclear plant decommissioning trust fund (Note 6) 287 276 Other 28 23

__________ _ 656 999 Property. Plant and Equipment - net (Note 1(

Electric plant inservice Transmission and distribution 5,603 2,566 Generation 2,679 2,464 General 476 310 8,758 5,340 Construction work in progress 223 181 Nuclear fuel 129 127 Electric plant 9,110 5,648 Gas and oil plant 204 196 Other property 252 103 9,566 5,947 Regulatory and Other Noncurrent Assets (Note 1)

Recoverable transition costs 1,946 2,172 Goodwill and other intangibles (Note 181 663 580 Other 878 538 3,487 3,290

$15,569 $12,562 The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.

PPL Corporation 45 2002 Annual Report CONSOLIDATED BALANCE SHEET (Millions of dollars) AtDecember31, 2002 2001 LIABILITIES AND EQUITY Current Liabilities Short-term debt (Note 8) $ 554 S 118 Short-term debt expected to be refinanced (Note 8) 389 Long-term debt 366 498 Above market NUG contracts (Note 14) 75 87 Accounts payable 488 565 Taxes 193 138 Interest 101 61 Dividends 66 51 Price risk management liabilities (Notes 1and 17) 110 106 Other 294 202 2,636 1,826 Long-term Debt 5,901 5,081 Deferred Credits and Other Noncurrent Liabilities Deferred income taxes and investment tax credits (Note 5) 2,370 1,449 Above market NUG contracts (Note 14) 352 493 Other (Notes 1,6 and 12) 1,307 911 4,029 2,853 Commitments and Contingent Liabilities (Note 14)

Minority Interest (Note 1) 36 38 Company-obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Company Debentures 661 825 Preferred Stock With sinking fund requirements 31 31 Without sinking fund requirements 51 51 82 82 Shareowners' Common Equity Common stock 2 2 Capital in excess of par value 2,539 1,956 Treasury stock (Note 1) (836) (836)

Earnings reinvested 1,013 1,023 Accumulated other comprehensive loss (Notes 1and 17) (446) (251)

Capital stock expense and other (48) (37) 2,224 1,857

$15,569 $12,562 The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.

PPL Corporation 46 2002 Annual Report CONSOLIDATED STATEMENT OF SHAREOWNERS' COMMON EQUITY AND COMPREHENSIVE INCOME (Millions of dollars, except share amounts) For the years ended December 31, 2002 2001 2000 Common stock at beginning of year $ 2 S 2 S 2 Common stock at end of year 2 2 2 Capital in excess of par value at beginning of year 1,956 1,895 1,860 Common stock issuedla) 592 56 35 Other (9) 5 Capital in excess of par value at end of year 2539 1,956 1,895 Treasury stock at beginning of year (836) (836) (836)

Treasury stock at end of year (836) (836) (836)

Earnings reinvested at beginning of year 1,023 999 654 Net income fbi 208 179 498 Cash dividends declared on common stock (218) (155) (153)

Earnings reinvested at end of year 1,013 1,023 999 Accumulated other comprehensive loss at beginning of year(cI (251) (36) (55)

Foreign currency translation adjustments lb) 125 (234) 15 Unrealized gain (loss) on available-for-sale securitiesib) (3) (4) 3 Minimum pension liability adjustments (bid! (301) l Unrealized gain (loss) on qualifying derivatives(h (16) 23 Accumulated other comprehensive loss at end of year (446) (251) (36)

Capital stock expense and other at beginning of year (37) (12) (12)

Issuance costs and other charges to issue common stock (18)

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

Other __

Capital stock expense and other at end of year (48) (37) (12)

Total shareowners' common equity $2,224 $1,857 $2,012 Common stock shares at beginning of yeariul 146,580 145,041 143,697 Common stock issued through the ESOP, DRIP, ICP, ICPKE, structured equity program and public offering _ 19,156 1,539 1,344 Common stock shares at end of year 165,736 146.580 145,041 (a} Shares in thousands. $.11par value, 390 million shares authorized. Each share entitles the holder to one vote on any question presented to any shareowners' meeting.

fbi Statement of Comprehensive Income (Note 1):

Net income S208 $179 $498 Other comprehensive income, (loss):

Foreign currency translation adjustments, net of tax (benefit) of S15). S15, Sl61 125 1234) 15 Unrealized gain (loss) on available-for-sale securities, net of tax (benefit) of 52), S13),

S2 (3) (4) 3 Minimum pension liability adjustments, net of tax (benefit) of S$131) 1301) 1 Unrealized gain (loss) on qualifying derivatives, net of tax (benefit) of S110),$12 (16) 23 Total other comprehensive income (loss) _(_ 1195) (215) 19 Comprehensive Income (Loss) $ 13 $ (36) $517

{clSee Note 1for disclosure of balances for each component of Accumulated Other Comprehensive Loss.

d) See Note 12for additional information on the adjustments to the additional minimum pension liability.

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

PPL Corporation 47 2002 Annual Report CONSOLIDATED STATEMENT OF PREFERRED STOCK Outstanding Shares Outstanding Shares (Millions of dollars) At December31, 2002 2001 2002 Authorized PPL ELECTRIC lal Preferred Stock - 5100 par, cumulative 4kh % $25 $25 247,524 629,936 Series 57 57 568,665 10,000,000 S82 $82 DETAILS OF PREFERRED STOCK lbl Sinking Fund Provisions Outstanding Shares Optional Shares to be Outstanding Redemption Redeemed Redemption (Millions of dollars) 2002 2001 2002 Price per Share Annually Period With Sinking Fund Requirements Series Preferred 6.125% $17 $17 167,500 $100.00(cl (dl 2003-2005 6.15% 10 10 97,500 100.00(d 97,500 April 2003 6.33% 4 4 46,000 100.00('l 46,000 July2003

$31 $31 Without Sinking Fund Requirements 4'h% Preferred $25 $25 247,524 $110.00 Series Preferred 3.35% 2 2 20,605 103.50 4.40% 12 12 117,676 102.00 4.60% 3 3 28,614 103.00 6.75% 9 9 90,770 Varies")

$51 $51 Decreases in Preferred Stock 2002 2001 2000 Shares Amount Shares Amount Shares Amount 4'h% Preferred (134)

Series Preferred 5.95% 110,000) S (1) 6.125% 1148,000) (14)

Decreases in Preferred Stock normally represent (i)the redemption of stock pursuantto sinking fund requirements; or (ii)shares redeemed pursuantto optional provisions.

There were no issuances or redemptions of preferred stock in2002 or 2000 through these provisions.

(a) Each share of PPL Electric's preferred stock entitlesthe holderto one vote on anyquestion presented to PPL Electric's shareowners' meetings. There were also 10 million shares of PPL's preferred stock and 5 million shares of PPL Electric's preference stock authorized; none were outstanding at December 31, 2002 and 2001.

0b1 The involuntary liquidation price of the preferred stock is 100 per share. The optional voluntary liquidation price isthe optional redemption price per share in effect except for the 41/2z%Preferred Stock for which such price is$100 per share (plus ineach case any unpaid dividends).

IOrThese series of preferred stock are not redeemable prior to 2003: 6.125%, 6.15%, 6.33% and 6.75%.

YdIShares to be redeemed annually on October 1as 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 48 2002 Annual Report CONSOLIDATED STATEMENT OF COMPANY-OBLIGATED MANDATORILY REDEEMABLE SECURITIES Outstanding Shares Outstanding Shares (Millions of dollars) AtDecember31, 2D02 2001 2002 Authorized Maturity Company-obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Company Debentures

$25 per security 8.10%CaC $150 6,000,000 July 2027'b1 8.20%al 100 4,000,000 April 2027lbl 7.75%Cc $575 575 23,000,000 23,000,000 May 2006

$1,000 per security 8.23%CdC 86 82,000 82,000 February 2027

$661 S825 Cal PPL Capital Trust and PPL Capital Trust 11issued to the public a total of $250 million of preferred securities through two Delaware statutory business trusts holding solely PPL Electric deben-tures. PPL Electric owned all of the common securities of the subsidiarytrusts, representing the remaining undivided beneficial ownership interest inthe assets of the trusts. The proceeds derived fromthe issuance of the preferred securities and the common securities were used by PPL Capital Trust and PPL Capital Trust 11to acquire $103 million and $155 million principal amount of PPL Electric Junior Subordinated Deferrable Interest Debentures (SubDrdinated Debentures). Thus, the preferred securities were supported by a corresponding amount of Subordinated Debentures issued by PPL Electric to the trusts.

lb) The preferred securities were subject to mandatory redemption upon the early redemption of all of the Subordinated Debentures. At the option of PPL Electric, the 8.20% Subordinated Debentures were redeemed in May 2002 and the 8.10% Subordinated Debentures were redeemed inSeptember 2002. The redemption price was 525 per preferred security plus an amount equal to accumulated and unpaid distributions to the date of redemption.

ir In May 2001, PPL and PPL Capital Funding Trust 1,a wholly owned finance subsidiary of PPL, issued S575 million of 7.75% PEPS Units. Each PEPS Unit consists of (i} a contractto purchase shares of PPL common stock on or prior to May 18,2004 and (iil a trust preferred security 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 contracts to purchase a num-ber of shares of PPL common stock on or priorto May 18,2004. The number of shares required to be purchased will depend on the average market price of PPLs common stock priorto the purchase date, subject to certain limitations. The holders' obligations to purchase shares under the purchase contracts may be settled with the proceeds of aremarketing of the preferred securities, which have been pledged to secure these obligations. The distribution rate on each preferred security is7.29% 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 inthe first half of 2004. Upon a remarketing, the interest rate on the subordinated notes and the distribution rate on the preferred securities will be reset at a rate that will be equal to or greater than 7.29%. PPL has guaranteed the payment of principal and interest on the subordinated notes issued to the trust by PPL Capital Funding. PPL has also fully and unconditionally guaranteed all of the Trust's obligations under the trust preferred securities. See Note 8 for a discussion of dividend restrictions related to PPUs subsidiaries.

(dC SIUK Capital Trust I issued $82 million of 8.23% preferred securities and invested the proceeds in8.23% subordinated debentures issued by SIUK Limited. Thus, the preferred securities are supported by a corresponding amount of subordinated debentures. SIUK Limited owns all of the common securities of SIUK Capital Trust 1.Inaddition, SIUK Limited has guaranteed all of SIUK Capital Trust I's obligations under the preferred securities. With PPrs acquisition of the controlling interest inWPD in September 2002, these preferred securities were consolidated on the books of PPL attheir then fair value of S86million. See Note 9 for information on the acquisition of a controlling interest inWPD.

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

PPL Corporation 49 2002 Annual Report CONSOLIDATED STATEMENT OF LONG-TERM DEBT Outstanding (Millions of dollars) At December31, 2002 2001 Maturity (a)

First Mortgage Bonds (b) 73/44% $ 28 May 1, 2002 67/a% $ 19 19 February 1, 2003 67/s% 25 25 March 1, 2004 6Y2% 110 110 April 1,2005 6.55% 146 146 March 1,2006 73/ % 10 10 2013-2017 81/22% Idl 11 2018-2022 63/4% to 7'/e% 72 72 2023-2024 First Mortgage Pollution Control Bonds 1b) 6.40% Series H 90 90 November 1, 2021 5.50% Series I 53 53 February 15, 2027 6.40% Series J 116 116 September 1, 2029 6.15% Series K 55 55 August 1, 2029 Senior Secured Bonds (bi 57/8 % 300 300 August 15, 2007 6h4% 500 500 August 15, 2009 1,496 1,535 Series 1999-1 Transition Bonds 6.08% to 7.15% 1,678 e) 1,923 2002-2008 Medium-Term Notes -5.75% to 8.375% tl 822In 1,347 2002-2007 Senior Unsecured Notes -6.40% 500 500 November 1, 2011 Pollution Control Revenue Bonds -1.54% 9 9 June 1, 2027 Unsecured Promissory Notes- 8.70% to 9.64% 12(gl 13 2010-2022 Unsecured Bonds - 6.50% to 9.25% 1,583""1 2004-2028 Inflation Linked Bonds - 6.20% to 6.40% 131 130 2006-2022 Other Long-Term Debt 21"1 134 2002-2012 6,252 5,591 Fair Value Swaps 28 3 Unamortized discount (13) (15) 6,267 5,579 Less amount due within one year (366) (498)

Total Long-Term Debt S5,901 $5,081 la)Aggregate long-term debt maturities through 2007 are (millions of dollars): 2003, $366; 2004, $576; 2005, $730; 2006, $852; 2007, $1,069.

lb) 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 electric transmission and distribution 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 principal amount of First Mortgage Bonds issued under the 1945 First Mortgage Bond Indenture and {ii) the lien of the 2001 Senior Secured Bond Indenture, which covers substantially all electric transmission and distribution plant owned by PPL Electric and which isjunior to the lien of the 1945 First Mortgage Bond Indenture.

ic) PPL fully and unconditionally guarantees the medium-term notes of PPL Capital Funding, a wholly owned finance subsidiary of PPL See Note 8 for a discussion of dividend restrictions related to PPLs subsidiaries.

Id) In May 2002, PPL Electric redeemed and retired all of its outstanding First Mortgage Bonds, 8-1/2% Series due 2022, at an aggregate par value of $11 million through the maintenance and replacement fund provisions of its 1945 First Mortgage Bond Indenture.

Ia) In August 1999, PPLTransiton Bond Companyissued $2.4billion of transition bondsto securitze a portion of PPLElectric's stranded costs.The bondswere issued in eightdifferentclasses, with expected average lives of 1to 81 years. Bond principal payments of $245 million were made in 2002.

In During 2002, PPL Capital Funding retired the following series of medium-term notes: in February 2002, $10 million of 735% Series due 2005; inSeptember 2002, $175 million of floating-rate Series B due 2002 and $25 million of 7.75% Series due 2002; in October 2002, $100 million of 735% Series due 2005 and $15 million of 8-3/8% Series due 2007; in November 2002, $200 million of 7.7% Reset Put Securities due 2007.

(9 In September 2002, PPL Gas Utilities made a $750,000 principal payment on its 9.64% Notes due 2010.

IN On September 6, 2002, PPL Global acquired a controlling interest inWPD, which resulted inthe consolidation of WPD's assets and liabilities. (See Note 9.)

°CEMAR's debt was deconsolidated when PPL relinquished control. (See Note 9.)

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

PPL Corporation 50 2002 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Dollars inmillions, except per share data, unless otherwise noted.

1 .

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES

PPL Global consolidates the results of controlled subsidiaries, WPD, Emel, EC, the Bolivian subsidiaries and other investments, on a one-month lag.

Business and Consolidation The portion of the subsidiaries' earnings owned by outside shareowners is PPL is an energy and utility holding company that, through its subsidiaries, is included in "Minority Interest" in the consolidated financial statements.

primarily engaged in the generation and marketing of electricity in the north-PPL Global's investments in CGE and CEMAR (effective August 21, 2002) are eastern and western U.S. and in the delivery of electricity in Pennsylvania, the accounted for using the cost method. Dividends from these investments are U.K. and Latin America. Based in Allentown, Pennsylvania, PPL is the parent recorded as income when received.

of PPL Energy Funding, PPL Electric, PPL Gas Utilities, PPL Services and PPL Capital Funding. Use of Estimates/Contingencies PPL Energy Funding is the parent of PPL Energy Supply, which serves as The preparation of financial statements in conformity with U.S. GAAP requires the holding company for PPUs principal unregulated subsidiaries. PPL Energy management to make estimates and assumptions that affect the reported Supply was formed in November 2000 to engage in competitive energy busi- amounts of assets and liabilities, the disclosure of contingent liabilities atthe nesses. In May 2001, PPL Energy Funding contributed its interests in PPL date of the financial statements and the reported amounts of revenues and Generation, PPL EnergyPlus and PPL Global to PPL Energy Supply, after receipt expenses during the reporting period. Actual results could differ from those of required regulatory approvals. As a result, PPL Energy Supply is now the par- estimates.

ent of PPL Generation, PPL EnergyPlus and PPL Global. PPL Energy Funding is PPL records loss contingencies in accordance with SFAS 5, "Accounting the sole Member of PPL Energy Supply. for Contingencies."

PPL Generation owns and operates a portfolio of domestic power generat-Accounting Records ing assets. These power plants are located in Pennsylvania, Montana, Arizona, The accounting records for PPL Electric and PPL Gas Utilities are maintained in Illinois, Connecticut New York and Maine and use well-diversified fuel sources accordance with the Uniform System of Accounts prescribed by the FERC and including coal, nuclear, natural gas, oil and hydro. PPL EnergyPlus markets or adopted by the PUC.

brokers electricity produced by PPL Generation, along with purchased power, natural gas and oil in competitive wholesale and deregulated retail markets, pri- Cash Equivalents marily in the northeastern and western portions of the U.S. PPL Global acquires All highly liquid debt instruments purchased with original maturities of three and develops domestic generation projects that are, in turn, operated by PPL months or less are considered to be cash equivalents.

Generation as part of its portfolio of generation assets. PPL Global also acquires Property, Plant and Equipment and holds international energy projects that are primarily focused on the distri-Property, plant and equipment is recorded at original cost, unless impaired bution of electricity.

under the provisions of SFAS 144, "Accounting for the Impairment or Disposal of PPL Electric is the principal regulated subsidiary of PPL. PPL Electric's prin-Long-Lived Assets," or SFAS 121, "Accounting for the Impairment of Long-Lived cipal businesses are the transmission and distribution of electricity to serve Assets and for Long-Lived Assets to be Disposed of." Original cost includes retail customers in its franchised territory in eastern and central Pennsylvania, material, labor, contractor costs, construction overheads and financing costs, and the supply of electricity to retail customers in that territory as a PLR.

where applicable. The cost of repairs and minor replacements are charged to PPL consolidates the financial statements of its affiliates when it has con-expense as incurred. PPL records costs associated with planned major mainte-trol. All significant intercompanytransactions have been eliminated. Minority nance projects in the period in which the costs are incurred. No costs are interests in operating results and equity ownership are reflected in the consoli-accrued in advance of the period in which the work is performed.

dated financial statements.

When a component of property, plant or equipment is retired that was The consolidated financial statements reflect the accounts of all controlled depreciated under the composite or group method, the original cost is charged affiliates on a current basis, with the exception of certain PPL Global invest-to accumulated depreciation. When all or a significant portion of an operating ments. It is the policy of PPL Global to consolidate foreign affiliates and record unit is retired or sold that was depreciated under the composite or group equity in earnings of affiliates on a lag, based on the availability of financial data method, the property and the related accumulated depreciation account is on a U.S. GAAP basis:

reduced and any gain or loss is included in income, unless otherwise required

Earnings from foreign equity method investments are recorded on a by regulators. See discussion of depreciation methods below.

three-month lag.

AFUDC is capitalized as part of the construction costs for regulated projects.

Interest is capitalized as part of construction costs for non-regulated projects.

PPL Corporation 51 2002 Annual Report Depreciation is computed over the estimated useful lives of property using The continued capitalization of project development and acquisition costs various methods including the straight-line, composite and group methods. is subject to on-going risks related to successful completion. In the event that The annual provisions for depreciation have been computed principally in PPL Global determines that a particular project is no longer viable, previously accordance with the following ranges of asset lives: generation, 5-50 years; capitalized costs are charged to expense in the period that such determination transmission and distribution, 15-80 years; and general, 3-80 years. PPL is made.

periodically reviews and adjusts the depreciable lives of its fixed assets.

Regulation Following are the classes of PPL property, plant and equipment, with the Historically, PPL Electric accounted for its regulated operations, which included associated accumulated depreciation, at December 31:

transmission, distribution and generation, in accordance with the provisions of 2002 2001 SFAS 71, "Accounting for the Effects of Certain Types of Regulation," which Electric plant requires rate-regulated entities to reflect the effects of regulatory decisions in Transmission and distribution $ 7,279 $ 3,973 their financial statements. PPL Electric discontinued application of SFAS 71 for Generation 7,407 7,144 the generation portion of its business, effective June 30,1998. In connection with General 744 481 the corporate realignment, effective July 1, 2000, PPL Electric's generating and Construction work in progress 223 180 Nuclear fuel 129 127 certain other related assets, along with associated liabilities, were transferred Gas and oil 323 304 to new unregulated subsidiaries of PPL Generation. PPL Electric's remaining Other property 301 131 regulated business and PPL Gas Utilities continue to be subject to SFAS 71.

16,406 12,340 The following regulatory assets were included in the 'Regulatory and Other Less: Accumulated depreciation 6.840 6,393 Noncurrent Assets" section of the Balance Sheet at December31:

$ 9,566 S 5,947 2002 2001 Recoverable transition costs $1,946 $2,172 Asset Impairment Taxes recoverable Long-lived assets and identifiable intangibles held and used by PPL and its sub- through future rates 260 253 Other 13 11 sidiaries are reviewed for impairment when events or circumstances indicate carrying amounts may not be recoverable. Such reviews were performed in $2,219 $2,436 accordance with SFAS 144 in 2002 and SFAS 121 in prior years. SFAS 144 and SFAS 121 required impairment losses to be recognized if the asset's carrying Based on the PUC Final Order, PPL Electric was amortizing its competitive amount was not recoverable from undiscounted future cash flow. The impair- transition (or stranded) costs over an 11-year transition period effective January ment charge is measured by the difference between the asset's carrying 1, 1999. In August 1999, competitive transition costs of $2.4 billion were con-amount and fair value. Equity investments are reviewed for impairment in verted to intangible transition costs when they were securitized by the issuance accordance with APB Opinion No. 18, "The Equity Method of Accounting for of transition bonds. The intangible transition costs are being amortized over the Investments in Common Stock." APB Opinion No. 18 provides that "a loss in life of the transition bonds, August 1999 through December 2008, in accordance value of an investment which is other than a temporary decline should be with an amortization schedule filed with the PUC. The assets of PPLTransition recognized." PPL identifies and measures loss in value of equity investments Bond Company, including the intangible transition property, are not available based upon a comparison of fair value to carrying value. to creditors of PPL or PPL Electric. The transition bonds are obligations of PPL Transition Bond Company and are non-recourse to PPL and PPL Electric. The Project Development Costs remaining competitive transition costs are also being amortized based on an PPL Global expenses the costs of evaluating potential acquisition and develop-amortization schedule previously filed with the PUC, adjusted for those competi-ment opportunities as incurred. Acquisition and development costs are capital-tive transition costs that were converted to intangible transition costs. As a ized upon approval of the investment by the PPL Global Board of Managers and result of the conversion of a significant portion of the competitive transition the Finance Committee of PPL's Board of Directors or, if later, the achievement costs into intangible transition costs, amortization of substantially all of the of sufficient project milestones such thatthe economic viability of the project is remaining competitive transition costs will occur in 2009.

reasonably assured. The level of assurance needed for capitalization of such Certain PPL Global affiliates continue to be subjectto SFAS 71. Although costs requires that all major uncertainties be resolved and thatthere be a high subject to price-cap regulation (as described in Note 14), WPD is not subject probabilitythat the projectwill proceed as planned, orthat such costs will be to SFAS 71.

recoverable through long-term operations, a financing or a sale.

PPL Corporation 52 2002 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Accounting for Derivatives and Other Contracts Held for Trading Purposes with the hedged item. Gains and losses from changes inthe market price of PPL subsidiaries enter into energy and energy-related contracts. PPL and sub- interest rate derivative contracts, when recognized on the Statement of Income, sidiaries also enter into interest rate derivative contracts to hedge their expo- are accounted for in "Interest Expense."

sure to changes inthe fair value of their debt instruments and to hedge their PPL has adopted the accounting requirements under EITF 02-3, "Issues exposure to variability in expected cash flows associated with existing debt Involved in Accounting for Derivative Contracts Held for Trading Purposes and instruments or forecasted transactions. PPL also enters into foreign currency Contracts Involved in Energy Trading and Risk Management Activities. As derivative contracts to hedge foreign currency exposures, including firm such, PPL now reflects its net realized and unrealized gains and losses associ-commitments, recognized assets or liabilities, forecasted transactions or net ated with all derivatives that are held for trading purposes in the "Net energy investments. trading margins" line on the Statement of Income. Non-derivative contracts As of January 1,2001, contracts that meet the definition of a derivative are that met the definition of energy trading activities as defined by EITF 98-10, accounted for under SFAS 133, 'Accounting for Derivative Instruments and "Accounting for Energy Trading and Risk Management Activities" are reflected Hedging Activities." Certain energy contracts have been excluded from SFAS 133's in the financial statements using the accrual method of accounting. Prior requirements because they meet the definition of a "normal sale or purchase" periods have been restated.

under DIG Issue C15, 'Scope Exceptions: Normal Purchases and Normal Sales Gains or losses on interest rate derivative contracts that settled prior to the Exception for Certain Option-Type Contracts and Forward Contracts in Electricity." adoption of SFAS 133 were deferred and are being recognized over the life of These contracts are reflected in the financial statements using the accrual method the debt Market gains and losses on foreign currency derivative contracts that of accounting. See Note 17 for additional information on SFAS 133. settled priortothe adoption of SFAS 133 were recognized in accordance with Under SFAS 133, all derivatives are recognized on the balance sheet at their SFAS 52, 'Foreign Currency Translation," and are included in 'Foreign currency fair value. On the date the derivative contract is executed, PPL designates the translation adjustments," a component of accumulated other comprehensive derivative as a hedge of the fair value of a recognized asset or liability or of an income (lossi.

unrecognized firm commitment ("fair value" hedge), a hedge of a forecasted Revenue Recognition transaction or of the variability of cash flows to be received or paid related to a Operating revenues, except for energy related businesses, are recorded based recognized asset or liability ("cash flow" hedge), a foreign currency fair value on deliveries through the end of the calendar month. Unbilled retail revenues or cash flow hedge ("foreign currency" hedge), a hedge of a net investment result because customers' meters are read and bills are rendered throughout in a foreign operation or a trading derivative. Changes in the fair value of a the month, rather than all being read at the end of the month. Unbilled revenues derivative that is highly effective as, and is designated and qualifies as, a fair for a month are calculated by multiplying an estimate of unbilled kWh by the value hedge, along with the loss or gain on the hedged asset or liability that estimated average cents per kWh.

is attributable to the hedged risk, are recorded in current-period earnings.

"Energy related businesses' revenue includes revenues from PPL Global Changes in the fair value of a derivative that is highly effective as, and is desig-and the mechanical contracting and engineering subsidiaries. PPL Global's nated as and qualifies as, a cash flow hedge are recorded in other comprehen-revenue reflects its proportionate share of affiliate earnings underthe equity sive income, until earnings are affected bythe variability of cash flows being method of accounting, as described in the 'Business and Consolidation" hedged. Changes in the fair value of derivatives that are designated as and section of Note 1,and dividends received from its investments are accounted qualify as foreign currency hedges are recorded in either current-period earn-for using the cost method. The mechanical contracting and engineering ings or other comprehensive income, depending on whether the hedge transac-subsidiaries record profits from construction contracts on the percentage-of-tion is a fair value hedge or a cash flow hedge. If, however, a derivative is used completion method of accounting. Income from time and material contracts is as a hedge of a net investment in a foreign operation, its changes in fair value, recognized currently as the work is performed. Costs include all direct material to the extent effective as a hedge, are recorded in the cumulative foreign cur-and labor costs and job-related overhead. Provisions for estimated loss on rencytranslation adjustments account within equity. Changes in the fair value uncompleted contracts, if any, are made in the period in which such losses of derivatives that are not designated as hedging instruments are reported in are determined.

current-period earnings.

WPD revenues are stated net of value added tax.

Unrealized gains and losses from changes in market prices of energy con-tracts accounted for as fair value hedges are reflected in "Energy purchases" Utility Revenue on the Statement of Income, as are changes in the underlying positions. Gains The Statement of Income "Utility" line item contains revenues from domestic and losses from changes in market prices of energy contracts accounted for as and international rate-regulated delivery operations, including WPD. These rev-cash flow hedges, when recognized on the Statement of Income, are reflected enues were previously reported as "Retail electric and gas" and 'Wholesale in "Wholesale energy marketing" revenues or "Energy purchases," consistent energy marketing and trading" by PPL.

PPL Corporation 53 2002 Annual Report Income Taxes method of transition permitted by SFAS 148, "Accounting for Stock-Based The income tax provision for PPL is calculated in accordance with SFAS 109, Compensation - Transition and Disclosure, an Amendment of FASB Statement "Accounting for Income Taxes." No. 123." See Note 22 for further discussion of SFAS 148 and this adoption.

PPL and its domestic subsidiaries file a consolidated U.S. federal income Use of the fair value method under SFAS 123 requires the recognition of com-tax return. pensation expense for stock options issued by PPLwhich APB Opinion No. 25 The provision for PPL Electric's deferred income taxes for regulated assets did not require. As currently structured, awards of restricted stock and stock is based upon the ratemaking principles reflected in rates established by the units will result in the same amount of compensation expense under the fair PUC and the FERC. The difference inthe provision for deferred income taxes value method of SFAS 123 as they did under the intrinsic value method of for regulated assets and the amount that otherwise would be recorded under APB Opinion No. 25.

U.S. GAAP is deferred and included intaxes recoverable through future rates The following table illustrates the effect on net income and EPS if the fair in"Regulatory and Other Non-Current Assets - Other" on the Balance Sheet. value method had been used to account for stock-based compensation in the See Note 5for additional information. years shown:

PPL Electric deferred investment tax credits when they were utilized and 2002 2001 2000 is amortizing the deferrals over the average lives of the related assets. Income Leases Net Income - as reported $208 $ 179 $ 498 Add: Stock-based employee PPL and its subsidiaries apply the provisions of SFAS 13, "Accounting for compensation expense included in Leases," to all leasing transactions. In addition, PPL applies the provisions of reported net income, net of tax 3 3 3 numerous other accounting pronouncements that provide specific guidance Deduct Total stock-based compensation and additional requirements related to accounting for leases. expense determined under the fair value See Note 10 for adiscussion of accounting for leases under which PPL based method for all awards, net of tax 8 6 4 subsidiaries are lessees. Pro forma net income S 203 $ 176 $ 497 InAugust 2002, PPL began commercial operation of its 79.9 MW oil pow- EPS ered station in Shoreham, New York. The Long Island Power Authority has Basic - as reported $1.37 $1.23 $3.45 contracted to purchase all of the plant's capacity and ancillary services as part Basic - pro forma $1.34 $1.21 $3.44 of a 15-year power purchase agreementwith PPL EnergyPlus. The capacity Diluted - as reported $1.36 $1.22 $3.44 payments inthe power purchase agreement result inthe plant being classified Diluted-proforma $1.33 $1.20 $3.43 as a direct financing lease, under which PPL EnergyPlus is the lessor. SFAS 13, Pension and Other Postretirement Benefits "Accounting for Leases," required PPL Energy Supply to remove the plant See Note 12 for a discussion of accounting for pension and other postretire-assets from the balance sheet and replace them with a receivable forthe gross ment benefits.

capacity payments and unearned income for the expected lease revenues. As of December 31, 2002, PPL had a receivable balance of $260 million (included Comprehensive Income in"Current Assets - Other" and "Regulatory and Other Noncurrent Assets - Comprehensive income consists of net income and other comprehensive Other" and an unearned revenue balance of $152 million (included in"Deferred income, defined as changes in common equity from transactions not related Credits and Other Noncurrent Uabilities - Other"}. Rental income received to shareowners. Other comprehensive income consists of unrealized gains or through this direct-financing lease during 2002 was $5million, and total future losses on available-for-sale securities and qualifying derivatives, the excess minimum lease payments expected to be received are estimated at $12 million of additional pension liability over unamortized prior service costs, and foreign for each of the years from 2003 through 2007. currency translation adjustments recorded by PPL Global. Comprehensive income is reflected on the Statement of Shareowners' Common Equity and Stock-Based Compensation Comprehensive Income, and "Accumulated other comprehensive loss" is PPL grants stock options, restricted stock and stock units to employees and presented on the Balance Sheet directors under several stock-based compensation plans, as detailed inNote 11.

The accumulated other comprehensive loss of PPL consisted of the SFAS 123, "Accounting for Stock-Based Compensation," encourages entities to following at December 31:

record compensation expense for stock-based employee compensation plans at fair value but provides the option of measuring compensation expense using 2002 2001 the intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Foreign currency translation adjustments $1143) $(268)

Stock Issued to Employees." As of December31, 2002, PPL and its subsidiaries Unrealized losses on available-for-sale securities (4) (1)

Minimum pension liability 1306) (5) accounted for stock-based compensation inaccordance with APB Opinion Unrealized gains on qualifying derivatives 7 23 No. 25. PPL and its subsidiaries adopted the fair value method of accounting for stock-based compensation effective January 1,2003 using the prospective $(446) $(2511

PPL Corporation 54 2002 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Treasury Stock 2. SEGMENT AND RELATED INFORMATION Treasury shares are reflected on the balance sheet as an offset to common PPUs reportable segments are Supply, Delivery and International. The Supply equity under the cost method of accounting. Management has no definitive segment primarily consists of the domestic energy marketing, domestic genera-plans forthe future use of these shares. Treasury shares are not considered tion and domestic development operations of PPL Energy Supply. The Delivery outstanding in calculating EPS.

segment includes the regulated electric and gas delivery operations of PPL Foreign Currency Translation and Transactions Electric and PPL Gas Utilities. The International segment includes PPL Global's Assets and liabilities of international operations, where the local currency is the responsibility for the acquisition and holding of international energy projects.

functional currency, are translated at year-end exchange rates, and related The majority of PPL Global's international investments are located in the U.K.,

revenues and expenses are translated at average exchange rates prevailing Chile, El Salvador and Bolivia.

during the year. Adjustments resulting from translation are recorded in accumu- Segments include direct charges, as well as an allocation of indirect corpo-lated other comprehensive income. rate costs, for services provided by PPL Services. These service costs include Gains or losses relating to foreign currency transactions are recognized functions such as financial, legal, human resources and information services.

currently in income. The aggregate transaction gain (loss) was S(9) million and Previously reported information has been reclassified to conform to the 58 million in 2002 and 2001, and was not significant in 2000. current presentation. Financial data for the segments are as follows:

Independent System Operator 2002 2001 2000 Certain PPL subsidiaries participate in PJM in several roles. Certain PPL sub- Income Statement Data sidiaries also participate in the New England Power Pool (NEPOOL) and the Revenues from external customers Supply S1,540 S1,630 $1,677 New York ISO (NYISO) in a less significant way. In PJM, PPL EnergyPlus is a Delivery 2,706 2,867 2,413 marketer, a load-serving entity to its customer-choice customers and a seller International Ca 1,083 580 455 for PPUs Pennsylvania generation subsidiaries. PPL Electric is a transmission 5,429 5,077 4,545 owner and provider of last resort load in PJM. In NEPOOL, PPL EnergyPlus is a Equity in earnings of unconsolidated affiliates marketer and a seller for PPUs New England generating assets. In the NYISO, Supply (12) 12 2 PPL EnergyPlus acts as a marketer. PPL Electric does not participate in International (al 3 113 78 NEPOOL or NYISO. (9) 125 80 A function of interchange accounting is to match participants' MWh entitle- Depreciation ments (generation plus scheduled bilateral purchases) against their MWh obli- Supply 129 126 137 gations (load plus scheduled bilateral sales) during every hour of every day. If Delivery 100 96 104 the net result during any given hour is an entitlement, the participant is credited International t 138 44 30 with a spot market sale to the ISO atthe respective market price forthat hour 367 266 271 if the net result is an obligation, the participant is charged with a spot market Amortizations - recoverable transition costs, nuclear fuel and other purchase from the ISO atthe respective market price for that hour. ISO purchases Supply (38) 1351 (48) and sales are not allocated to individual customers.

Delivery 236 259 236 PPL records the hourly net sales and purchases in its financial statements 198 224 188 as sales to and purchases from the respective ISOs, in accordance with the FERC and industry accounting.

Extraordinary Item In December 2000, PPL Electric recorded an $11 million extraordinary credit relating to wholesale power activity.

Reclassifications Certain amounts in the 2001 and 2000 financial statements have been reclas-sified to conform to the current presentation.

New Accounting Standards See Note 22 for a discussion of new accounting standards.

PPL Corporation 55 2002 Annual Report 2002 2001 2000 2002 2001 2000 Interest income Geographic Data Supply (5) 3 128) Revenues from external customers Delivery 20 10 27 Domestic $4,346 $4,497 $4,090 International la) 13 2 14 Foreign (a] 1,083 580 455 28 15 13 $5,429 $5,077 $4,545 Interest expense Supply 106 58 109 As of December31, 2002 2001 Delivery 214 233 230 Property, plant and equipment International (a) 240 95 37 Domestic $5,797 $5,367 550 385 376 Foreign Id) 3,769 580 Income taxes

$9,566 $5,947 Supply 119 153 221 Delivery 24 71 59 (aWThe period ended December 31, 2002 contains the results of WPD. See Note 9 for International (a] 67 37 14 additional information on the acquisition of a controlling interest in WPD.

210 261 294 1bW The International segment includes the Cumulative Effect of a Change in Extraordinary item Accounting Principle' recorded in March 2002. See Note 18 for additional infor-Delivery 11 mation. The International segment also includes the write-downs of the CEMAR 11 investment described in Note 9.

Net Income fel The 2002 amount represents the acquisition of the controlling interest in WPD.

Id) The December 31, 2002 balance sheet includes the consolidation of the accounts Supply 356 368 325 Delivery 48 126 113 of WPD. See Note 9 for additional information on the acquisition of WPD.

International lb? (196) (315) 60

$208 $ 179 $ 498

3. INVESTMENT IN UNCONSOLIDATED AFFILIATES - AT EQUITY Cash Flow Data Investments in unconsolidated affiliates accounted for under the equity method Expenditures for property, plant and equipment were $234 million and $586 million at December 31,2002 and 2001. The balance Supply $ 299 $290 $ 278 at December 31, 2001 included PPL Global's investment in WPDH Limited, which Delivery 236 149 148 was $328 million. In the third quarter of 2002, PPL Global acquired a controlling International 113 126 34 interest in WPD. As a result PPL Global fully consolidated the financial results 648 565 460 of WPD at September 30, 2002. See Note 9 for additional information.

Investment in generating assets and Investment in unconsolidated affiliates accounted for under the equity electric energy projects method at December 31, 2002, and the effective equity ownership percentages, Supply 261 176 97 were as follows:

International (c) 211 136 473

$472 $312 $570 PPL Global Aguaytia Energy, LLC - 11.4%

As of December 31, 2002 2001 Hidro Iberica, B.V-50.0%

Balance Sheet Data Latin American Energy & Electricity Fund 1,LP - 16.6%

Net investment in unconsolidated Transemel - 60.0%

affiliates - at equity Wind Resources Limited -45.0%

Supply $ 198 $ 211 PPL Generation International (d} 36 375 Safe Harbor Water Power Corporation - 33.3%

234 586 Bangor Pacific Hydro Associates - 50.0%

Total assets Southwest Power Partners, LLC - 50.0%

Supply 4,930 4,716 Delivery 5,867 6,097 International (di 4,772 1,749

$15,569 $12,562

PPL Corporation 56 2002 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Summarized below is information from the financial statements of unconsol- 2002 2001 2000 idated affiliates accounted for under the equity method, underlying the amounts Basic EPS included in PPUs consolidated financial statemi tnts: Net Income - before extraordinary item 2002 2001 2000 and cumulative effect of a change

- in accounting principle S 2.35 $1.16 $3.38 Income Statement Data (al Extraordinary item (net of tax) 0.07 Revenues $118 S111 $9g Cumulative effect of achange in Operating Income 13 42 40 accounting principle (net of taxi (0.98) 0.07 Net Income (Loss) (9) 52 15 Net Income S 1.37 S1.23 S3.45 December 31, December31, Diluted EPS 2002 2001 Net Income - before extraordinary item and cumulative effect of a change Balance Sheet Data al in accounting principle $ 2.35 $1.15 $3.37 Current Assets $139 $144 Extraordinary item (net of tax) 0.07 Noncurrent Assets 807 865 Cumulative effect of achange in Current Liabilities 31 37 accounting principle (net of tax) 10.99) 0.07 Noncurrent Liabilities 298 310 Net Income $ 1.36 $1.22 $3.44 Cal For purpose of comparability, the summarized information of WPD isexcluded from all periods. See Note 12 for a description of the cumulative effect of a change in accounting for pension gains and losses and the pro forma effect of retroactive 4.t. EARNINGS PER SHARE EARNINGS PER SHARE application of the change in accounting.

See Note 18 for a description of the cumulative effect of a change in Basic EPS is calculated by dividing 'Net Income" on the Statement of Income accounting related to the adoption of SFAS 142 and the elimination of goodwill by the weighted average number of common shares outstanding during the amortization, as well as the pro forma effect of retroactive application of the period. In the calculation of diluted EPS, weighted average shares outstanding elimination of goodwill amortization.

are increased for additional shares that would be outstanding if potentially In May 2001, PPL issued 23 million PEPS Units that contain a purchase dilutive securities were converted to common stock. contract component for PPL's common stock. The purchase contract would Potentially dilutive securities consist of stock options granted under the settle between 8.8 million and 10.8 million of PPL's common shares, depending incentive compensation plans, stock units representing common stock granted on a conversion ratio bed to the price of PPUs common stock. The PEPS Units under directors compensation programs and PEPS Units. will only be dilutive if the average price of PPUs common stock exceeds $65.03 Dividends and distributions on preferred securities are included in net for any period. Since the weighted average price has not exceeded $65.03 income in the computation of basic and diluted EPS. since issuance, they were excluded from the diluted EPS calculations.

The basic and diluted EPS calculations, and the reconciliation of the shares Stock options to purchase approximately 1,294,000 and 896,000 PPL common (in thousands) used in the calculations, are shown below: shares for 2002 and 2001 were not included in those period's computation of 2002 2001 2000 diluted EPS because the exercise price of the options was greater than the Income (Numerator) -- average market price of the common shares. Therefore, the effect would have been antidilutive.

Net income - before extraordinary item and cumulative effect of a change in accounting principle S 358 S169 $487 Extraordinary item (net of tax) 11 5. INCOME AND OTHER TAXES Cumulative effect of a change in accounting principle (net of tax) (150) 10 For 2002, 2001 and 2000, the corporate federal income tax rate was 35%. The Net Income S208 $179 $498 statutory corporate net income tax rates for Pennsylvania and Montana were 9.99% and 6.75%.

Shares (Denominator)

Shares for Basic EPS 152,492 145,974 144,350 Add: Incremental shares Stock options 244 569 364 Stock units 73 71 67 Shares for Diluted EPS 152,809 146,614 144,781

PPL Corporation 57 2002 Annual Report The tax effects of significanttemporary differences comprising PPL's net 2002 2001 2000 deferred income tax liability were as follows: Reconciliation of Income Tax Expense 2002 2001 Indicated federal income tax on pre-tax income before extraordinary Deferred Tax Assets item and a cumulative effect of a Deferred investmenttax credits $ 54 $ 60 change in accounting principle at NUG contracts and buybacks 203 272 statutory tax rate - 35% $250 $168 $284 Accrued pension costs 214 74 Deferred foreign income taxes 233 69 Increase/(decrease) due to:

Cancellation of generation projects 60 State income taxes 11 25 45 18 Flow through of depreciation Write-down of generating assets 91 61 differences not previously normalized 2 Impairment write-down Amortization of investmenttax credit (11) (11) (11)

Contribution in aid of construction 55 42 Write-down of international energy projects 14 144 Other 209 200 Valuation allowance (327) (132) Difference related to income recognition of foreign affiliates 751 706 (net of foreign income taxes) 18 19) 17)

Deferred Tax Liabilities Federal income tax credits (50o (40) (6)

Electric plant- net 922 852 Other (22) (16) (13)

Restructuring - CTC 778 861 (40) 93 10 Taxes recoverable through future rates 104 104 Reacquired debt costs 11 12 Total income tax expense $210 $261 $294 Foreign - plant 792 Effective income tax rate 29.5% 54.4% 36.3%

Foreign - pensions 167 Taxes, Other than Income Foreign - other 35 42 State gross receipts $154 $112 $128 Other domestic 83 63 State utility realty 3 4 6 2,892 1,934 State capital stock 7 20 23 Property - international 42 Net deferred tax liability $2,141 $1,228 Domestic property and other 26 19 19

$232 $155 $176 Details of the components of income tax expense, a reconciliation of federal income taxes derived from statutory tax rates applied to income from PPL Global had foreign net operating loss carryforwards of approximately continuing operations for accounting purposes, and details of taxes other

$28 million and $34 million at December 31, 2002 and 2001. PPL Global also had than income are as follows:

foreign capital loss carryforwards of $760 million at December 31, 2002 and 2002 2001 2000 none at December 31,2001. All of these losses have an unlimited carryforward Income Tax Expense period. However, it is more likely than not thatthese will not be utilized and as Current-Federal S 41 $270 $285 such, a full valuation allowance has been provided.

Current - State (9) 36 57 PPL Global does not pay or record U.S. income taxes on the undistributed Current- Foreign 52 8 11 earnings of its foreign subsidiaries where management has determined that the 84 314 353 earnings are permanently reinvested. The cumulative undistributed earnings Deferred - Federal 70 (86) (52) are included in 'Earnings reinvested" on the Balance Sheet. The amounts con-Deferred -State 27 4 12 sidered permanently reinvested at December 31, 2002 and 2001 were $295 mil-Deferred - Foreign 44 44 (4) lion and $38 million. If the earnings were remitted as dividends, PPL Global may 141 (38) (44) be subjectto additional U.S. taxes, net of allowable foreign tax credits. It is not Investment tax credit net-federal (15) (15) (15) practical to estimate the amount of additional taxes that might be payable on Total $210 $261 $294 these foreign earnings.

Total income tax expense - Federal $ 96 $169 $218 Total income tax expense - State 18 40 69 Total income tax expense - Foreign 96 52 7 6. NUCLEAR DECOMMISSIONING COSTS Total $210 $261 $294 The costto decommission the Susquehanna station is based on a site-specific studyto dismantle and decommission each unit immediately following final shut-down. PPL Susquehanna's 90% share of the total estimated cost of decommis-sioning the Susquehanna station was approximately $936 million measured in 2002 dollars. This estimate includes decommissioning the radiological portions of the station and the cost of removal of non-radiological structures and materials.

PPL Corporation 58 2002 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Decommissioning costs are recorded as a component of depreciation December 31, 2002 December 31, 2001 expense. Beginning in January 1999, in accordance with the PUC Final Order, Carrying Fair Carrying Fair

$130 million of decommissioning costs are being recovered from customers Amount Value Amount Value through the CTC over the 11-year life of the CTC rather than the remaining life Liabilities of Susquehanna. The recovery will include a return on unamortized decommis- Long-term debt (ci 6,267 6,657 5,579 5,724 sioning costs. Decommissioning charges were S22 million in 2002, $24 million Company-obligated manda-in 2001 and $26 million in 2000. torily redeemable preferred securities of subsidiary Amounts collected from PPL Electric's customers for decommissioning, less trusts holding solely applicable taxes, are deposited in external trust funds for investment and can company debentures (c 661 507 825 705 be used only for future decommissioning costs. Accrued nuclear decommis- Short-term debt (oh 943 943 118 118 sioning costs were $296 million and $294 million at December 31, 2002 and 2001, Price risk management and are included in "Deferred Credits and Other Noncurrent Liabilities - Other." liabilities - current ibl In November 2001, PPL Susquehanna notified the NRC that it intends to file Energy 32 32 12 12 for 20-year license renewals for each of the Susquehanna units. If approved, Interest 14 14 4 4 Foreign exchange 6 6 2 2 the operating licenses would be extended from 2022 to 2042 for Unit 1 and from Price risk management liabilities -

2024 to 2044 for Unit 2.

noncurrent: (hi See Note 22 for additional information on SFAS 143, "Accounting for Asset Energy 7 7 7 7 Retirement Obligations," which changed the accounting for the decommission- Interest 33 33 3 3 ing of the Susquehanna station effective January 1,2003. Foreign exchange 9 9 Preferred stock with sinking fund requirements Wci 31 30 31 31

7. FINANCIAL INSTRUMENTS Other financial instruments included inother The carrying amount on the Balance Sheet and the estimated fair value of current liabilities (oh 12 12 financial instruments are set forth below. These tables exclude derivative and (a} The carrying value of these financial instruments generally is based on estab-non-derivative energy contracts that do not meet the definition of a financial lished market prices and approximates fair value.

instrument because physical delivery is expected. (bh Valued using either exchange-traded market quotes or prices obtained through December 31, 2002 December 31, 2001 third-party brokers. See Note 17 about the various uses of derivative financial Carrying Fair Carrying Fair instruments.

Amount Value Amount Value (c The fair value generally is based on quoted market prices for the securities where available and estimates based on current rates offered to PPL where Assets quoted market prices are not available.

Cash and cash equivalents (a} 5 245 S 245 $ 933 S 933 Nuclear plant decom-missioning trust fund (a) 287 287 276 276 Price risk management 8. CREDIT ARRANGEMENTS AND FINANCING ACTIVITIES assets - current (bh Energy 30 30 22 22 Credit Arrangements Foreign exchange 6 6 In order to enhance liquidity, and as a credit back-stop to their respective com-Price risk management mercial paper programs, PPL Electric maintains a S400 million 364-day credit assets - noncurrent lb( facility maturing in June 2003 (replacing a similar facility that had expired in Energy 12 12 44 44 June 2002), and PPL Energy Supply maintains three credit facilities: a $300 million Interest 12 12 6 6 364-day credit facility maturing in June 2003, a S500 million three-year credit Foreign exchange 63 63 Other investments (oh 51 51 61 61 facility maturing in June 2004 and a $300 million three-year credit facility matur-Other financial instruments ing in June 2005 (the two S300 million credit facilities replaced a $600 million included in other 364-day credit facility which expired in June 2002). At December 31, 2002, no current assets Sai 5 5 3 3 borrowings were outstanding under any of these facilities. Both PPL Electric and PPL Energy Supply have the ability to cause the lenders to issue letters of credit under their respective facilities. At December 31, 2002, PPL Electric had

$40 million of letters of credit outstanding under its facility, and PPL Energy Supply had $47 million of letters of credit outstanding under its S500 million facility, of which S25 million was for the benefit of PPL Montana.

PPL Corporation 59 2002 Annual Report PPL Montana maintained a $100 million three-year credit facility, which In September 2002, PPL issued 16.7 million shares of common stock for matured in November 2002, to meet its liquidity needs and to provide for the S30.50 per share, resulting in gross proceeds of approximately $509 million. PPL issuance of up to $75 million in letters of credit. Additionally, PPL Montana received net proceeds of $493 million, which were used to redeem all of the maintained a $150 million credit facility, which matured in April 2002, for the $150 million outstanding 8.10% Preferred Securities issued by PPL Capital Trust sole purpose of issuing letters of credit These facilities were not renewed. 11and to repay short-term debt In the fourth quarter of 2002, PPL Montana entered into a $100 million three- During the first quarter of 2002, PPL issued $13 million of common stock in year creditfacility with another PPL Energy Supply subsidiary on market terms small amounts on a periodic basis under its Structured Equity Shelf Program. This to meet Rtsliquidity needs. At December 31, 2002, PPL Montana had outstanding program was terminated in November 2002 and replaced with another program borrowings of $26 million under this facility. with a different sales agent Underthis new program, PPL issued $41 million of In October 2002, WPD (South West)'s 416 million British pounds sterling common stock in the fourth quarter of 2002 and $50 million in January 2003.

short-term facilities were replaced by a 250 million British pounds sterling At December 31, 2002, PPL Energy Supply had $374 million of commercial bridge facility and two revolving credit facilities: a one-year 100 million British paper outstanding.

pounds sterling credit facility and a five-year 150 million British pounds sterling In May 2002, PPL Electric:

credit facility. At December 31, 2002, WPD (South West) had outstanding bor-

retired $11 million of its outstanding First Mortgage Bonds, 8-1/2% Series due rowings of $389 million under its bridge facility and $55 million under its credit 2022, at par value, through the maintenance and replacement fund provisions facilities based on year-end currency exchange rates. The bridge facility is of the 1945 First Mortgage Bond Indenture; expected to be refinanced with long-term bonds in the first half of 2003.

retired $28 million of its outstanding First Mortgage Bonds, 7-3/4% Series due The subsidiaries of PPL are separate legal entities. PPL's subsidiaries are May 2002, at par value; and not liable forthe debts of PPL Accordingly, creditors of PPL may not satisfytheir

instructed the property trustee of PPL Capital Trust to redeem, at par value, debts from the assets of the subsidiaries absent a specific contractual undertak- all of the $100 million of outstanding 8.20% Preferred Securities due 2027 that ing by a subsidiary to pay PPUs creditors or as required by applicable law or were previously issued by PPL Capital Trust.

regulation. Similarly, absent a specific contractual undertaking or as required In the third quarter of 2002, PPL Electric instructed the property trustee by applicable law or regulation, PPL is not liable for the debts of its subsidiaries.

for the 8.10% Preferred Securities due 2027 to redeem, at par value, all of the Accordingly, creditors of PPL's subsidiaries may not satisfy their debts from the

$150 million of outstanding preferred securities issued by PPL Capital Trust 11.

assets of PPL absent a specific contractual undertaking by PPLto pay the cred-This redemption occurred in September 2002.

itors of its subsidiaries or as required by applicable law or regulation.

During 2002, PPL Transition Bond Company made principal payments on Financing Activities bonds totaling $245 million.

In February 2002, PPL Capital Funding repurchased $10 million, par value, of At December 31, 2002, PPL Electric had $15 million of commercial paper its medium-term notes, 7.75% Series due 2005, at a market value of $11 million. outstanding.

In October 2002, it repurchased an additional $100 million, par value, of these Dividend Restrictions notes at a market value of $104 million.

The PPL Montana Colstrip lease places certain restrictions on PPL Montana's In September 2002, PPL Capital Funding retired $175 million of its medium-ability to declare dividends. At this time, PPL believes that these covenants will term notes, floating-rate Series B due 2002, and $25 million of its medium-term not limit PPL Montana's ability to operate as desired and will not affect PPL's notes, 7.75% Series due 2002, both at par value.

ability to meet any of its cash obligations. Certain of PPL Global's international In September 2002, PPL Capital Funding cancelled the remarketing agree-subsidiaries also have financing arrangements which limit their abilityto pay ment on its 77% Reset Put Securities due 2007. This agreement would have dividends. However, PPL does not atthis time, expectthat any of such limita-permitted a third partyto remarket the securities at an above-market coupon in tions would significantly impact its abilityto meet its cash obligations. PPL November 2002. This action required PPL Capital Funding to pay a $30 million Electric's 2001 Senior Secured Bond Indenture restricts dividend payments termination fee to the third party in September, and PPL Capital Funding repur-in the event that PPL Electric fails to meet interest coverage ratios or fails to chased the principal amount ($200 million) of these securities in November 2002.

comply with certain separateness formalities undertaken in connection with A $24 million charge (the payment to the third party net of hedge income and its strategic initiative (see Note 20 for additional information). PPL Electric does the unamortized balance of the original option premium) was included in not at this time, expect that any of such limitations would significantly impact "Interest Expense" on the Statement of Income.

its ability to declare dividends.

In October 2002, PPL Capital Funding repurchased $15 million, parvalue, of its medium-term notes, 8-3/8% Series due 2007, at a market value of $16 million.

PPL Corporation 60 20t2 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. ACQUISITIONS, DEVELOPMENT AND DIVESTITURES Prior to the acquisition, PPL Global held 51% of the equity interest in WPD but shared control with Mirant pursuant to a shareholders' agreement The Domestic Generation Projects shareholders' agreement was terminated in connection with the closing of the In December 2001, PPL Global made a decision to cancel approximately acquisition. No regulatory approvals were required for this transaction.

2,100 MW of previously planned generation development in Pennsylvania and The purchase of Mirant's interest in WPD was accounted for as a step-Washington state. These projects were in the early stage of development and acquisition and resulted in the consolidation of WPD's results of operation into would have had an estimated capital cost of approximately $1.3 billion. The PPL's Statement of Income as of January 1, 2002, on a one-month lag, consis-charge for cancellation of these generation projects, which was primarily due to tent with PPL Global's current consolidation policy. The PPL income statement cancellation fees under turbine purchase contracts, was approximately S150 mil-for the period ended December 31, 2002 reflects the results of WPD for the lion, or $88 million after-tax, and was reported on the 2001 Statement of Income twelve months ended November 30, 2002. The acquisition also resulted in the as 'Cancellation of generation projects," a component of "Other charges.' At addition of S3.4 billion of assets and $2.1 billion of WPD's debt to the balance June 30, 2002, PPL Global had completed payment of the cancellation fees.

sheet. However, the non-recourse nature of WPD's debt to PPL will not change.

In November 2002, PPL Global canceled the development of a 44 MW The assets acquired and liabilities assumed were recorded at estimated fair electricity-generating facility at Freeport, Long Island due to scheduling delays values as determined by management based on information currently available.

in the development process and increased project costs. As a result of this PPL Global is in the process of obtaining an independent appraisal of the fair cancellation, PPUs capital expenditure program was reduced by approximately value of acquired property, plant and equipment and any intangible assets.

$65 million over 2003 and 2004.

Management is also completing its review and determination of fair value of Also in November, PPL Global evaluated its options with respect to six unas-other assets acquired and liabilities assumed, including pro-acquisition contin-signed turbines and SCRs that are complete or substantially complete. These gencies. Accordingly, the preliminary allocation of purchase price is subjectto units were intended to be used atthe Kings Park site on Long Island, New York.

revision based on the final determination of appraised and other fair values. The At that time, given low energy prices and the unavailability of a power contract following table summarizes the preliminary allocation of purchase price based PPL Global was reevaluating its options with respect to the Kings Park project.

on estimated fair values of the assets acquired and liabilities assumed at the Due to the uncertainty of the project and absence of other viable projects, date of acquisition, plus the book value of assets and liabilities underlying a valuation based upon replacement costs of the turbines and the SCRs was PPL Global's previous 51% equity ownership:

completed. This resulted in the recognition of a S44 million impairment charge, which is reported on the Statement of Income as 'Write-down of generation Current assets $ 228 assets," a component of "Other charges." A deferred income tax benefit of Investments la) 14511

$18 million was recognized on the write-down. Property, plant and equipment 3,429 In January 2003, PPL announced that it decided to seek a buyer and not Goodwill 225 proceed with development of the 300 MW Kings Park project. PPL is exploring Other 239 the sale of both the generation equipment and the development rights at Kings Total assets acquired 3,670 Park. The decision reduced PPLs planned capital expenditures for generation Current liabilities 787 by a total of approximately S165 million in 2003 and 2004. Long-term debt 1,574 See Note 10 for a discussion of the Lower Mt Bethel project. Other 1,073 Total liabilities assumed 3,434 International Energy Projects Net assets acquired S 236 Acquisition of Controlling Interest in WPD On September 6, 2002, PPL Global acquired the remaining 49% equity interest in la Includes the reversal of PPL Global's equity investment.

WPOH Limited and WPDL from Mirant for approximately $236 million, including acquisition costs. Mirant announced its decision to exit the investment earlier in The goodwill reflected above includes the remaining value of PPL Global's the year. The acquisition of Mirant's 49% interest provides PPL Global with com- 51% share of the goodwill recognized by WPD on its acquisition of Hyder.

plete control of WPD. WPD operates two electric distribution companies in the U.K., which together serve approximately 2.5 million end-users and have about 2,500 employees. The acquisition was initially funded bythe issuance of com-mercial paper by PPL Energy Supply. The commercial paper was paid off with proceeds of the September 2002 common stock sale by PPL

PPL Corporation 61 2002 Annual Report The unaudited pro forma information that follows is presented to give effect As a result of its financial difficulties, CEMAR failed to pay certain of its to the acquisition on the statement of income of PPL. The pro forma adjust- creditors for obligations when due. In addition, CEMAR was not in compliance ments assume that the transaction was consummated at the beginning of the with the financial covenants in its 150 million Brazilian reais (approximately income statement period. $56 million) debenture indenture for the year ended December 31, 2001, and As Pro Forma As for the quarter ended March 31,2002. CEMAR reached agreementwith the Reported Adjustments Adjusted required majority of debenture holders on a postponement until February 1, 2002 2003 of the annual rolloverterms pursuanttothe debenture agreement and a Operating revenue $5,429 $5,429 waiver for the failure to meet certain financial covenants through measurement Income from continuing operations periods ending September 30, 2002. As far as PPL can ascertain, CEMAR subse-(before cumulative effect of a quentlyviolated a cross default covenant of the debenture indenture through change in accounting principle) 358 $ 71 429 nonpayment of certain short-term credit lines and the full 150 million Brazilian Net income 208 71 279 reais are due and owing. In addition, the rollover term postponement and Basic EPS 1.37 0.46 1.83 covenant waiver agreementforthe debentures expired as of February 1, allow-2001 ing these creditors to demand payment in full. CEMAR was required to propose Operating revenue $5,077 $ 499 $5,576 credit extension terms 25 days priorto the February 1 deadline, butfailed to do Income from continuing operations so. The intervention management (discussed below) of CEMAR has represented (before cumulative effect of a that CEMAR has received an extension until February 14 to pay certain unse-change in accounting principle) 169 67 236 cured credit lines that had previously matured and had been extended several Net income 179 67 246 Basic EPS 1.23 0.46 1.69 times during late 2002. PPL does not know whether these creditors have granted a further extension beyond February 14.

In July 2002, PPL announced a proposal to sell all of its 90% equity interest Write-down of International Energy Projects in CEMAR to Franklin Park Energy, LLC. The sale was subject to approval by CEMAR ANEEL and other customary conditions. On August 21, ANEEL denied the At December 31, 2001, PPL Global estimated that the long-term viability of its request for transfer of PPUs equity interest in CEMAR to Franklin Park Energy.

CEMAR investment was jeopardized and that there was minimal probability The purchase and sale agreement was terminated by Franklin Park Energy on of positive future cash flows. At that time, PPL Global recorded an impairment August 26 as a result of ANEEUs denial of the transfer request loss in the carrying value of its net assets in CEMAR, an increase in its valua- On August 20, 2002, the trustee for CEMAR's debenture holders and three tion allowance in deferred tax assets, and a credit to "Minority Interest" on the bank lenders to CEMAR filed an injunction with a state court in Brazil, enjoining Statement of Income. The net result of these transactions was a $217 million CEMAR's officers and the board of directors of Brisk Participacoes Ltda. (Brisk),

charge to earnings, with $179 million included in "Write-down of international a wholly-owned subsidiary of PPL Global and CEMAR's controlling shareholder, energy projects," a component of "Other charges," $44 million in deferred fromtaking actionsthatwould resultinthe equivalentofa U.S. Chapter7liqui-income taxes and a $6 million credit to "Minority Interest" dation proceeding or liquidating event for CEMAR. Brisk filed objections to the At March 31, 2002, PPL Global recorded a further impairment loss in the injunction with the state court on September 4. On August 21, CEMAR filed a carrying value of its net assets in CEMAR of approximately $4million, after-tax. concordata preventive, the Brazilian equivalent of a U.S. Chapter 11 bankruptcy The pre-tax charge was $6million, and was recorded as a charge to "Write- work-out proceeding. On September 18, certain creditors and bondholders of down of international energy projects" on the Statement of Income. CEMAR filed a complaint with the Brazilian courts against Brisk, requesting that Throughout the first half of 2002, PPL was working with governmental Brisk's voting rights in CEMAR be suspended for a 90-day period and that the authorities in Brazil and CEMAR's creditors on a plan to return the company to shares representing the controlling interest in CEMAR be transferred to a third financial stability. That plan included two requests by CEMAR for rate-increase party recommended by the creditors representing two-thirds of CEMAR's debt.

reviews, which Brazilian regulators denied in January and June 2002. PPL On August 21, 2002, ANEEL authorized an administrative intervention in viewed the rate-increase reviews as critical in restoring CEMAR to financial CEMAR and fully assumed operational and financial control of the company. In stability. Given the regulator's denial of the rate-increase reviews and the finan- its public announcement relating to the intervention, ANEEL said that its inter-cial condition of CEMAR, PPL made a decision in June 2002 to exit the invest- vention and control of CEMAR would last for an initial term of 180 days and that ment. PPL Global's remaining portion of its CEMAR investment primarily related it could be extended. On August 29, at the request of the intervenor appointed to its foreign currencytranslation adjustment balance, was written-off as of by ANEEL, the bankruptcy judge dismissed the concordata preventiva filing June 30, 2002. The $94 million charge was recorded in "Write-down of interna- without prejudice.

tional energy projects" on the Statement of Income.

PPL Corporation 62 2002 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The intervenor appointed by ANEEL issued a public statement and schedule WPD/Teesside for the transfer of the ownership interest in CEMAR to a new owner. Pursuant WPD has a 15.4% equity interest in Teesside Power Limited, the owner of the to that schedule, ANEEL announced its approval in November 2002 of three 1,875 MW Teesside Power Station, located in northeast England. Through its Brazilian bidders that submitted pre-qualification documents. Also in November, European affiliates, Enron was an owner, operator and power purchaser of the a federal court in Brazil granted a preliminary injunction requested by a citizen station's output As a result of Enron being placed into receivership in the U.K.

connected to a Maranhao labor union suspending the process to transferthe and its default on obligations under the power purchase agreements, in the ownership interest in CEMAR. Although the schedule announced by the inter- fourth quarter of 2001, WPD wrote off its entire equity investment in Teesside venor reflected a closing for the transfer of control of CEMAR to a third party Power Limited. PPL Global's share of the impairment loss was $21 million and is on December 20, 2002, the closing did not occur due to the failure of the poten- included in "Write-down of international energy projects," a component of tial buyer and certain creditors to reach agreement on the restructuring of "Other Charges" on the Statement of Income.

CEMAR's debts. The deadline for the sale process was extended to February 17, In connection with the Enron bankruptcy and the probable resulting loss of 2003, the same day the initial term of the intervention was scheduled to end. Teesside cash flows, PPL and its subsidiaries evaluated the carrying value of Currently, three injunctions applicable to the sale process are pending, all of WPD. Fair value, measured using discounted cash flows, was compared to the which ANEEL has appealed. No conforming bids were submitted to ANEEL by carrying value to determine whether impairment existed at December 31, 2001.

the February 17 deadline due to the outstanding injunctions preventing the sale Fair value was determined considering the loss of the value of the future cash process from continuing. ANEEL publicly announced a 180 day extension to the flows from the Teesside Power Station and a forecasted reduction in future initial intervention on February 14, citing the continuing unresolved financial cri- operating cash flows at WPD. The probability-weighted impairment loss was sis of CEMAR as the primary reason for the extension. PPL has not yet been $117 million, after-tax. The pre-tax charge was $134 million, and was recorded notified by ANEEL of a revised schedule for the sale process. As a result of this as a charge to "Write-down of international energy projects."

action, PPL Global will continue its current policy of not consolidating CEMAR In 2002, PPL Global recognized an $8 million tax benefit on the worthless-(as described belowl. ness of WPD's investment in Teesside.

As of February 11, 2003, due to the inability to discharge their obligations Other under the continuing intervention, PPL-related officers and directors of CEMAR Late in 2002, PPL Global evaluated certain investments for impairment and resigned from their respective positions.

recorded a S5 million impairment charge in connection with its investment in Based on this series of events, PPL Global no longer controls or manages CGE, a $4 million impairment of a corporate joint venture's investment in Brazil, CEMAR and PPL Global has deconsolidated the financial assets and liabilities of and a $4million write-down of certain non-electrical assets in Bolivia.

CEMAR from its financial statements. The CEMAR investment is now accounted for using the cost method. As a result in the third quarter of 2002, PPL Global Sales recorded approximately $23 million of operating losses of CEMAR through Late in 2002, PPL Global sold its minority interests in small hydroelectric gener-August 21, 2002, the day ANEEL assumed control. Consistent with the cost ating facilities in Bolivia and in Portugal to concentrate on its majority-owned method of accounting, PPL Global is no longer recording CEMAR's operating electricity distribution companies in Chile, Bolivia, El Salvador and the U.K.

results. Although return of control to PPL Global is considered highly unlikely, PPL Global received approximately $15 million in total from the sales.

PPL Global is evaluating the accounting treatment if control is returned in the future. At December 31, 2002, the negative investment was included in "Deferred Credits and Other Noncurrent Liabilities - Other." Any negative carry- 1 0. LEASES ing value of the investment in CEMAR will be reversed upon the final sale or Colstrip Generating Plant other disposition of the company.

In July 2000, PPL Montana sold its interest in the Colstrip generating plant The following major reductions in consolidated assets and liabilities resulted to owner lessors who are leasing the assets back to PPL Montana under four from the deconsolidation and recording of the cost investment of CEMAR:

36-year operating leases. The proceeds from this sale approximated $410 million.

PPL Montana recorded a deferred gain on the sale of approximately S8 million, Assets Current Assets 5 71 which is being amortized into "Other operation and maintenance" in the Property, Plant and Equipment- net 255 Statement of Income overthe term of the operating lease on a straight-line Regulatory and Other Noncurrent Assets 12 basis. PPL Montana used the sale proceeds to reduce outstanding debt and 338 make distributions to PPL Generation.

Liabilities and Equity PPL Montana leases a 50% interest in Colstrip Units 1 and 2 and a 30%

Current Liabilities 194 interest in Unit 3, through four non-cancelable operating leases. These leases Long-term Debt 84 provide two renewal options based on the economic useful life of the genera-Deferred Credits and Other Noncurrent Liabilities 65 tion assets. PPL Montana is required to pay all expenses associated with the Shareowners' Common Equity 7 operations of the generation units. The leases place certain restrictions on PPL Montana's ability to incur additional debt, sell assets and declare dividends and Accumulated Loss in Excess of Investment requires PPL Montana to maintain certain financial ratios related to cash flow

PPL Corporation 63 2002 Annual Report and net worth. The amount outstanding under these leases at December 31, of the project or upon an event of default. These events of default during the 2002 was S314 million. There are no residual value guarantees in these leases. construction period include a violation of environmental law, material environ-However, upon an event of default or an event of loss, the lessee could be -mental damage, revocation or failure to obtain environmental approval, defaults required to pay a termination value of amounts sufficient to allow the lessor to arising out of any fraudulent act illegal act misapplication of funds or willful repay amounts owing on the lessor notes and make the lessor whole for its misconduct, or if a bankruptcy event occurs. These events of default during the equity investment and anticipated return on investment The events of default lease term include, subject to certain exceptions, payment or judgment defaults, include payment defaults, breaches of representations or covenants, accelera- breach of representations or covenants, defaults in other indebtedness, termi-tion of other indebtedness of PPL Montana, change in control of PPL Montana nation of the financing documents, or violations of environmental law, material and certain bankruptcy events. The termination value is estimated to be environmental damage or loss of a required environmental approval. The total

$551 million at December 31, 2002. exposure as a result of any of these events of default occurring is estimated to be up to $512 million as of December 31, 2002. The maximum exposure is University Park and Sundance estimated to be up to $575 million as of the commencement of the lease based In May 2001, a PPL Global subsidiary entered into a $1.06 billion operating on current market conditions. The obligations of the lessee under this lease, lease arrangement, as lessee, for the development construction and operation including payment obligations, have been guaranteed by PPL Energy Supply.

of several commercial power generation facilities. The lessor is a variable inter-The Air Quality Plan Approval issued by the Pennsylvania DEP for construc-est entitythat was created forthe sole purpose of owning the facilities and tion of the Lower Mt. Bethel facility has been appealed by the New Jersey DEP incurring the related financing costs. In February 2002, in connection with the to the Pennsylvania DEP Environmental Hearing Board. The PPL Global sub-December 2001 decision to cancel several development projects, the available sidiary involved in the Lower Mt Bethel lease financing has joined with the commitment under this lease was reduced to $700 million to cover only the Pennsylvania DEP in opposing this appeal. In addition, in August 2002, the 540 MW gas-powered University Park project near University Park, Illinois, and Northampton County Court of Common Pleas issued a decision concerning the the 450 MW gas-powered Sundance project near Coolidge, Arizona. In July 2002, permissible noise levels from the Lower Mt Bethel facility when it becomes these facilities were substantially completed and the initial lease term com-operational. Specifically, the court's decision addressed the noise measurement menced. The first lease payment was made in August 2002. The commitment criteria and the point at which the noise levels are to be measured. PPL has under this lease was further reduced to $660 million in September 2002. The appealed the court's decision to the Commonwealth Court, and an intervenor in lease terminates in June 2008. At the end of the lease term, the lessee has the the lawsuit has cross-appealed the court's decision. The Lower Mt. Bethel facil-option to extend the lease or purchase the facilities. If the lessee does not choose ity is expected to be operational in late 2003. PPL cannot predict the outcome either of these options, then it must sell the assets on behalf of the lessor and of these matters or their ultimate impact on the Lower Mt Bethel facility, but guarantee a residual value of up to $545 million based on an estimated total such impact may be material.

lessors investment of $657 million for both projects combined. If the financing is terminated early as a result of significant environmental damage, or an event Cancellation of Lease for Turbine Generator Units and Related Equipment of default the lessee could be obligated to pay up to 100% of the lessor's invest- In November 2000, a PPL Global subsidiary entered into a $555 million operating ment in the facilities. These events of default include, subject to certain excep- lease arrangement for turbine generator units and related equipment (SCRs, tions, payment or judgment defaults, breach of representations or covenants, transformers and spare engines). In June 2002, this operating lease was can-defaults in other indebtedness, termination of the financing documents or loss celled in connection with the December 2001 decision to cancel several devel-of a required approval. The obligations of the lessee under this lease, including opment projects. Priorto terminating the lease, certain equipment under this payment obligations, have been guaranteed by PPL Energy Supply. lease was either purchased by a PPL Global subsidiary or sold to another lessor.

Lower Mt Bethel In December 2001, a PPL Global subsidiary entered into a $455 million operating Other Leases lease arrangement as lessee, for the development construction and operation In March 2000, PPL Electric terminated its nuclear fuel lease and repurchased of a 600 MW gas-fired combined-cycle generation facility located in Lower $154 million of nuclear fuel from the lessor energy trust. In July 2000, all nuclear Mt. Bethel Township, Northampton County, Pennsylvania. The lessor is a vari- fuel was transferred to PPL Susquehanna in connection with the corporate able interest entitythat was created forthe sole purpose of owning the facility realignment and incurring the related financing costs. The initial lease term is approximately In addition to the leasing arrangements discussed above, PPL and its sub-10 years, beginning on the date of commercial operation, which is expected to sidiaries also have leases for vehicles, office space, land, buildings, personal occur in late 2003. At the end of the lease term, the lessee has the option to computers and other equipment Rental expense for operating leases was extend the lease or purchase the facility. If the lessee does not choose either of $62 million in 2002, $52 million in 2001 and $45 million in 2000.

these options, then it must sell the assets on behalf of the lessor and guarantee Total future minimum rental payments for all operating leases are estimated a residual value estimated to be up to $321 million based on an estimated total as follows: $99 million in 2003, $135 million in 2004, $131 million in 2005, $130 mil-lessor's investment of $455 million. The lessee could be obligated to pay up to lion in 2006 and 2007 and $795 million thereafter.

100% of the lessor's investment and other obligations in the facilities if the financing is terminated early as a result of a loss, destruction or condemnation

PPL Corporation 64 2002 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 1 . STOCK-BASED COMPENSATION ated payout under Plan provisions fortermination, retirement disability and death of employees. Restricted shares vestfully if control of PPL changes, as Under the PPL Incentive Compensation Plan (ICP) and the Incentive Compensation defined by the Plans.

Plan for Key Employees (ICPKE) (together, the "Plans"), restricted shares of PPL A summary of restricted stock grants follows:

common stock as well as stock options to purchase shares and stock units may be granted to officers and other key employees of PPL PPL Electric and other Weighted Shares Average affiliated companies. Awards under the Plans are made by the Compensation Restricted Stock Grants Granted Fair Value and Corporate Governance Committee (CCGC) of the PPL Board of Directors, in 2002 147,735 $34.12 the case of the ICP, and by the PPL Corporate Leadership Council (CLCI, in the 2001 202,590 43.09 case of the ICPKE. Each Plan limits the number of shares available for awards 2000 440,549 21.30 to two percent of the outstanding common stock of PPL on the first day of each calendar year. The maximum number of options that can be awarded under each Compensation expense related to restricted stock awards was $5million, Plan to any single eligible employee in any calendar year is 1.5 million shares.

S6 million and less than S3 million for 2002,2001 and 2000. At December 31, 2002, Any portion of these options that has not been granted may be carried over and there were 624,711 restricted shares outstanding. These awards currently vest used in any subsequent year. If any award lapses, is forfeited or the rights to from three to twenty-five years from the date of grant.

the participantterminate, the shares of common stock underlying such an award are again available for grant Shares delivered under the Plans may be in the Stock Options form of authorized and unissued common stock, common stock held in treasury Under the Plans, stock options may also be granted with an option exercise by PPL or common stock purchased on the open market (including private pur- price per share not less than the fair market value of PPL's common stock on chases) in accordance with applicable securities laws. At December 31, 2002, the date of grant The options are exercisable beginning one year after the date no stock units had been issued under the ICP orthe ICPKE. of grant, assuming the individual is still employed by PPL or a subsidiary, in installments as determined by the CCGC in the case of the ICP, and the CLC in Restricted Stock the case of the ICPKE. Options outstanding at December 31, 2002 vest over a Restricted shares of PPL common stock are outstanding shares with full voting three-year period from the date of grant in equal installments. The CCGC and and dividend rights. However, the shares are subject to forfeiture or acceler-CLC have discretion to accelerate the exercisability of the options. All options expire no later than ten years from the grant date. The options become exer-cisable if control of PPL changes, as defined by the Plans.

A summary of stock option activity follows:

2002 2001 2000 Weighted Weighted Weighted Number of Average Number of Average Number of Average Options Exercise Price Options Exercise Price Options Exercise Price Outstanding at beginning of year 2,255,051 $31.36 1,969,301 $23.64 626,020 $26.85 Granted 840,430 $33.49 922,860 S43.16 1,501,110 $22.45 Exercised (62,710) S22.82 (548,424) S23.49 (56.590) $26.84 Forfeited (24,086) S36.18 (88,686) $31.31 (101,239) $24.02 Outstanding at end of year 3,008,685 $32.09 2,255,051 $31.36 1,969,301 $23.64 Options exercisable at end of year 1,400,701 306,544 215,158 Weighted-average fair value of options granted $11.68 S10.42 S3.35 The estimated fair value of each option granted was calculated using a modified Black-Scholes option-pricing model. The weighted average assump-tions used in the model were as follows:

2002 2001 2000 Risk-free interest rate 5.35% 5.46% 6.74%

Expected option life 10 yrs. 10 yrs. 10yrs.

Expected stock volatility 39.11% 30.24% 19.79%

Dividend yield 3.34% 4.28% 5.70%

PPL Corporation 65 2002 Annual Report The following table summarizes information about stock options at December 31, 2002:

Options Outstanding Options Exercisable Weighted Number Average Weighted Number Weighted Outstanding Remaining Average Exercisable Average Range of Exercise Prices at 12/31/02 Contractual Life Exercise Prices at 12131/02 Exercise Price

$19.00-$24.00 912,176 7.1 $22.45 571,196 $22.49

$25.00-$29.00 395,175 6.2 $26.85 395,175 $26.85

$30.00-$35.00 824,440 9.1 $33.49 36,030 $33.49

$40.00-$45.00 876,894 8.1 $43.16 398,300 $43.16 Total options outstanding had a weighted-average remaining life of 7.8 years at December 31, 2002.

PPL and its subsidiaries adopted the fair value method of accounting for The majority of employees of PPUs subsidiaries will become eligible for stock-based compensation, as defined in SFAS 123, "Accounting for Stock- certain health care and life insurance benefits upon retirement through contrib-Based Compensation," under the prospective method as defined by SFAS 148, utory plans. Postretirement benefits under the PPL Retiree Health Plans (cover-

"Accounting for Stock-Based Compensation -Transition and Disclosure" ing retirees of PPL Electric and various other affiliated PPL companies) and for effective January 1, 2003. At December 31, 2002, PPL applied the intrinsic the North Penn Gas Plans are paid from funded VEBA trusts sponsored by the value method, permitted under SFAS 123 and defined in APB Opinion No. 25, respective companies.

"Accounting for Stock Issued to Employees" and related interpretations. See At December 31, 2002, PPL Electric had a regulatory asset of $5 million relat-Note 1 for additional information related to the adoption of the fair value method. ing to postretirement benefits that is being amortized and recovered in rates, with a remaining life of 10 years. PPL Electric also maintains an additional liabil-ity for the cost of health care of retired miners of former subsidiaries that had

12. RETIREMENT AND POSTEMPLOYMENT BENEFITS been engaged in coal mining. At December 31, 2002, the liability was $23 million.

The liability is the net of $54 million of estimated future benefit payments offset Pension and Other Postretirement Benefits PPL and its subsidiaries sponsor various pension and other postretirement by $31 million of available assets in a PPL Electric-funded VEBA trust PPL Energy Supply subsidiaries engaged in the mechanical contracting andpostmploy meunt borPenefitplaon.,'and SPfolows guidancerofSEAS87, 106e business make contributions to various union-sponsored multiemployer pension "Employers'AccountiBengefor Pthens "

TandSEAS 106sions,'

"hemploccounting foand health and welfare plans, depending on an employee's status. Contributions for Postretirement Benefits Other Than Pensions," when accounting for these benefits. of $30 million, $21 million and $10 million were made in 2002, 2001 and 2000. The increase in contributions is primarily the result of the growing workforce at the PPL and certain of its subsidiaries also provide supplemental retirement mechanical contracting companies. The contribution rates have also increased benefits to directors, executives and other key management employees through mear toar.

unfunded nonqualified retirement plans.

In the third quarter 2002, PPL Global acquired a controlling interest in WPDH Limited and WPDL. Included in the fully consolidated financial results of PPL for 2002 is the impact of the various pension plans WPD sponsors in the U.K. The following disclosures distinguish between PPL's domestic and international pension plans for those items impacted:

Net pension and postretirement benefit costs (credits) were as follows:

Pension Benefits Postretirement Benefits 2002 2001 2000 2002 2001 2000 Domestic International Domestic International Domestic Servicecost $ 40 $ 13 $ 38 $ 1 $ 40 $ 5 $ 5 $5 Interest cost 99 98 91 3 86 26 22 22 Expected return on plan assets (147) (179) 11401 (31 11131 (12) 111) 181 Net amortization and deferral (31) 3 (50) (21) 15 12 12 Net periodic pension and postretirement costs priorto special termination benefits (39) (65) (61) 1 (8) 34 28 31 Special termination benefits 62 3 4 Net periodic pension and postretirement benefit costl/credit) $ 23 $ (65) $ (58) $ 1 $ (8) $ 38 $ 28 $31

PPL Corporation 66 2002 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Net periodic pension costs charged (credited) to operating expense, exclud- Retiree health and welfare benefits costs charged to operating expense, exclud-ing amounts charged to construction and other non-expense accounts, were: ing amounts charged to construction and other non-expense accounts, were 2D02 2001 $27 million, $21 million and $25 million in 2002, 2001 and 2000.

Domestic Int'l Domestic Int'l Postretirement medical costs at December 31, 2002 were based on the assumption that health care costs would increase 12% in 2003, then the rate of Operating Expense (ai S(31) $(58) S(48) S1 increase would decline gradually to 5% in 2010 and thereafter. A one-percent-Ia) Excludes the $62 million cost of special termination benefits, which are included age point change in the assumed health care cost trend assumption would separately on the Statement of Income as a component of the $75 million have the following effects:

"Workforce reduction" charge. One Percentage Point Increase Decrease In 2001, PPL changed its method of amortizing unrecognized gains or Effect on service cost and interest cost components $1 S 11) losses in the annual pension expense or income determined under SFAS 87, Effect on postretirement benefit obligation $22 $118)

"Employers' Accounting for Pensions." Under the old method, the net unrecog-nized gains or losses in excess of 10% of the greater of the plan's projected The following assumptions were used in the valuation of the benefit benefit obligation or market-related value of plan assets were amortized on a obligations:

straight-line basis over the estimated average future service period of plan Pension Benefits 2002 2001 2000 participants. Under the new method, a second corridor is utilized forthe net Domestic Int'l Domestic Int'l Domestic unrecognized gains or losses in excess of 30% of the plan's projected benefit Discount rate 6.75% 5.75% 7.25% 10.24% 7.5%

obligation. The net unrecognized gains or losses outside the second corridor Expected return are now amortized on a straight-line method over a period equal to one-half on plan assets 9.0% 8.31% 9.2% 10.24% 9.2%

of the average future service period of the plan participants. The new method Rate of compen-is preferable under SFAS 87 because it provides more current recognition sation increase 4.0% 3.75% 4.25% 7.12% 4.75%

of gains and losses, thereby lessening the accumulation of unrecognized gains and losses. Postretirement Medical Benefits 2002 2001 2000 The pro forma effect of retroactive application of this change in accounting Discount rate 6.75% 7.25% 7_5%

principle would have had the following effect: Expected return on plan assets 7.80% 7.60% 7.6%

Net Income EPS Rate of compensation increase 4.0cM 4.25% 4.75%

2001 2000 2001 2000 SO 0) S7 $5.07) S05

PPL Corporation 67 2002 Annual Report The funded status of the PPL plans was as follows:

Pension Benefits Postretirement Medical Benefits 2002 2001 2002 2001 Domestic International Domestic International Change in Benefit Obligation BenefitObligation,Januaryl $1,279 5 37 $1,192 $330 S311 Service cost 40 13 38 $ 1 5 5 Interest cost 99 98 91 3 26 22 Participant contributions 4 1 1 1 Plan amendments 80 39 4 21 Actuarial (gain)/loss 76 (531 10 4 59 12 Special termination benefits 62 4 Acquisition/divestitures 1,970 30 Settlements/curtailments (301 Actual expense paid (1) (41 Net benefits paid (77) (128) (52) (21 (23) (21)

Currency conversion 176 Benefit Obligation, December 31 1,558 2,126 1,279 37 423 330 Change in Plan Assets Plan assets at fair value, January 1 1,633 21 1,794 155 149 Actual return on plan assets (182) (335) (107) (2) 111) (6)

Employer contributions 3 1 2 1 41 32 Participant contributions 4 1 1 1 Acquisition/divestitures 2,050 23 Settlements/curtailments (21)

Actual expense paid (1) (4)

Net benefits paid (77) (128) (52) (2) (23) (21)

Currency conversion 165 Plan assets at fair value, December31 1,376 1,757 1,633 21 163 155 Funded Status Funded Status of Plan (182) (369) 354 (16) (260) (175)

Unrecognized actuarial (gain)/loss (144) 497 (587) 8 123 42 Unrecognized priorservice cost 178 34 110 39 23 Unrecognized transition assets (31) (36) 87 96 Currency conversion 26 Net amount recognized at end of year $ (179) S 188 $ (159) S (8) $ (11) 5 (14)

Amounts recognized in the Balance Sheet Consist of Prepaid benefit cost $ 1 $ 219 S I Accrued benefit liability (180) (31) (160) $ (8) $ (11) $ (14)

Additional minimum liability (29) (453) (14)

Intangible asset 5 37 5 Accumulated other comprehensive income 24 416 9 Netamountrecognizedatend ofyear S (179) S 188 $ (159) $ (8) S (11) $ (14)

PPL Corporation 68 2002 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The projected benefit obligation, accumulated benefit obligation and fair The liabilities for these plans are accounted for under the guidance of value of plan assets for pension plans with accumulated benefit obligations in EITF 88-1 "Determination of Vested Benefit Obligation for a Defined Benefit excess of plan assets for PPLs domestic plans were $122 million, $110 million Pension Plan" using what is commonly referred to as the "shut down" method, and $46 million as of December 31, 2002 and $79 million, $69 million and $26 mil- where a company records the undiscounted obligation as if itwere payable lion as of December 31, 2001. at each balance sheet date. The combined liabilities for these plans at The projected benefit obligation, accumulated benefit obligation and fair December 31, 2002 and 2001 were S6 million, and are recorded in "Deferred value of plan assets for pension plans with accumulated benefit obligations in Credits and Noncurrent Liabilities - Other" on the Balance Sheet excess of plan assets for PPLs international plans were $2.1 billion, S2.0 billion and $1.8 billion as of December 31, 2002 and S37 million, $27 million and S21 mil-lion as of December 31, 2001. 1 3. JOINTLY-OWNED FACILITIES Savings Plans At December 31, 2002, subsidiaries of PPL owned undivided interests in the Substantially all employees of PPUs subsidiaries are eligible to participate in following facilities:

deferred savings plans (401(k)s). Contributions to the plans charged to operating Accumu-expense approximated $11 million, $10 million and $9million in2002, 2001 and 2000. Electric lated Construc-Ownership Plant in Other Depre- tion Work Employee Stock Ownership Plan Interest Service Property ciation in Progress PPL sponsors a non-leveraged ESOP, in which substantially all employees, PPL Generation excluding those of PPL Global, PPL Montana, PPL Gas Utilities and the mechan- Generating Stations ical contractors, are enrolled after one year of credited service. Dividends Susquehanna 90.00% $4,213 $3,530 S59 paid on ESOP shares are treated as ordinary dividends by PPL. Under existing Keystone 12.34% 74 47 18 Wyman 8.33% 15 3 income tax laws, PPL is permitted to deduct the amount of those dividends for Conemaugh 16.25% 187 64 4 income tax purposes and to contribute the resulting tax savings (dividend-Merrill Creek based contribution) to the ESOR Reservoir 8.37% $22 13 The dividend-based contribution is used to buy shares of PPL's common stock and is expressly conditioned upon the deductibility of the contribution for federal Additionally, PPL Montana has a 50% undivided leasehold interest in Colstrip income tax purposes. Contributions to the ESOP are allocated to eligible partici-Units 1 and 2, as well as a 30% undivided leasehold interest in Colstrip Unit 3.

pants' accounts as of the end of each year, based 75% on shares held in existing Each PPL Generation subsidiary provided its own funding for its share of participants' accounts and 25% on the eligible participants' compensation.

the facility. Each receives a portion of the total output of the generating stations Amounts charged as compensation expense for ESOP contributions approx-equal to its percentage ownership. The share of fuel and other operating costs imated $5million in 2002 and S4 million in each of 2001 and 2000. These amounts associated with the stations is reflected on the Statement of Income.

were offset by the dividend-based contribution tax savings and had no impact on PPLs earnings.

ESOP shares outstanding at December 31, 2002 totaled 5,021,544, or 3% of total common shares outstanding, and are included in all EPS calculations.

14. COMMITMENTS AND CONTINGENT LIABILITIES Energy Purchases and Sales Commitments Postemployment Benefits LIABILITY FOR ABOVE MARKET NUG CONTRACTS Certain PPL subsidiaries provide health and life insurance benefits to disabled In 1998, PPL Electric recorded a loss accrual for above market contracts employees and income benefits to eligible spouses of deceased employees.

with NUGs of $854 million, due to its generation business being deregulated.

Postemployment benefits charged to operating expenses were not significant Effective January 1999, PPL Electric began reducing this liability as an offsetto in 2002, 2001 or 2000.

"Energy purchases" on the Statement of Income. This reduction is based on the Certain of PPL Global subsidiaries, including Emel, EC, Elfec and Vidivision, estimated timing of the purchases from the NUGs and projected market prices provide limited non-pension benefits to all current employees. All active employ-for this generation. The final existing NUG contract expires in 2014. In connec-ees are entitled to benefits in the event of termination or retirement in accor-tion with the corporate realignment, effective July 1, 2000, the remaining bal-dance with government sponsored programs. These plans generally obligate ance of this liability was transferred to PPL EnergyPlus. At December 31, 2002, a company to pay one month's salary per year of service to employees in the the remaining liability associated with the above market NUG contracts was event of involuntarytermination. Under certain plans, employees with five

$427 million.

or more years of service are entitled to this payment in the event of voluntary In the first quarter of 2002, PPL Energy Supply paid approximately S50 million or involuntary termination. There is no limit on the number of years of service to terminate the purchase commitment under an energy contract with one of in the calculation of the benefit obligation.

the NUGs. The recorded liability associated with this NUG contractwas $75 mil-lion. The excess of the liability over the termination payment resulted in a $25 million credit to "Energy purchases" on the Statement of Income.

PPL Corporation 69 2002 Annual Report WHOLESALE ENERGY COMMITMENTS authorities also reached a settlement concerning the 1998 and 1999 tax years As part of the purchase of generation assets from Montana Power, PPL which, if effectuated, would not result in any additional PURTA tax liability for Montana agreed to supply electricity under two wholesale transition service PPL. This portion of the settlement with the local tax authorities is subject, agreements with Montana Power to serve its retail load not served by other however, to the outcome of claims asserted by certain intervenors which are providers or provided by Montana Power's remaining generation. The first described below.

agreement expired in December 2001, and the second agreement expired in In August 2000, over PPL's objections,the court permitted Philadelphia City June 2002. In addition, as part of its purchase of the generation assets from and County, the Philadelphia School District and the Southeastern Pennsylvania Montana Power, PPL Montana assumed a power purchase agreement and Transportation Authority (SEPTA) (collectively, the "Philadelphia parties") to another power sales agreement In accordance with purchase accounting intervene in the case. The Philadelphia parties have intervened because they guidelines, PPL Montana recorded liabilities of $118 million as the estimated believe a change in the assessment of the plantwill affectthe amountthey fair value of these agreements at the acquisition date. These liabilities are would collect under PURTA for the tax years 1998 and 1999.As part of the being reduced over the terms of the agreements as adjustments to "Wholesale change in the law, the local real estate assessment determines what the 1998 energy marketing" revenues and "Energy purchases" on the Statement of and 1999 PURTA payments by PPL will be. In November 2000, the Philadelphia Income. The unamortized balance of these liabilities at December 31, 2002 parties submitted their own appraisal report which indicates that the taxable was $64 million and is included on the Balance Sheet in "Deferred Credits and fair market value of the Susquehanna station under PURTA for 1998 and 1999 Other Noncurrent Liabilities - Other." is approximately $2.3 billion. Based on this appraisal, PPL would have to pay On July 1,2002, PPL EnergyPlus began to sell to NorthWestern an aggre- up to an extra $213 million in PURTA taxes for tax years 1998 and 1999.

gate of 450 MW of energyto be supplied by PPL Montana. Under two five-year PPL's appeal of the Susquehanna station assessment for 1998 and 1999 agreements, PPL EnergyPlus will supply 300 MW of around-the-clock electricity was decided in its favor by the Luzerne County Court of Common Pleas. The and 150 MW of unit-contingent on-peak electricity. Philadelphia parties appealed this decision to the Commonwealth Court and PPL cross-appealed on the issue of the right of the Philadelphia parties to inter-Legal Matters vene. As a result of these proceedings and appeals, it is possible that a final PPL and its subsidiaries are involved in numerous legal proceedings, claims determination of market value and the associated tax liability for 1998 and 1999 and litigation in the ordinary course of business. PPL and its subsidiaries may not occur for several years.

cannot predict the ultimate outcome of such matters, or whether such matters See Note 19 for a description of the July 1,2000 corporate realignment in may result in material liabilities.

which PPL Electric's generating plants in Pennsylvania were transferred to TAX ASSESSMENT APPEALS various PPL affiliates.

Pursuant to changes in PURTA enacted in 1999, PPL subsidiaries have filed a PPL Montana is currently protesting certain property tax assessments number of tax assessment appeals in various Pennsylvania counties where PPL by the Montana Department of Revenue (MDOR) on its generation facilities.

facilibes are located. These appeals challenge existing local tax assessments, The tax liabilities in dispute are approximately $1.7 million for 2000, $1.8 million which now comprise the basis for payment of the PURTA tax on PPUs proper- for 2001 and $8.6 million for 2002. PPL Montana's dispute with respect to most ties. Also, as of January 1,2000, generation facilities are no longer taxed under of the 2002 tax liablity is based on the assessed value used by MDOR for PPL PURTA, and these local assessments will be used directly to determine local Montana's hydroelectric facilities versus the assessed value used forthe facili-real estate tax liability for PPL's power plants. In July 1999, PPLfiled retroactive ties of another hydroelectric generator in the state. The state tax appeals board appeals fortaxyears 1998 and 1999, as permitted bythe new law. In addition, is scheduled to hearthe 2000 and 2001 disputes in early 2004, while the hearing PPL has filed appeals for 2000 and beyond, as permitted under normal assess- for the 2002 dispute is expected to be later in 2004. In response to these tax dis-ment procedures. It is anticipated that assessment appeals may now be an putes, the 2003 Montana legislature has either introduced or proposed several annual occurrence. bills to further tax PPL Montana, including, but not limited to, bills that would Hearings on the pending appeals were held by the boards of assessment increase the portion of the current wholesale electrical transaction tax paid by appeals in each county, and decisions have now been rendered by all counties. the company and increase PPL Montana's annual property taxes from approxi-Tothe extentthe appealswere denied or PPLwas not otherwise satisfied with mately$15 million peryearto an amountapproaching $30 million peryear. PPL the results, PPLfiled further appeals from the board decisions with the appro- Montana cannot predict the outcome of the tax assessment disputes or the priate county Courts of Common Pleas. likelihood that any such proposed legislation would ultimately become law.

Of the three pending proceedings in Pennsylvania, only the appeal concern-MONTANA POWER SHAREHOLDERS' LITIGATION ing the assessed value of the Susquehanna nuclear station will result in annual In August 2001, a purported class-action lawsuit was filed by a group of share-local taxes exceeding $1million. The county assessment of the Susquehanna holders of Montana Power against Montana Power, the directors of Montana station indicated a marketvalue of $3.9 billion. Based on this value, the annual Power, certain advisors and consultants of Montana Power and PPL Montana.

local taxes forthe Susquehanna station would have been about$70 million.

The plaintiffs allege, among other things, that Montana Power was required to, However, PPL was able to reach a settlement with the local taxing authorities and did not, obtain shareholder approval of the sale of Montana Power's gener-in December 2000, for tax years 2000 and beyond. This settlement will result in ation assets to PPL Montana in 1999. Although most of the claims in the com-the payment of annual local taxes of about $3million. PPL and the local taxing plaint are against Montana Power, its board of directors, and its consultants

PPL Corporation 70 2002 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS and advisors, two claims are asserted against PPL Montana. In the first claim, Regulatory Issues plaintiffs seek a declaration that because Montana Power shareholders did not CALIFORNIA ISO AND PACIFIC NORTHWEST vote on the 1999 sale of generating assets to PPL Montana, that sale "was null Through its subsidiaries, PPL has made approximately $18 million of sales to the and void ab initio." The second claim alleges that PPL Montana was privy to California ISO, of which $17 million has not been paid to PPL subsidiaries. Given and participated in a strategy whereby Montana Power would sell its genera- the myriad of electricity supply problems presently faced by the California elec-tion assets to PPL Montana without first obtaining Montana Power shareholder tric utilities and the California ISO, PPL cannot predict whether or when it will approval, and that PPL Montana has made net profits in excess of $100 million receive payment. As of December 31, 2002, PPL has fully reserved for possible as the result of this alleged illegal sale. In the second claim, plaintiffs request underrecoveries of payments for these sales.

that the court impose a "resulting and/or constructive trust" on both the gener- Litigation arising out of the California electricity supply situation has been ation assets themselves and all profits, plus interest on the amounts subjectto filed at the FERC and in California courts against sellers of energy to the the trust. In November 2001, PPL Montana and the other defendants filed a California ISO. The plaintiffs and intervenors in these proceedings allege motion to dismiss the plaintiffs' complaint on the basis that it fails to state a abuses of market power, manipulation of market prices, unfair trade practices claim upon which relief may be granted, and the plaintiffs filed a motion for the and violations of state antitrust laws, among other things, and seek price caps lawsuit to be certified by the court as a class-action. In August 2002, the court on wholesale sales in California and other western power markets, refunds of denied this motion to dismiss, except as to certain matters not relating to PPL excess profits allegedly earned on these sales of energy, and other relief, Montana, and granted the plaintiffs' motion for the certification of the lawsuit In including treble damages and attorneys' fees. Certain of PPL's subsidiaries have January 2003, the case was removed to the U.S. District Court in Montana. PPL intervened in the FERC proceedings in order to protect their interests, but have cannot predict the outcome of this matter. not been named by any plaintiffs in any of the court actions alleging abuses of market power, manipulation of market prices, unfair trade practices and viola-MONTANA HYDROELECTRIC INITIATIVE tions of state antitrust laws. However, in April 2002, PPL Montana was named On November 5, 2002, a proposed Montana Hydroelectric Security Act initiative by a defendant in a consolidated court proceeding, which combined into one was defeated on a statewide ballot by a betterthan 2 to 1 margin. Among the master proceeding several of the lawsuits alleging antitrust violations and stated purposes of the initiative was to create an elected Montana public power unfair trade practices. Specifically, one of the original generators being sued commission to determine whether purchasing hydroelectric dams in Montana by the various plaintiffs in the consolidated court proceeding filed a cross-would be in the public interest. Such a commission could have decided to complaint against 30 other generators and power marketers, including PPL acquire any or all of the hydroelectric dams owned by PPL Montana either pur-Montana. This generator denies that any unlawful, unfair or fraudulent conduct suant to a negotiated purchase or an acquisition at fair market value through occurred or caused any harm to the plaintiffs, and explains thatthe plaintiffs' the power of condemnation. PPL Montana had vigorously opposed the initiative claims are completely barred by federal law. Nonetheless, this generator along with several other Montana groups and individuals.

alleges that it filed its complaint against the other generators and power mar-NORTHWESTERN CORPORATION LITIGATION keters in order to assist the court in resolving the proceeding and asserts that In connection with the acquisition of the Montana generation assets, the if it is found liable, the other generators and power marketers, including PPL Montana Power APA, which was previously assigned to PPL Montana by Montana, caused, contributed to and/or participated in the plaintiffs' alleged PPL Global, includes a provision concerning the proposed purchase by PPL losses. This litigation, originally brought in state court in California, had been Montana of a portion of NorthWestern's interest in the 500-kilovolt Colstrip removed to federal court in California.

Transmission System (CTS) for $97 million. During 2002, PPL Montana had been In addition, PPL Montana has been named as a defendant in a declaratory in discussions with NorthWestern regarding the proposed purchase of the judgment action initiated by the State of California to prevent certain members CTS and the claims that PPL Montana believes it has against NorthWestern of the California Power Exchange from seeking compensation for the state's arising from the Montana Power APA and related agreements. Notwithstanding seizure of certain energy contracts. PPL Montana is a member of the California such discussions, in September 2002, NorthWestern filed a lawsuit against Power Exchange, but it has no energy contracts with or through the California PPL Montana in Montana state court seeking specific performance of PPL Power Exchange and has not sought compensation in connection with the Montana's purchase of the CTS or, alternatively, damages for breach of con- state's seizure.

tract Pursuant to PPL Montana's application, the matter was removed to the Attorneys general in several western states, including California, have U.S. District Court for the District of Montana, Butte Division. Following the begun investigations related to the electricity supply situation in California removal of the matter to the federal court, PPL Montana moved to dismiss and other western states. The FERC has determined that all sellers of energy NorthWestern's claim for specific performance of PPL Montana's purchase into markets operated by the California ISO and the California Power Exchange, of the CTS. NorthWestern subsequently asserted additional claims against including PPL Montana, should be subjectto refund liabilityforthe period PPL Montana arising under the Montana Power APA. In December 2002, beginning October 2, 2000 through June 20, 2001 and has initiated an evidentiary NorthWestern filed a motion seeking summary judgment as to certain of its hearing concerning refund amounts. The FERC also is considering whether to claims against PPL Montana. PPL Montana has opposed this summary judg- order refunds for spot market bilateral sales made in the Pacific Northwest ment motion. The U.S. District Court has notyet ruled on either PPL Montana's including sales made by PPL Montana during the period December 2000 motion to dismiss or NorthWestern's motion for summary judgment. PPL cannot through June 2001. The FERC Administrative Law Judge assigned to the Pacific predict the outcome of this litigation.

PPL Corporation 71 2002 Annual Report Northwest proceeding has recommended that no refunds be ordered for such In January 2003, the MPSC voted 5-0 to rescind the MPSC Order in its sales into the Pacific Northwest The FERC presently is considering this recom- enfirety, without prejudice to future MPSC actions. At such time as the MPSC mendation. The FERC has been conducting an additional investigation of alleged Order is no longer subject to appellate review, PPL Montana and the MPSC price manipulation in power markets in California and the western U.S. In con- will file a stipulation providing for withdrawal of PPUs complaint, without preju-nection with this investigation, the FERC has served several sets of data requests dice to refile such complaint in the future.

on sellers of energy inthose markets, including PPL Montana. PPL Montana PJM CAPACITY TRANSACTIONS sold only a small amount of electricity into the California market during 2000 In November 2001, the PJM Market Monitor publicly released a report pre-and 2001, and it did not sell any electricity into the California market during 2002.

pared for the PUC entitled 'Capacity Market Questions" relating to the pricing In rts response to a FERC data request concerning PPL Montana's California of installed capacity in the PJM daily market during the first quarter of 2001.

trading strategies, PPL Montana explained that it did not engage in the type of The report concludes that PPL EnergyPlus (identified in the report as "Entity 1")

California trading strategies that have been attributed to Enron. In responses was able to exercise market power to raise the market-clearing price above to FERC data requests concerning whether PPL Montana and PPL EnergyPlus the competitive level during that period. PPL EnergyPlus does not agree with engaged in so-called "wash trades" in the western U.S., PPL Montana and PPL the Market Monitor's conclusions that it exercised market power; in addition, EnergyPlus explained that they have not, and do not, engage in such trades.

the Market Monitor acknowledged in his report that PJM's standards and rules While PPL believes that it has not engaged in any impropertrading prac-did not prohibit PPL EnergyPlus' conduct In November 2001, the PUC issued tices, PPL cannot predict whether, or the extentto which, any of its subsidiaries an Investigation Order directing is Law Bureau to conduct an investigation will be the target of any additional governmental investigations or named in into PJM capacity market and the allegations in the Market Monitor's report.

other lawsuits or refund proceedings, the outcome of any such lawsuits or In June 2002, the PUC issued an investigation report alleging, among other proceedings or whether the ultimate impact on PPL of the electricity supply things, that PPL had "unfairly manipulated electricity markets in early 2001,"

situation in California and other western states will be material.

and that "there was an unlawful exercise of market power and market rules MPSC ORDER gaming by PPL" that was damaging to wholesale and retail electricity markets In June 2001, the MPSC issued an order (MPSC Order) in which it found that in Pennsylvania. The PUC stated that it was not authorized to, and was not Montana Power must continue to provide electric service to its customers attempting to, adjudicate the merits of PPUs defenses to these charges, but attariffed rates until its transition plan underthe Montana Electricity Utility has referred the matter to the U.S. Department of Justice - Antitrust Division, Industry Restructuring and Customer Choice Act is finally approved, and that or DOJ, the FERC and the Pennsylvania Attorney General. PPL had previously purchasers of generating assets from Montana Power must provide electricity responded to certain information requests of the DOJ in connection with a to meet Montana Power's full load requirements at prices to Montana Power civil investigative demand regarding capacity transactions in PJM, and PPL that reflect costs calculated as if the generating assets had not been sold. PPL has agreed to provide the Office of the Pennsylvania Attorney General with any Montana purchased Montana Power's interests in two coal-fired plants and information that it provided to the DOJ. In addition, in July 2002, PPL appealed 11hydroelectric units in 1999, and NorthWestern purchased Montana Power's the PUC order to the Commonwealth Court of Pennsylvania. Since the PUC clar-electricity delivery business in the first quarter of 2002. ified that its report has no precedential value and should be given no weight in In July 2001, PPL Montana filed a complaint againstthe MPSC with the U.S. any future proceedings, PPL consented to having its appeal dismissed by the District Court in Helena, Montana, challenging the MPSC Order. In its complaint Commonwealth Court. Accordingly, the Commonwealth Court dismissed the PPL Montana asserted, among other things, that the Federal Power Act pre- appeal in September 2002. Although PPL believes that the PUC's report is inac-empts states from exercising regulatory authority over the sale of electricity in curate, that its conclusions are groundless, and that PPL acted ethically and wholesale markets, and requested the court to declare the MPSC action pre- legally, in compliance with all applicable laws and regulations, PPL cannot empted, unconstitutional and void. In addition, the complaint requested thatthe predict the outcome or extent of any investigations, litigation or other proceed-MPSC be enjoined from seeking to exercise any authority, control or regulation ings related to this matter.

of wholesale sales from PPL Montana's generating assets. In March 2002, the In September 2002, PPL was served with a complaint filed by Utilimax.com, District Court dismissed PPL Montana's lawsuit on procedural grounds, ruling Inc., which was a member of PJM, in the U.S. District Court for the Eastern that the Eleventh Amendment to the U.S. Constitution prevented PPL Montana District of Pennsylvania against PPL and PPL EnergyPlus alleging, among other from bringing the action in federal court. The District Court noted that the action things, violations of the federal antitrust laws in connection with the capacity could be filed in a state court in Montana. PPL Montana appealed the District transactions described in the PJM Market Monitor report In addition, in Court's ruling to the United States Court of Appeals for the Ninth Circuit. In December 2002, PPL was served with a complaint against PPL, PPL EnergyPlus July 2002, the MPSC filed an unopposed motion for summary disposition of the and PPL Electric filed in the same court by a group of 14 Pennsylvania boroughs appeal, requesting the Ninth Circuitto reverse the District Court's ruling and that apparently alleges, in broad terms, similar violations of the federal antitrust send the case backto the District Court in light of a recent Eleventh laws. These boroughs are wholesale customers of PPL Electric. Although PPL Amendment decision by the U.S. Supreme Court In October 2002, the Ninth believes the claims under both complaints are without merit and intends to Circuit granted the MPSC's unopposed motion, vacated the District Court's defend the actions vigorously, it cannot predict the outcome of these matters.

ruling and sentthe case backto the District Court

PPL Corporation 72 2002 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FERC MARKET-BASED RATE AUTHORITY Each distribution business constitutes a natural regional monopoly and is In December 1998, the FERC issued an order authorizing PPL EnergyPlus to subject to control on the prices it can charge and the quality of supply it must make wholesale sales of electric power and related products at market-based provide. The operations of WPD are regulated under its distribution licenses, rates. In that order, the FERC directed PPL EnergyPlus to file an updated market pursuant to which income generated is subject to an allowed revenue regula-analysis within three years of the date of the order, and every three years there- tory framework that provides economic incentives to minimize operating, capital after. PPL EnergyPlus filed its initial updated market analysis in December 2001. and financing costs. Under the Electricity Act, WPD is under a statutory duty Several parties thereafter filed interventions and protests requesting that, in to connect any customer requiring electricity within their area and to maintain light of the PJM Market Monitor's report described above, PPL EnergyPlus that connection. The allowed revenue that is recovered from electricity supply be required to provide additional information demonstrating that it has met the businesses through charges by the Distribution Network Operator (DNO) made FERC's market power tests necessary for PPL EnergyPlus to continue its market- for the use of the distribution network is regulated on the basis of the Retail based rate authority. PPL EnergyPlus has responded that the FERC does not Price Index IRPI) minus X formula. The allowed revenue is increased by RPI require the economic test suggested by the intervenors and that in any event, minus X during the tenure of each price control period. (RPI is a measure of it would meet such economic test if required by the FERC. PPL EnergyPlus inflation and equals the percentage change in the U.K. RPI between the six-cannot predict the outcome of this matter. month period of July to December in the previous year. The X factor is estab-lished by the Regulator following review and represents an annual efficiency FERC NOTICE OF PROPOSED RULEMAKING factor.) The Regulator currently sets the Distribution Price Control Formula In July 2002, the FERC issued a Notice of Proposed Rulemaking entitled for five-year periods.

"Remedying Undue Discrimination through Open Access Transmission Service The current Distribution Price Control Formula permits DNOs, within a and Standard Electricity Market Design." The proposed rule is currently avail-review period, to partially retain additional revenues due to increased distribu-able for public comment, with a final rule expected in late 2003. The proposed tion of units and to retain all increases in operating profit due to efficient opera-rule contains a proposed implementation date of July 31, 2003. However, since tions and the reduction of expenses (including financing costs). The Regulator the issuance of the proposed rule, the FERC has announced several delays in may reduce this increase in operating profit through a one-off price reduction the comment deadlines. Thus, any implementation dates are likely to be later in the firstyear of the new pricing regime, if the Regulator determines that it is than originally projected. This far-reaching proposed rule, in its currentform, not a function of efficiency savings, or, if genuine efficiency savings have been purports to establish uniform transmission rules and establish a standard made, and the Regulator determines that customers should benefit through market design by, among other things:

lower prices.

enacting standard transmission tariffs and uniform market mechanisms, In December 1999, the Regulator published final price proposals for distri-

monitoring and mitigating "market power,"

bution price control forthe 12 DNOs in England and Wales. These proposals

managing transmission congestion through pricing and tradable represented a reduction to distribution prices of 20% forWPD (South West) financial rights, and 26% for WPD (South Wales) effective April 2000, followed by a reduction

requiring independent operational control over transmission facilities, in real terms (i.e., before inflation is taken into account) of 3% each year from

forming state advisory committees on regional transmission organizations April 2001. This price control is scheduled to operate until March 2005.

and resource adequacy, and Improvements in quality of supply form an important part of the final propos-

exercising FERC jurisdiction over all transmission service.

als. Revised targets for system performance, in terms of the security and avail-If adopted, this proposed rule may have a significant impact on PPL and ability of supply, were proposed with new targets for reductions in minutes lost its subsidiaries, which cannot be predicted at this time. and interruptions.

The Regulator has introduced a quality of service incentive plan forthe U.K. ELECTRICITY REGULATION period from April 2002 to March 2005. Companies will be penalized annually The principal legislation governing the structure of the electricity industry in up to 2% of revenue for failing to meet their quality of supply targets for the Great Britain is the Electricity Act 1989 (the "Electricity Act"), as amended by incentive plan. The plan includes a mechanism for rewarding companies which the Utilities Act 2000 (the "Utilities Act").

exceed their targets based on their rate of improvement of performance during The provisions in the Utilities Act include the replacement of individual gas the period and a process for rewarding exceptional performance by specifying and electricity regulators with the Gas and Electricity Markets Authority (the how the targets will be reset.

"Regulator"). The principal objective of the Regulator is to protect the interests Distribution businesses must also meetthe Guaranteed and Overall of consumers, wherever appropriate, by promoting effective competition in Standards of Performance, which are set by the Regulator to ensure an appro-electricity generation and supply. There currently is no competition in electricity priate level of quality of supply. If a company fails to provide the level of service distribution.

specified, it must make a fixed payment to the retail customer affected.

PPL Corporation 73 2002 Annual Report Environmental Matters - Domestic 'New Source" requirements under the Clean Air Act The EPA has since issued Due to the environmental issues discussed below or other environmental mat- notices of violation and commenced enforcement activities against other utilities.

ters, PPL subsidiaries may be required to modify, replace or cease operating Although the EPA has threatened to continue expanding its enforcement actions, certain facilities to comply with statutes, regulations and actions by regulatory the future direction of the 'New Source" requirements is presently unclear.

bodies or courts. In this regard, PPL subsidiaries also may incur capital expen- Therefore, at this time, PPL is unable to predict whether such EPA enforcement ditures or operating expenses in amounts which are not now determinable, actions will be brought with respectto any of its affiliates' plants. However, but which could be significant. the EPA regional offices that regulate plants in Pennsylvania (Region 111) and Montana (Region VIII) have indicated an intention to issue information requests AIR to all utilities in their jurisdiction. The Region VIII office issued such a request The Clean Air Act deals, in part, with acid rain, attainment of federal ambient to PPL Montana's Corette plant in 2000, and the Region Ill office issued such a ozone standards and toxic air emissions in the U.S. PPL's subsidiaries are in request to PPL Generation's Martins Creek plant in 2002. PPL and its subsidiaries substantial compliance with the Clean Air Act have responded to both of these information requests. PPL cannot presently The Bush administration and certain members of Congress have made pro-predict what if any, action the EPA might take in this regard. Should the EPA posals regarding possible amendments to the Clean Air Act These amendments or any state initiate one or more enforcement actions against PPL or its could require significant further reductions in nitrogen oxide, sulfur dioxide and subsidiaries, compliance with any such enforcement actions could result in mercury and could possibly require measures to limit carbon dioxide.

additional capital and operating expenses in amounts which are not now The Pennsylvania DEP has finalized regulations requiring further seasonal determinable, but which could be significant.

(May-June) nitrogen oxide reductions to 80% from 1990 levels starting in 2003.

The EPA has finalized some changes to its "New Source" regulations, These further reductions are based on the requirements of the Northeast Ozone which do not significantly affect PPL's plants. However, the EPA is also propos-Transport Region Memorandum of Understanding and two EPA ambient ozone ing to further revise its regulations in a way that will require power plants to initiatives: the September 1998 EPA State Implementation Plan (SIP) call (i.e.,

meet 'New Source" performance standards and/or undergo 'New Source" EPA's requirement for states to revise their SIPs) issued under Section 110 of review for many maintenance and repair activities that are currently exempt the Clean Air Act requiring reductions from 22 eastern states, including The New Jersey DEP and some New Jersey residents have raised environ-Pennsylvania; and the EPA's approval of petitions filed by Northeastern states, mental concerns with respect to the Martins Creek plant particularly with requiring reductions from sources in 12 Northeastern states and Washington respect to sulfur dioxide emissions and the opacity of the plume. PPL Martins D.C., including PPL sources. The EPA's SIP-call was substantially upheld by the Creek is discussing these concerns with the New Jersey DER The cost of D.C. Circuit Court of Appeals on challenge. Although the Court extended the addressing New Jersey's sulfur dioxide concerns and opacity issues is not implementation deadline to May 2004, the Pennsylvania DEP has not changed now determinable but could be significant its rules accordingly. PPL expects to achieve the 2003 nitrogen oxide reductions with the recent installation of SCR technology on the Montour units, and may WATER/WASTE install SCR technology on one or more Brunner Island units at a later date. A final NPDES permit has been issued to the Brunner Island generating plant.

The EPA has also developed new standards for ambient levels of ozone The permit contains a provision requiring further studies on the thermal impact and fine particulates in the U.S. These standards have been upheld following of the cooling water discharge from the plant. Depending on the outcome of court challenges. The new particulates standard may require further reductions these studies, the plant could be subject to capital and operating costs that are in sulfur dioxide and year-round nitrogen oxide reductions commencing in not now determinable, but which could be significant.

2010-2012 at SIP-call levels in Pennsylvania for certain PPL subsidiaries, and The EPA has significantly tightened the water quality standard for arsenic.

at slightly less stringent levels in Montana. The revised ozone standard is not The revised standard may require several PPL subsidiaries to further treat expected to have a material effect on facilities of PPL subsidiaries. wastewater and/or take abatement action at their power plants, the cost of Underthe Clean Air Act, the EPA has been studying the health effects of which is not now determinable, but which could be significant hazardous air emissions from power plants and other sources in orderto deter- The EPA recently finalized requirements for new or modified water intake mine what emissions should be regulated, and has determined that mercury structures. These requirements will affect where generating facilities are built and nickel emissions must be regulated. The EPA may determine that other will establish intake design standards, and could lead to requirements for cool-hazardous air emissions from power plants should be regulated. In this regard, ing towers at new and modified power plants. Another new rule, expected to the EPA is expected to develop mercury and nickel regulations by 2004. be finalized in 2004, will address existing structures. Each of these rules could In 1999, the EPA initiated enforcement actions against several utilities, impose significant operating costs on PPL subsidiaries, which are not now asserting that older, coal-fired power plants operated by those utilities have, determinable, but which could be significant over the years, been modified in ways that subject them to more stringent

PPL Corporation 74 2002 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPERFUND AND OTHER REMEDIATION material in connection with the repair or installation of heating, ventilating and In 1995, PPL Electric entered into a consent order with the Pennsylvania DEP air conditioning systems, have been named as defendants in asbestos-related to address a number of sites where it may be liable for remediation. This may lawsuits. PPL cannot predict the outcome of these lawsuits or whether addi-include potential PCB contamination at certain PPL Electric substations and tional claims may be asserted against its subsidiaries in the future. PPL does pole sites; potential contamination at a number of coal gas manufacturing not expectthatthe ultimate resolution of the current lawsuits will have a facilities formerly owned or operated by PPL Electric; and oil or other contami- material adverse effect on its financial condition.

nation which may exist at some of PPL Electric's former generating facilities.

ELECTRIC AND MAGNETIC FIELDS As of December 31, 2002, work has been completed on over 90% of the sites Concerns have been expressed by some members of the public regarding the included in the consent order.

potential health effects of EMFs. These fields are emitted by all devices carrying In 1996, PPL Gas Utilities entered into a similar consent order with the electricity, including electric transmission and distribution lines and substation Pennsylvania DEP to address a number of sites where subsidiaries of PPL Gas equipment Government officials in the U.S. and the U.K. have focused attention Utilities may be liable for remediation. The sites primarily include former coal on this issue. PPL and its subsidiaries support the current efforts to determine gas manufacturing facilities. Subsidiaries of PPL Gas Utilities are also investi-whether EMFs cause any human health problems and are taking steps to gating the potential for any mercury contamination from gas meters and regula-reduce EMFs, where practical, inthe design of new transmission and distribu-tors. Accordingly, PPL Gas Utilities and Pennsylvania DEP have agreed to add bon facilities. PPL is unable to predict what effect, if any, the EMF issue might 72 meter/regulation sites to the consent order. As of December 31, 2002, PPL have on its operations and facilities either in the U.S. or abroad, and the associ-Gas Utilities had addressed 15% of the sites under its consent order.

ated cost, or what, if any, liabilities it might incur related to the EMF issue.

At December 31, 2002, PPL Electric and PPL Gas Utilities had accrued approximately S4 million and $10 million, representing the estimated amounts LOWER MT BETHEL they will have to spend for site remediation, including those sites covered by See Note 10 for a discussion of air and noise issues associated with the devel-each company's consent orders mentioned above. Depending on the outcome opment of the Lower Mt. Bethel project.

of investigations at sites where investigations have not been completed, the Environmental Matters - International costs of remediation and other liabilities could be substantial.

U.K.

In conjunction with its 1999 sale of generating assets to PPL Montana, WPD's distribution businesses are subject to numerous regulatory and statutory Montana Power prepared a Phase I and Phase 11Environmental Site Assessment requirements with respect to environmental matters. WPD believes it has taken The assessment identifies approximately S7 million of future capital expendi-and continues to take measures to complywith the applicable laws and govern-tures through the year 2020 related to various groundwater remediation issues.

mental regulations for the protection of the environment. There are no material Additional capital expenditures could be required in amounts which are not legal or administrative proceedings pending against WPD with respect to any now determinable, but which could be significant.

environmental matter. See "Environmental Matters-Domestic-Electric and In 1999, the Montana Supreme Court held in favor of several citizens' Magnetic Fields' for a discussion of EMFs.

groups that the right to a clean and healthful environment is a fundamental right guaranteed by the Montana Constitution. The court's ruling could result in LATIN AMERICA significantly more stringent environmental laws and regulations, as well as an Certain of PPUs affiliates have electric distribution operations in Latin America.

increase in citizens' suits under Montana's environmental laws. The effect on PPL believes that these operations are in compliance in all material respects PPL Montana of any such changes in laws or regulations or any such increase with all applicable laws and government regulations to protectthe environment.

in legal actions is not currently determinable, but it could be significant. PPL is not aware of any material administrative proceeding against these com-Under the Montana Power APA, PPL Montana is indemnified by Montana panies with respect to any environmental matter.

Power for any pre-acquisition environmental liabilities. However, this indemnifi-Other cation is conditioned on certain circumstances and subject to certain limitations COMMITMENTS - ACQUISITIONS, DEVELOPMENT AND LEASE ACTIVITIES set forth in the Montana Power APA, including circumstances under which PPL At December 31, 2002, PPL Global and its subsidiaries had approximately Montana and Montana Power would share in certain costs. As a result of the

$1 million of outstanding purchase commitments related to domestic construc-acquisition by NorthWestern of Montana Powers electricity delivery business, tion projects. In addition, a lessor had S47 million of purchase commitments for PPL Montana will pursue any such indemnification claims against NorthWestern.

domestic construction projects for which a PPL subsidiary is the construction Future cleanup or remediation work at sites currently under review, or at agent. PPLs exposure is limited to the guarantees underthe operating lease.

sites not currently identified, may result in material additional operating costs See Note 10 for additional information on guarantees under operating lease for PPL subsidiaries that cannot be estimated atthis time.

arrangements.

ASBESTOS NUCLEAR INSURANCE There have been increasing litigation claims throughout the U.S. based on PPL Susquehanna is a member of certain insurance programs which provide exposure to asbestos against companies that manufacture or distribute coverage for property damage to members' nuclear generating stations.

asbestos products or that have these products on their premises. Certain of Facilities at the Susquehanna station are insured against property damage PPUs generation subsidiaries and certain of its energy services subsidiaries, losses up to S2.75 billion under these programs. PPL Susquehanna is also a such as those that have supplied, may have supplied or installed asbestos member of an insurance program which provides insurance coverage for the

PPL Corporation 75 2002 Annual Report cost of replacement power during prolonged outages of nuclear units caused PPL Susquehanna is contingently obligated to pay $40 million related by certain specified conditions. Underthe property and replacement power to potential retroactive premiums that could be assessed under its nuclear insurance programs, PPL Susquehanna could be assessed retroactive premi- insurance program. See "Nuclear Insurance" for additional information. PPL ums in the event of the insurers' adverse loss experience. Effective April 1, 2002, Susquehanna also has payment obligations related to decommissioning its this maximum assessment increased from $20 million to $40 million, to increase nuclear generation plant See Note 6 for further discussion.

the insurers capacityto cover catastrophic losses. PPL EnergyPlus is party to a wide range of energy trading or purchase PPL Susquehanna's public liability for claims resulting from a nuclear incident and sale agreements pursuantto which the parties indemnify each other for at the Susquehanna station is limited to about $9.55 billion under provisions of any damages arising from events that occur while the indemnifying party has The Price Anderson Amendments Act of 1988. PPL Susquehanna is protected title to the electricity or natural gas. For example, inthe case of the partythat against this liability by a combination of commercial insurance and an industry is delivering the product, such party would be responsible for damages arising assessment program. In the event of a nuclear incident at any of the reactors from events occurring prior to delivery. The overall maximum amount of the covered by The Price Anderson Amendments Act of 1988, PPL Susquehanna obligation under such indemnifications cannot be reasonably estimated.

could be assessed up to $176 million per incident payable at$20 million per year. In connection with their sales of various businesses, WPD and its affiliates have provided the purchasers with indemnifications that are standard for such GUARANTEES AND OTHER ASSURANCES transactions, including indemnifications for certain pre-existing liabilities and In the normal course of business, PPL and its subsidiaries enter into agree-environmental and tax matters. In addition, in connection with certain of these ments that provide financial performance assurance to third parties on behalf of sales, WPD and its affiliates have agreed to continue their obligations under certain subsidiaries. Such agreements include, for example, guarantees, stand-existing third party guarantees, either for a set period of fime following the by letters of credit issued by financial institutions and surety bonds issued by transactions or upon the condition that the purchasers make reasonable efforts insurance companies. These agreements are entered into primarily to support to terminate the guarantees. They have also guaranteed the payment of up to or enhance the creditworthiness attributed to a subsidiary on a stand-alone

$44 million under a contract assigned as part of one of these sales. Finally, WPD basis, thereby facilitating the extension of creditto accomplish the subsidiaries' and Rtsaffiliates remain secondarily responsible for lease payments under cer-intended commercial purposes.

tain leases that they have assigned to third parties. These various indemnifica-PPL and its subsidiaries provide certain guarantees on behalf of third par-tons, guarantees and lease obligations vary in duration and in the maximum ties that are required to be disclosed in accordance with FASB Interpretation potential payment which cannot be estimated but which in the aggregate could No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, be material. To date, neither WPD nor any of its affiliates have made any signifi-Including Indirect Guarantees of Indebtedness of Others, an Interpretation cant payments with respect to these indemnifications, guarantees or lease of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation obligations, and they do not expect any future payments to be significant No. 34." See Note 22 for a discussion of FIN 45 and the impact of adoption.

Certain acquisition agreements relating to the acquisition of mechanical The guarantees provided on behalf of third parties as of December31, 2002 contractors contain provisions that require a PPL Energy Supply subsidiary to are discussed below.

make guaranteed payments and/or contingent payments based upon the prof-PPL or its subsidiaries provide guarantees in the amount of approximately itability of the business unit or if specified minimum revenue requirements are

$20 million, as of December31, 2002, related to debt of unconsolidated entities.

met The maximum potential amount of these contingent payments outstanding The guarantees are reduced as the related debt balances decline, and they at December 31, 2002 is not considered material.

expire from June 2006 to April 2009.

PPL Electric provides a guarantee in the amount of approximately $7 million, As of December 31, 2002, PPL Energy Supply has letters of credit totaling as of December 31, 2002, related to debt of an unconsolidated entity. The

$4 million issued under its $500 million credit facility on behalf of PPL and PPL guarantee expires in June 2008.

Gas Utilities. These letters of credit expire in 2003 and 2004.

PPL Electric also provides residual value guarantees to lessors under its PPL Energy Supply provides a guarantee in the amount of approximately operating leases for vehicles and other equipment As of December 31, 2002,

$11 million, as of December 31, 2002, related to debt of an unconsolidated the maximum amount of the residual value guarantees forthese leases was entity. This guarantee is reduced as the debt balance declines, and it expires approximately $93 million.

in April 2009.

PPL Montana may be obligated under certain circumstances to pay a termi-PPL Generation has entered into certain partnership arrangements for nation value to the lessor under the operating leases for the Colstrip generating the sale of coal to third parties. PPL Generation has also executed support plants. See Note 10 for further discussion of the termination value payment agreements forthe benefit of these third party purchasers pursuant to which PPL Montana also provides residual value guarantees to the lessor under it guarantees the partnerships' obligations in an amount up to its pro rata its operating lease for certain equipment As of December 31, 2002, the maxi-ownership interest in the partnerships. PPL Generation's maximum aggregate mum amount of the residual value guarantees forthis lease was approximately exposure underthese support arrangements is approximately$9 million.

$4 million.

Certain PPL Generation subsidiaries provide residual value guarantees The operating lease arrangements described above and the companies' under the operating leases forthe Sundance, University Park and Lower or their subsidiaries' other lease arrangements include certain indemnifications Mt. Bethel generating facilities. See Note 10 for further discussion of these in favor of the lessors (e.g., indemnifications for environmental matters) with residual value guarantees.

terms that range in duration and scope and that are not explicitly defined. Where appropriate, an obligation for such indemnifications is recorded as a liability.

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PPL Corporation 76 2002 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Because the obligated amounts of these types of indemnifications often are not explicitly stated, the overall maximum amount of the obligation under such

17. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES indemnifications cannot be reasonably estimated. As of December 31, 2002, PPL adopted SFAS 133, "Accounting for Derivative Instruments and Hedging none of PPL or its subsidiaries has recorded any liability on their financial state- Activities," on January 1, 2001. Upon adoption and in accordance with the tran-ments in connection with these indemnification obligations, as they do not sition provisions of SFAS 133, PPL recorded a cumulative-effect credit of $11 believe, based on information currently available, that it is probable that any million in earnings, included as an increase to "Wholesale energy marketing" amounts will be paid under these guarantees. revenues and a decrease to "Energy purchases" on the Statement of Income.

In connection with many of their financing transactions, PPL and its sub- PPL also recorded a cumulative-effect charge of S182 million in "Accumulated sidiaries engage trustees or custodial, escrow or other agents to act for the other comprehensive loss," a component of Common Equity. As of December benefit of the investors or to provide other agency services. PPL and its sub- 31, 2002, the balance in "Accumulated other comprehensive loss" related to sidiaries typically provide indemnification to these agents for any liability or unrealized gains and losses on qualifying derivatives was a net gain of $7mil-expenses incurred by them in performing their obligations. No liability is lion, as a result of reclassifying part of the transition adjustment into earnings, recorded forthese indemnifications because the companies believe that it changes in market prices and the adoption of DIG Issue C15 (see discussion is unlikely that they will be required to perform or otherwise incur any losses in "Implementation Issues" below).

associated with these indemnification provisions.

Management of Market Risk Exposures PPL and its subsidiaries also have various guarantees in contracts that they Market risk is the potential loss PPL may incur as a result of price changes enter into in the normal course of business. These guarantees are primarily in associated with a particular financial or commodity instrument PPL is exposed the form of indemnities that range in duration and coverage and that do not to market risk from:

explicitly state the amount of the indemnification obligation. These guarantees

Commodity price risk for energy and energy-related products associated would only result in immaterial increases in future costs and do not represent with the sale of electricity from our generating assets, the purchase of fuel significant commitments or contingent liabilities of the indebtedness of others.

forthe generating assets and energy trading activities; To date, none of PPL or its subsidiaries has made any significant payments for

Interest rate risk associated with variable-rate debt and the fair value of these indemnification obligations.

fixed-rate debt used to finance operations, as well as the fair value of debt PPL, on behalf of itself and its subsidiaries, maintains insurance that covers securities invested in by PPL's nuclear decommissioning fund; liability assumed under contract for bodily injury and property damage. The

Foreign currency exchange rate risk associated with investments in affiliates coverage requires a $4 million deductible per occurrence and provides maxi-in Latin America and Europe, as well as purchases of equipment in currencies mum aggregate coverage of approximately S175 million. This insurance may other than U.S. dollars; and be applicable to certain obligations under the contractual arrangements

equity securities price risk associated with the fair value of equity securities discussed above.

invested in by PPL's nuclear decommissioning fund.

PPL has a comprehensive risk management policy approved by the Board 1 5. RELATED PARTY TRANSACTIONS of Directors to manage the market risk and counterparty credit risk. The RMC, comprised of senior management and chaired by the Vice President- Risk Intercompany Transactions Management oversees the risk management function. Key risk control activi-The subsidiaries of PPL engage inintercompany transactions. Ths transac- ties designed to ensure compliance with risk policies and detailed programs donspinclude osthe sAle oiifiene intercompany trnansactions andeallocatonsu include, but are not limited to, credit review and approval, validation of transac-corporate costs. All significant intercompany transactions between PPL sub- tions and market prices, verification of risk and transaction limits, sensitivity analyses, and daily portfolio reporting, including open positions, mark-to-market valuations, and other risk measurement metrics. In addition, efforts are on-1 6.OTHER INCOME - NET going to develop systems to improve the timeliness, quality and breadth of market and credit risk information.

The breakdown of Other Income was as follows: PPL utilizes forward contracts, futures contracts, options and swaps as 2002 2001 2000 part of its risk management strategy to minimize unanticipated fluctuations in Other______________

Income _ earnings caused by commodity price, interest rate and foreign currency volatil-Other Income Interest income $28 $15 513 ity. All derivatives are recognized on the balance sheet at their fair value, unless Equity earnings 2 (2) 1 they meet SFAS 133 criteria for exclusion (see discussion in "Implementation Gain by WPD on the disposition of property 6 Issues" below).

Miscellaneous 15 24 11 Total 51 37 25 Other Deductions Write-off regulatory asset - PA Pilot Program 12 Miscellaneous 18 20 20 Other Income - net 533 $17 $17)

PPL Corporation 77 2002 Annual Report Fair Value Hedges Implementation Issues PPL subsidiaries enter into financial or physical contracts to hedge a portion On June 29, 2001, the FASB issued definitive guidance on DIG Issue Cls: "Scope of the fair value of firm commitments of forward electricity sales. These con- Exceptions: Normal Purchases and Normal Sales Exception for Certain Option-tracts range in maturitythrough 2006. Additionally, PPL and its subsidiaries Type Contracts and Forward Contracts in Electricity." Issue C15 provides addi-enter into financial contracts to hedge fluctuations in market value of existing tional guidance on the classification and application of SFAS 133 relating to debt issuances. These contracts range in maturity through 2029. purchases and sales of electricity utilizing forward contracts and options. This PPL recognized the following net gains, after-tax, resulting from firm com- guidance became effective as of July 1, 2001. In December 2001, the FASB mitments that no longer qualified as fair value hedges (reported in "Wholesale revised the guidance in Issue C15, principally related to the eligibility of options energy marketing" revenues and 'Energy purchases' on the Statement of forthe normal purchases and normal sales exception. The revised guidance Income): $0in 2002 and $7million in 2001. was effective January 1,2002.

PPL did not recognize any gains/flosses) resulting from the ineffective portion Purchases and sales of forward electricity and option contracts that require of fair value hedges for the twelve months ended December 31, 2002 or 2001. physical delivery and which are expected to be used or sold by the reporting entity in the normal course of business would generally be considered "normal Cash Flow Hedges purchases and normal sales" under SFAS 133. These transactions, while within PPL subsidiaries enter into financial and physical contracts, including forwards, the scope of SFAS 133, are not required to be marked to fair value in the financial futures and swaps, to hedge the price risk associated with electric, gas and oil statements because they qualify for the normal purchases and sales exception.

commodities. Additionally, PPL and its subsidiaries enter into financial interest As of December 31,2002 and December 31,2001, "Accumulated other compre-rate swap contracts to hedge interest expense associated with both existing hensive income" included a net gain of an insignificant amount and $11 million, and anticipated debt issuances. These contracts and swaps range in maturity respectively, related to forward transactions classified as cash flow hedges prior through 2006. PPL also enters into foreign currency forward contracts to hedge to adoption of DIG Issue C15. This gain will be reversed from "Accumulated exchange rates associated with firm commitments denominated in foreign cur-other comprehensive income" and recognized in earnings as the contracts rencies and to hedge the net investment of foreign operations. These forward deliver through 2008.

contracts range in maturity through 2028.

In December 2001, the FASB revised guidance on DIG Issue C16, "Scope Cash flow hedges may be discontinued because it is probable thatthe Exceptions: Applying the Normal Purchases and Normal Sales Exception to original forecasted transaction will not occur by the end of the originally speci-Contracts that Combine a Forward Contract and a Purchased Option Contract."

fied time period. PPL discontinued certain cash flow hedges which resulted in Issue C16 provides additional guidance on the classification and application the following net losses, after-tax, reclassifications (reported in "Wholesale of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities,"

energy marketing" revenues, "Energy purchases" and 'Interest Expense" on relating to purchases and sales of electricity utilizing forward contracts and the Statement of Income): $(9) million in 2002 and $(14) million in 2001.

options, as well as the eligibility of fuel contracts forthe normal purchases and Due to hedge ineffectiveness, PPL reclassified the following net gains/

normal sales exception. The revised guidance was effective April 1,2002. PPL (losses), after-tax, (reported in "Wholesale energy marketing" revenues and had no financial statement impact from the revised guidance on fuel contracts "Energy purchases" on the Statement of Income): $(2) million in 2002 and classified as normal.

3D in 2001.

PPL adopted the final provisions of EITF 02-3 during the fourth quarter of As of December 31, 2002, the deferred net loss, after-tax, on derivative 2002. As such, PPL now reflects its net realized and unrealized gains and losses instruments in "Accumulated other comprehensive income" expected to be associated with all derivatives that are held for trading purposes in the 'Net reclassified into earnings during the next twelve months (excluding derivative energy trading margins" line on the Statement of Income. Non-derivative activities of equity investments) was $4million.

contracts that metthe definition of energy trading activities as defined by The following table shows the change in accumulated unrealized gains or EITF 98-10, "Accounting for Energy Trading and Risk Management Activities" losses on derivatives in other comprehensive income for the following periods:

are reflected in the financial statements using the accrual method of account-2002 2001 ing. Under the accrual method of accounting, unrealized gains and losses are Beginning accumulated derivative gain S 23 not reflected in the financial statements. Prior periods have been reclassified.

Cumulative effect of a change in accounting PPL did not need to record a cumulative effect of this change in accounting principle at January 1,2001 $(1821 principle, because all non-derivative energy-related trading contracts had Net change associated with current period been shown in the financial statements at their amortized cost This reflected hedging activities and other 9 221 Net change associated with C15 accounting change (a) 111) modeling reserves that incorporated the lack of independence in valuing Net change from reclassification into earnings (14) 1161 contracts for which there were no external market prices.

Ending accumulated derivative gain $ 7 5 23 The financial statement impact of netting energy trading activities is as follows:

('I In June 2001, the FASB cleared DIG Issue C15, "Scope Exceptions: Normal 2002 2001 2000 Purchases and Normal Sales Exception for Certain Option-Type Contracts and Forward Contracts in Electricity," which extends the normal purchases and nor- Prior classification mal sales exception to electricity purchase and sale agreements meeting certain Wholesale energy marketing 3596 $690 $1,186 criteria. The mark-to-market value recorded in accumulated other comprehensive Energy purchases 577 653 1,139 income as of December 31,2002 isbeing amortized through the original delivery Net energytrading margins S 19 $ 37 $ 47 terms of the contracts.

PPL Corporation 78 2002 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Credit Concentration 18. GOODWILL AND OTHER INTANGIBLE ASSETS PPL and its subsidiaries enter into contracts with many entities for the purchase On January 1,2002, PPL and its subsidiaries adopted SFAS 142, "Goodwill and and sale of energy. Most of these contracts are considered a normal part of Other Intangible Assets," which eliminates the amortization of goodwill and doing business and, as such, the mark-to-market value of these contracts is not other acquired intangible assets with indefinite economic useful lives. SFAS 142 reflected in the financial statements. However, the mark-to-market value of requires an annual impairment test of goodwill at the reporting unit level. A these contracts is considered when committing to a new business from a credit reporting unit is a segment or one level below a segment (referred to as a com-perspective.

ponent). Intangible assets other than goodwill that are not subject to amortiza-PPL and its subsidiaries have credit exposures to energy trading partners.

tion are also required to undergo an annual impairment test. PPL changed the The majority of these exposures were the mark-to-market value of multi-year classification of certain intangible assets on the balance sheet upon adopting contracts for energy sales. Therefore, if these counterparties fail to perform their SFAS 142. Previously reported information has been restated to conform to the obligations under such contracts, the companies would not experience an current presentation. The following information is disclosed in accordance with immediate financial loss, but would experience lower revenues in future years SFAS 142.

to the extent that replacement sales could not be made at the same prices as sales under the defaulted contracts. Acquired Intangible Assets At December 31, 2002, PPL had a credit exposure of 5162 million to energy The carrying amount and the accumulated amortization of acquired intangible trading partners. Five counterparties accounted for 58% of this exposure. assets were as follows:

No other individual counterparty accounted for more than 3% of the exposure. December 31, 2D02 December31, 2001 With one exception, each of the five primary counterparties had an investment Accumu- Accumu-grade credit rating from Standard & Poor's. The non-investment grade counter- Carrying lated Carrying lated party has agreed to accelerated payment provisions under its contracts with Amount Amortization Amount Amortization PPL Montana that substantially reduce PPL Montana's exposure. Land and transmission rights $242 $89 $247 S85 PPL and its subsidiaries have the right to request collateral from each of Emission allowances 41 35 Licenses and other 42 6 33 4 these counterparties, except for one government agency, in the event their credit rating falls below investment grade. It is also the policy of PPL and its 5325 $95 $315 $90 subsidiaries to enter into netting agreements with all of their counterparties to minimize credit exposure. Current intangible assets are included in "Current Assets - Other," and long-term intangible assets are included in "Goodwill and other intangibles" on Enron Bankruptcy the Balance Sheet.

In connection with the December 2001 bankruptcy filings by Enron Corporation Amortization expense was approximately $5million for 2002. Amortization and its affiliates (collectively 'Enron"), certain PPL subsidiaries terminated expense is estimated at $5 million per year for 2003 through 2007.

certain electricity, gas and othertrading agreements with Enron. PPL and its subsidiaries' 2001 earnings exposure associated with termination of these con- Goodwill tracts was approximately S8 million after-tax, and is recorded in "Wholesale The changes in the carrying amounts of goodwill by segment were as follows:

energy marketing" and "Energy purchases" on the Statement of Income. Supply International Delivery Total Additionally, certain of these contracts with Enron extended through 2005, and Balance as of January 1,2002 $72 $ 257 $55 S384 were at prices more favorable to PPLthan current market prices. However, Goodwill acquired 13 6 19 there was no further accounting charge to be recorded. Interest in WPD goodwill ta 225 225 In October 2002, certain PPL subsidiaries filed proofs of claim in Enron's Effect of foreign exchange rates 14) (4) bankruptcy proceedings, in an aggregate amount of approximately $50 million. Impairment losses (150) (150)

PPL and its subsidiaries cannot predict the amounts, if any, that theywill Balance as of December 31, 2002 $85 $ 334 $55 $ 474 recover as a result of their claims in the Enron bankruptcy proceedings.

tal See Note 9 for additional information.

Goodwill is included in "Goodwill and other intangibles" on the Balance Sheet.

The reporting units of the Supply, Delivery and International segments completed the transition impairment test in the first quarter of 2002. A transition goodwill impairment loss of $150 million was recognized in the Latin American reporting unit within the International segment, and is reported as a "Cumulative Effect of a Change in Accounting Principle" on the Statement of Income. The fair value of the reporting unit was estimated using the expected present value of future cash flows.

PPL Corporation 79 2002 Annual Report Reconciliation of Prior Periods to Exclude Amortization 1 9. CORPORATE REALIGNMENT The following table reconciles reported earnings for 2000 and 2001 to earnings On July 1, 2000, PPL and PPL Electric completed a corporate realignment in adjusted to exclude amortization expense related to goodwill and equity method orderto effectively separate PPL Electric's regulated transmission and distribu-goodwill. Those expenses were no longer recorded in 2002 in accordance with tion operations from its recently deregulated generation operations and to SFAS 142. PPL was not affected by changes in amortization periods for other better position the companies and their affiliates in the new competitive market-intangible assets.

place. The realignment included PPL Electric's transfer of certain generation Forthe Years EndedDecember31, 2002 2001 2000 and related assets, and associated liabilities, to PPL and PPL Energy Funding at Reported net income before extraordinary book value. The net book value of this transfer, recorded effective July 1, 2000, item and cumulative effect of a change was $271 million.

in accounting principle $358 $169 $487 This $271 million non-cash dividend to PPL had a significant impact on Add back: Goodwill amortization 13 11 the consolidated assets and liabilities of PPL Electric. As indicated on the Add back: Equity method goodwill amortization 3 3 Statement of Cash Flows of PPL Electric, approximately $73 million of cash Adjusted net income before extraordinary and cash equivalents of consolidated affiliates was divested as a result of item and cumulative effect of a change in accounting principle $358 S185 $501 the realignment distribution.

As a result of the corporate realignment PPL Electric's principal businesses Reported net income $208 S179 $498 Add back: Goodwill amortization 13 11 are the transmission and distribution of electricity to serve retail customers in Add back: Equity method goodwill amortization 3 3 its franchised territory in eastern and central Pennsylvania, and the supply of Adjusted net income $208 $195 $512 electricity to retail customers in that territory as a PLR. Other subsidiaries of PPL and PPL Electric are generally aligned in the new corporate structure Basic EPS according to their principal business functions.

Reported net income before extraordinary PPL Energy Funding contributed certain of these generating and unregu-item and cumulative effect of a change lated marketing assets and liabilities at a net book value of approximately in accounting principle $2.35 $1.16 $3.38 Goodwill amortization 0.09 0.07 $1.6 billion to PPL Generation and PPL EnergyPlus.

Equity method goodwill amortization 0.02 0.02 PPL Energy Supply was subsequently formed as a subsidiary of PPL Energy Funding, to serve as the parent company for the unregulated subsidiaries. As Adjusted net income before extraordinary item and cumulative effect of a change a result of the corporate realignment PPL Generation's principal business is in accounting principle S2.35 $1.27 $3.47 owning and operating U.S. generating facilities through various subsidiaries; Reported net income $1.37 $1.23 $3.45 PPL EnergyPlus' principal business is wholesale and deregulated retail energy Goodwill amortization 0.09 0.07 marketing; and PPL Global's principal businesses are the acquisition and devel-Equity method goodwill amortization 0.02 0.02 opment of both U.S. and international energy projects, and the ownership and Adjusted net income $1.37 $1.34 $3.54 operation of international projects.

The corporate realignment followed receipt of various regulatory approvals, Diluted EPS including approvals from the IRS,the PUC, the FERC, and the NRC.

Reported net income before extraordinary item and cumulative effect of a change in accounting principle $2.35 $1.15 $3.37 Goodwill amortization 0.09 0.07 2&. STRATEGIC INITIATIVE Equity method goodwill amortization 0.02 0.02 In August 2001, PPL completed a strategic initiative to confirm the structural Adjusted net income before extraordinary separation of PPL Electric from PPL and PPL's other affiliated companies. This item and cumulative effect of a change initiative enabled PPL Electric to reduce business risk by securing a supply in accounting principle $2.35 $1.26 $3.46 contract adequate to meet its PLR obligations, enabled PPL Electric to lower its Reported net income $1.36 $1.22 $3.44 capital costs, enabled PPL EnergyPlus to lock in an electric supply agreement Goodwill amortization 0.09 0.07 atcurrentfavorable prices, and enabled PPLto raise capital at attractive rates Equity method goodwill amortization 0.02 0.02 for its unregulated businesses, while allowing PPLto retain valuable advantages Adjusted net income $1.36 $1.33 $3.53 related to operating both energy supply and energy delivery businesses.

In connection with this initiative, PPL Electric:

obtained a long-term electric supply contractto meet its PLR obligations, at prices generally equal to the pre-determined "capped" rates it is authorized to charge its PLR customers from 2002 through 2009 under the 1998 PUC settlement order;

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PPL Corporation 80 2002 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

agreed to limit its businesses to electric transmission and distribution and Also in July 2001, PPL Electric filed a shelf registration statement with the activities relating to or arising out of those businesses; SEC to issue up to S900 million in debt In August 2001, PPL Electric sold $800 mil-

adopted amendments to its Articles of Incorporation and Bylaws containing lion of senior secured bonds under this registration statement. The offering corporate governance and operating provisions designed to reinforce its consisted of two series of bonds: $300 million of 5-7/8% Series due 2007 and corporate separateness from affiliated companies; $500 million of 6-1/4% Series due 2009. PPL Electric used a portion of the pro-

appointed an independent director to its Board of Directors and required the ceeds from these debt issuances to make the S90 million up-front payment unanimous consent of the Board of Directors, including the consent of the to PPL EnergyPlus, and S280 million was used to repurchase a portion of its independent director, to amendments to these corporate governance and common stock from PPL The remainder of the proceeds was used for general operating provisions or to the commencement of any insolvency proceeding, corporate purposes.

including any filing of a voluntary petition in bankruptcy or other similar actions; Taken collectively, the steps in the strategic initiative are intended to pro-

appointed an independent compliance administrator to review, on a semi- tect the customers of PPL Electric from volatile energy prices and facilitate a annual basis, its compliance with the new corporate governance and operat- significant increase in leverage at PPL Electric, while lowering its cost of capi-ing requirements contained in its amended Articles of Incorporation and tal. PPUs shareowners also benefited from this initiative because it provided Bylaws; and low-cost capital to the higher-growth, unregulated side of PPUs business.

adopted a plan of division pursuant to the Pennsylvania Business Corporation Law. The plan of division resulted in two separate corporations. PPL Electric was the surviving corporation and a new Pennsylvania corporation was cre- 21 . WORKFORCE REDUCTION ated. Under the plan of division, $5 million of cash and certain of PPL Electric's In an effortto improve operational efficiency and reduce costs, PPL and its potential liabilities were allocated to the new corporation. PPL has guaranteed subsidiaries completed a workforce reduction in June 2002 that will eliminate the obligations of the new corporation with respect to such liabilities.

up to 598 employees, or about 7% of PPUs U.S. workforce, at a cost of $74 mil-The enhancements to PPL Electric's legal separation from its affiliates are lion. The program was broad-based and impacted all employee groups except intended to minimize the risk that a court would order PPL Electric's assets and certain positions that are key to providing high-quality service to PP's electric-liabilities to be substantively consolidated with those of PPL or another affiliate ity delivery customers. Linemen, electricians and line foremen, for example, of PPL in the event that PPL or another PPL affiliate were to become a debtor were not affected by the reductions. An additional $1million workforce reduc-in a bankruptcy case. tion charge was recorded in September 2002, when plans, specific to PPL At a special meeting of PPL Electric's shareowners held on July 17, 2001, the Global and PPL Montana subsidiaries, were finalized which are expected to plan of division and the amendments to PPL Electric's Articles of Incorporation impact 26 employees. These additional reductions increased PPUs total charge and Bylaws were approved, and became effective upon filing the articles of for workforce reductions to $75 million for the elimination of up to 624 positions.

division and the plan of division with the Secretary of State of the Commonwealth Annual savings in operating expenses associated with the workforce reduction of Pennsylvania. This filing was made in August 2001. are estimated to be approximately S50 million.

As part of the strategic initiative, PPL Electric solicited bids to contract with PPL recorded the cost of the program as a one-time charge of $75 million energy suppliers to meet its obligation to deliver energy to its customers from included in the Statement of Income as "Workforce reduction." This charge 2002 through 2009. In June 2001, PPL Electric announced that PPL EnergyPlus reduced net income by S44 million after-taxes. The program provides primarily was the low bidder, among six bids examined, and was selected to provide the for enhanced early retirement benefits and/or one-time special pension separa-energy supply requirements of PPL Electric from 2002 through 2009. Under this tion allowances based on an employee's age and years of service. These fea-contract, PPL EnergyPlus will provide electricity at pre-determined capped tures of the program will be paid from the PPL Retirement Plan pension trust prices that PPL Electric is authorized to charge its PLR customers, and received and increased PPUs pension and postretirement benefit liabilities by S65 million.

a $90 million payment to offset differences between the revenues expected The remaining $10 million of costs relate primarily to severance payments under the capped prices and projected market prices through the life of the and outplacement costs which will be paid by PPL, and are included on the supply agreement (as projected by PPL EnergyPlus at the time of its bid). The Balance Sheet under "Current Liabilities."

contract resulted in PPL EnergyPlus having an eight-year contract at current As of December 31, 2002, 354 PPL employees were terminated and have market prices. PPL has guaranteed the obligations of PPL EnergyPlus under received S7 million of non-pension benefits. The remaining $3 million liability the new contract for non-pension benefits will be paid over the next six months.

In July 2001, the energy supply contractwas approved by the PUC and accepted for filing by the FERC.

PPL Corporation 81 2002 Annual Report

22. NEW ACCOUNTING STANDARDS Occurring Events and Transactions," for the disposal of segments of a business.

SFAS 144 also broadens the reporting of discontinued operations. PPL and its SFAS 142 subsidiaries adopted SFAS 144 on January 1,2002, with no material impact on See Note 18 for a discussion of SFAS 142, 'Goodwill and Other Intangible the financial statements.

Assets," and the impact of adoption.

SFAS 145 SFAS 143 In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No. 4, In 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."

Obligations," which addresses the accounting for obligations associated with The most relevant provision of SFAS 145 is the rescission of SFAS 4, "Reporting the retirement of tangible long-lived assets. SFAS 143 requires legal obligations Gains and Losses from Extinguishment of Debt, an Amendment of APB Opinion associated with the retirement of long-lived assets to be recognized as a liabil-No. 30," which required all gains and losses from extinguishment of debt to be ity in the financial statements. The initial obligation should be measured at the aggregated and, if material, classified as an extraordinary item, net of any estimated fair value. An equivalent amount should be recorded as an increase related income tax effect. As a result of the rescission, the criteria in APB in the value of the capitalized asset and allocated to expense over the useful Opinion No. 30 will now be used to classify those gains and losses. The provi-life of the asset Until the obligation is settled, the liability should be increased, sions of SFAS 145 related to the rescission of SFAS 4 shall be applied in fiscal through the recognition of accretion expense in the income statement, for years beginning after May 15, 2002, with early application encouraged. PPL and changes in the obligation due to the passage of time. SFAS 143 is effective for its subsidiaries adopted these provisions during the fourth quarter of 2002. All fiscal years beginning after June 15, 2002.

prior periods were restated, as necessary. The provisions related to the amend-PPL adopted SFAS 143 effective January 1, 2003. Application of the new ment of SFAS 13, "Accounting for Leases," were adopted for transactions rules resulted in an increase in net property, plant and equipment of $32 million, occurring after May 15, 2002. The adoption of SFAS 145 did not have a material reversal of the previously recorded decommissioning liability of $296 million, impact on PPL or its subsidiaries. However, SFAS 145 may impact the account-recognition of asset retirement obligations of 5229 million, recognition of a ing treatment of future extinguishments of debt and lease transactions.

deferred tax liability of $41 million and a cumulative effect of adoption that increased net income and equity by$58 million. Accretion and depreciation SFAS 146 expenses resulting from the application of SFAS 143 are expected to be approx- In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated imately $12 million in 2003. PPL identified various legal obligations to retire with Exit or Disposal Activities." SEAS 146 addresses financial accounting and long-lived assets, the largest of which relates to the decommissioning of the reporting for costs associated with exit or disposal activities and nullifies EITF Susquehanna station. PPL identified and recorded other asset retirement obli- 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other gations related to significant interim retirements at the Susquehanna station, Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)."

various environmental requirements for coal piles, ash basins and other waste SFAS 146 requires the recognition of a liability for costs associated with exit or basin retirements. disposal activities when the liability is incurred rather than at the date of a com-mitmentto an exit or disposal plan. SFAS 146 also establishes thatthe initial lia-SEAS 144 bility should be measured at its estimated fair value. The provisions of SFAS 146 In 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal are effective for exit or disposal activities initiated after December 31, 2002, of Long-Lived Assets,' which replaces SFAS 121, "Accounting forthe Impairment with earlier application encouraged. PPL and its subsidiaries adopted SFAS 146 of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." For long-effective January 1, 2003. The initial adoption did not have an impact on PPL lived assets to be held and used, SFAS 144 retains the requirements of SFAS 121 or its subsidiaries. However, SFAS 146 may impactthe accounting treatment to recognize an impairment loss only if the carrying amount is not recoverable of future disposal or exit activities.

from undiscounted cash flows and to measure an impairment loss as the differ-ence between the carrying amount and fair value of the asset For long-lived SFAS 148 assets to be disposed of by sale, SFAS 144 establishes a single accounting In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based model based on the framework established in SFAS 121. The accounting model Compensation - Transition and Disclosure, an Amendment of FASB Statement for long-lived assets to be disposed of by sale applies to all long-lived assets, No. 123." SFAS 148 provides three transition methods for adopting the fair value including discontinued operations, and replaces the provisions of APB Opinion method of accounting for stock-based compensation as prescribed under No. 30, 'Reporting the Results of Operations-Reporting the Effects of Disposal SFAS 123 and enhances the required disclosures effective for fiscal years end-of a Segment of a Business, and Extraordinary, Unusual and Infrequently ing after December 15, 2002. SFAS 148 also requires certain disclosures in financial reports issued for interim periods beginning after December 15, 2002.

PPL Corporation 82 2002 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PPL and its subsidiaries elected to adopt the fair value method of account- accounting treatment of future guarantee obligations. The disclosure provisions ing for stock-based compensation as of January 1, 2003, which will require are effective for financial statements of interim and annual periods ending after PPL and its subsidiaries to begin recording compensation expense for stock December 15, 2002. See Notes 10 and 14 for disclosure of guarantees and other option awards over the period the awards vest. PPL and its subsidiaries have assurances existing as of December 31, 2002.

chosen to apply the prospective method of transition permitted by SFAS 148, FIN 46 which provides that PPL and its subsidiaries will recognize expense for all stock-In January 2003, the FASB issued Interpretation No. 46, "Consolidation of based compensation awards granted, modified or settled on or after January 1, Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 clarifies that 2003. Consequently, the initial adoption of the fair value method of accounting variable interest entities, as defined therein, that do not disperse risks among for stock-based compensation under SFAS 123, as well as the adoption of the parties involved should be consolidated by the entity that is determined to SFAS 148, did not have an immediate impact on the financial results of PPL be the primary beneficiary. FIN 46 also requires certain disclosures to be made or its subsidiaries.

by the primary beneficiary and by an enterprise that holds a significantvariable See Note 1 for the annual disclosures required by SFAS 148.

interest in a variable interest entity but is not the primary beneficiary. FIN 46 EITF 02-3 applies immediately to variable interest entities created after January 31, 2003 See Note 17 for a discussion of EITF 02-3 and the impact of adoption. and to variable interest entities in which an enterprise obtains an interest after January 31, 2003. For variable interest entities in which an enterprise holds a FIN 45 variable interest thatwas acquired before February 1, 2003, FIN 46 must be In November 2002, the FASB issued Interpretation No. 45, 'Guarantor's adopted no later than the first fiscal year or interim period beginning after Accounting and Disclosure Requirements for Guarantees, Including Indirect June 15, 2003. FIN 46 may be applied by restating previously issued financial Guarantees of Indebtedness of Others, an Interpretation of FASB Statements statements with a cumulative effect adjustment as of the beginning of the first No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34." FIN 45 clarifies year restated. Restatement is encouraged but not required.

that upon issuance of certain types of guarantees, the guarantor must recog-PPL expects that FIN 46 will apply to the leases for its Sundance, University nize an initial liability for the fair value of the obligation it assumes under the Park and Lower Mt Bethel generating facilities. See Note 10 for further discus-guarantee. FIN 45 does not provide detailed guidance on the offsetting entry to sion of these leases and disclosure required by FIN 46. PPL is currently evalu-be made when recognizing the liability or on measuring the obligation subse-ating the restructuring of these leases. If PPL elects not to restructure these quent to its initial recognition. The offsetting entry will be dependent upon the leases, PPL believes that it will be required to consolidate the financial state-circumstances under which the guarantee is issued, and the initial liability ments of the variable interest entities that own the leased facilities. The princi-should typically be reduced as the guarantor is released from risk under the pal impact from such consolidation would be the inclusion of the generating guarantee. FIN 45 also requires a guarantor to make significant new disclosures facilities as assets and the lease debt as liabilities in the consolidated balance for virtually all guarantees. The provisions relating to the initial recognition and sheets of PPL Additionally, PPL would be required to recognize a cumulative measurement of guarantee obligations must be applied on a prospective basis effect of a change in accounting principle in connection with the initial consoli-to guarantees issued or modified after December 31, 2002. PPL and its sub-dation of these variable interest entities. Such amount is currentiy estimated sidiaries adopted FIN 45 effective January 1, 2003. The initial adoption did not to be approximately $13 million, assuming FIN 46 is applied to these entities have an impact on PPL or its subsidiaries. However, FIN 45 may impact the effective July 1, 2003 and prior year financial statements are not restated.

PPL Corporation 83 2002 Annual Report GLOSSARY OF TERMS AND ABBREVIATIONS 1945 First Mortgage Bond Indenture - PPL Electric's Mortgage and Deed of DIG - Derivatives Implementation Group.

Trust dated as of October 1,1945, to Deutsche Bank Trust Company Americas, DOE - Department of Energy, a U.S. government agency.

as trustee, as supplemented.

DRIP - Dividend Reinvestment Plan.

2001 Senior Secured Bond Indenture - PPL Electric's Indenture, dated as of August 1, 2001, to JPMorgan Chase Bank, as trustee, as supplemented. EC - Electricidad de Centroamerica, S.A. de CV., an El Salvadoran holding company and the majority owner of DelSur and El Salvador Telecom, S.A.

AFUDC (Allowance for Funds Used During Construction) - the cost of equity de C.V. PPL Global has 100 percent ownership of EC.

and debt funds used to finance construction projects of regulated businesses that is capitalized as part of construction cost EGS - electric generation supplier.

ANEEL - National Electric Energy Agency, Brazil's agency that regulates the EITF- Emerging Issues Task Force, an organization that assists the FASB in transmission and distribution of energy. improving financial reporting through the identification, discussion and resolution of financial issues within the framework of existing authoritative literature.

APA-Asset Purchase Agreement.

Elfec - Empresa de Luz y Fuerza Electrica Cochabamba Sociedad Anonima, APB-Accounting Principles Board.

a Bolivian electric distribution company in which PPL Global has a majority ARB -Accounting Research Bulletin. ownership interest.

Bangor Hydro - Bangor Hydro-Electric Company. Emel - Empresas Emel S.A., a Chilean electric distribution holding company of which PPL Global has majority ownership.

Bcf - billion cubic feet EMF- electric and magnetic fields.

CEMAR - Companhia Energ6bca do Maranhao, a Brazilian electric distribution company in which PPL Global has a majority ownership interest. Enrichment- the concentration of fissionable isotopes to produce a fuel suitable for use in a nuclear reactor.

CGE - Compafia General Electricidad, S.A., a distributor of electricity and natural gas with other industrial segments in Chile and Argentina in which EPA - Environmental Protection Agency, a U.S. government agency.

PPL Global has an 8.5 percent direct and indirect minority ownership interest EPS - earnings floss) per share.

Clean Air Act - federal legislation enacted to address certain environmental ESOP - Employee Stock Ownership Plan.

issues related to air emissions including acid rain, ozone and toxic air emissions.

EWG - exempt wholesale generator.

CTC - competitive transition charge on customer bills to recover allowable transition costs under the Customer Choice Act Fabrication -the process which manufactures nuclear fuel assemblies for insertion into the reactor.

Customer Choice Act-the Pennsylvania Electricity Generation Customer Choice and Competition Act, legislation enacted to restructure the state's FASB - Financial Accounting Standards Board, a rulemaking organization electric utility industry to create retail access to a competitive market for that establishes financial accounting and reporting standards.

generation of electricity.

FERC - Federal Energy Regulatory Commission, the federal agency that regulates DelSur - Distribuidora de Electricidad Del-Sur, S.A. de CV., an electric interstate transmission and wholesale sales of electricity and related matters.

distribution company in El Salvador, a majority of which is owned by EC.

FIN - FASB Interpretation Number, intended to clarify accounting pronounce-DEP - Department of Environmental Protection, a state government agency. ments previously issued by the FASB.

Derivative - a financial instrument or other contract with all three of the GAAP - generally accepted accounting principles.

following characteristics:

Griffith Energy- Griffith Energy LLC, which owns and operates a 600 MW

a. It has (1)one or more underlyings and (2)one or more notional amounts gas-fired station in Kingman, Arizona, and which is jointly owned by subsidiaries or payment provisions or both. Those terms determine the amount of the of PPL Generation and Duke Energy Corporation.

settlement or settlements, and, in some cases, whether or not a settlement is required. GWh - gigawatt-hour, one million kilowatt-hours.

b. It requires no initial net investment or an initial net investment that is smaller Hyder - Hyder Limited, a subsidiary of WPDL and previous owner of than would be required for other types of contracts that would be expected South Wales Electricity plc. In March 2001, South Wales Electricity pIc to have a similar response to changes in market factors.

was acquired by WPDH Limited and renamed WPD (South Wales).

c. Its terms require or permit net settlement, it can readily be settled net by a means outside the contract, or it provides for delivery of an asset that puts IBEW- International Brotherhood of Electrical Workers.

the recipient in a position not substantially different from net settlement

PPL Corporation 84 2002 Annual Report GLOSSARY OF TERMS AND ABBREVIATIONS (continued)

ICP- Incentive Compensation Plan. PPL- PPL Corporation, the parent holding company of PPL Electric, PPL Energy Funding and other subsidiaries.

ICPKE - Incentive Compensation Plan for Key Employees.

PPL Capital Funding - PPL Capital Funding, Inc., a PPL financing subsidiary.

IRS - Internal Revenue Service, a U.S. government agency.

PPL Capital Funding Trust I - a Delaware statutory business trust created ISO - Independent System Operator.

to issue PEPS Units, whose common securities are held by PPL.

ITC - intangible transition charge on customer bills to recover intangible PPL Capital Trust - a Delaware statutory business trust created to issue transition costs associated with securitizing stranded costs underthe Preferred Securities, whose common securities are held by PPL Electric.

Customer Choice Act.

PPL Capital Trust 11- a Delaware statutory business trust created to issue kWh - kilowatt-hour, basic unit of electrical energy.

Preferred Securities, whose common securities are held by PPL Electric.

kVA - kilovolt-ampere.

PPL Coal Supply - PPL Coal Supply, LLC, a limited liability company owned by LIBOR - London Interbank Offered Rate. PPL Coal Holdings Corporation (a subsidiary of PPL Generation) and Iris Energy, LLC. PPL Coal Supply procures coal, which it sells to PPL Generation power Mirant- Mirant Corporation, a diversified energy company based in Atlanta.

plants, and to Iris Energy for purposes of producing synfuel.

PPL Global and Mirant jointly owned WPD until September 6, 2002.

PPL Electric - PPL Electric Utilities Corporation, a regulated utility subsidiary Montana Power-The Montana Power Company, a Montana-based company of PPL that transmits and distributes electricity in its service territory, and that sold its generating assets to PPL Montana in December 1999. Through provides electric supply to retail customers in this territory as a PLR.

a series of transactions consummated during the first quarter 2002, Montana Power sold its electricity delivery business to NorthWestern. PPL Energy Funding - PPL Energy Funding Corporation, which is a subsidiary of PPL and the parent company of PPL Energy Supply.

MPSC - Montana Public Service Commission.

PPL EnergyPlus - PPL EnergyPlus, LLC, a subsidiary of PPL Energy Supply, MW- megawatt.

which markets wholesale and retail electricity, and supplies energy and MWh - megawatt-hour, one thousand kilowatt-hours. energy services in newly deregulated markets.

NorthWestern - NorthWestern Corporation, a Delaware corporation and suc- PPL Energy Supply - PPL Energy Supply, LLC, the parent company of PPL cessor in interestto Montana Power's electricity delivery business, including Generation, PPL EnergyPlus, PPL Global and other subsidiaries. Formed in Montana Power's rights and obligations under contracts with PPL Montana. November 2000, PPL Energy Supply is a subsidiary of PPL Energy Funding.

NPDES - National Pollutant Discharge Elimination System. PPL Gas Utilities - PPL Gas Utilities Corporation, a regulated utility subsidiary of PPL specializing in natural gas distribution, transmission and storage NRC - Nuclear Regulatory Commission, the federal agency that regulates services, and the competitive sale of propane.

operation of nuclear power facilities.

PPL Generation - PPL Generation, LLC, a subsidiary of PPL Energy Supply, NUGs - Non-Utility Generators, generating plants not owned by public utilities, which owns and operates U.S. generating facilities through various subsidiaries.

whose electrical output must be purchased by utilities under the PURPA if the plant meets certain criteria. PPL Global - PPL Global, LLC, a subsidiary of PPL Energy Supply, which acquires and develops domestic generation projects, and acquires and holds OSM - Office of Surface Mining, a U.S. government agency.

international energy projects that are primarily focused on the distribution PCB - polychlorinated biphenyl, an additive to oil used in certain electrical of electricity.

equipment up to the late 1970s. Now classified as a hazardous chemical.

PPL Holtwood - PPL Holtwood, LLC, a subsidiary of PPL Generation, which PEPS Units (Premium Equity Participating Security Units) - securities issued owns PPL's hydroelectric generating operations in Pennsylvania.

by PPL Capital Funding Trust 1,consisting of a Preferred Security and a forward PPL Maine - PPL Maine, LLC, a subsidiary of PPL Generation, which owns contract to purchase PPL common stock.

generating operations in Maine.

PJM (PJM Interconnection, LLCI - operates the electric transmission network PPL Martins Creek - PPL Martins Creek, LLC, a fossil generating subsidiary and electric energy market in the mid-Atlantic region of the United States.

of PPL Generation.

PLR (Provider of Last Resort) - PPL Electric providing electricity to retail PPL Montana - PPL Montana, LLC, an indirect subsidiary of PPL Generation, customers within its delivery territory who have chosen not to shop for which generates electricity for wholesale sales in Montana and the electricity under the Customer Choice Act.

Pacific Northwest.

PPL Corporation 85 2002 Annual Report PPL Services - PPL Services Corporation, a subsidiary of PPL, which Tolling agreement - agreement whereby the owner of an electric generating provides shared services for PPL and its subsidiaries. facility agrees to use that facility to convert fuel provided by a third party into electric energy for delivery back to the third party.

PPL Susquehanna - PPL Susquehanna, LLC, the nuclear generating subsidiary of PPL Generation. UF- inflation-indexed peso-denominated unit.

PPL Telcom - PPLTelcom, LLC, an indirect subsidiary of PPL Energy Funding, VEBA - Voluntary Employee Benefit Association Trust trust accounts for which provides telecommunication services to eastern and central health and welfare plans for future benefit payments for employees, retirees Pennsylvania. or their beneficiaries.

PPL Transition Bond Company - PPL Transition Bond Company, LLC, a wholly Vidivision -Vidivision S.A., a Bolivian company providing construction and owned subsidiary of PPL Electric, formed to issue transition bonds under the engineering services, as well as cable, television and Internet services, in Customer Choice Act. which PPL Global has a majority ownership interest Integra S.A., a Bolivian contracting company, merged into Vidivision in 2001.

Preferred Securities - company-obligated mandatorily redeemable preferred securities issued by PPL Capital Trust PPL Capital Trust 11and PPL Capital WPD - refers collectivelyto Western Power Distribution Holdings Limited and Funding Trust I, holding solely debentures of PPL Electric, in the case of WPD Investment Holdings Limited. PPL Global purchased Mirant's 49 percent PPL Capital Trust and PPL Capital Trust II, and solely debentures of PPL Capital ownership interest in these entities on September 6, 2002, thereby achieving Funding in the case of PPL Capital Funding Trust !. 100 percent ownership and operational control.

PUC - Pennsylvania Public Utility Commission, the state agency that regulates WPD (South Wales) - Western Power Distribution (South Wales) plc, a British certain ratemaking, services, accounting and operations of Pennsylvania utilities. regional electric utility company.

PVC Final Order - final order issued by the PUC on August 27, 1998, approving WPD (South West) -Western Power Distribution (South West) plc, a British the settlement of PPL Electric Utilities' restructuring proceeding. regional electric utility company.

PUHCA - Public Utility Holding Company Act of 1935, legislation passed by WPDH Limited - Western Power Distribution Holdings Limited, formerly WPD the U.S. Congress. 1953 Limited, a wholly owned subsidiary of PPL Global. WPDH Limited owns WPD Holdings U.K., which owns WPD (South West) and WPD (South Wales).

PURPA - Public Utility Regulatory Policies Act of 1978, legislation passed by the U.S. Congress to encourage energy conservation, efficient use of WPDL- WPD Investment Holdings Limited, an indirect wholly owned subsidiary resources and equitable rates. of PPL Global. WPDL owns 100 percent of the common shares of Hyder.

PURTA - the Pennsylvania Public Utility Realty Tax Act RMC- Risk Management Committee.

RTO - regional transmission organization.

SCR -selective catalytic reduction, a pollution control process.

SEC - Securities and Exchange Commission, a U.S. government agency.

SFAS - Statement of Financial Accounting Standards, the accounting and financial reporting rules issued bythe FASB.

SIUK Capital Trust I - a business trust created to issue preferred securities, whose common securities are held by SIUK Limited.

SIUK Limited - an intermediate holding company within the WPDH Limited group. It owns WPD (South West).

Superfund - federal environmental legislation that addresses remediation of contaminated sites; states also have similar statutes.

Synfuel projects - production facilities that manufacture synthetic fuel from coal or coal byproducts. Favorable federal tax credits are available on qualified synfuel products.

I PPL Corporation 86e 2002 Annual Report BOARD OF DIRECTORS Frederick M. Bernthal - - E. Allen Deaver.

Washington, D.C. Lancaster, Pa.

President- Former Executive Vice President and Director

-Universities Research Association Armstrong World Industries, Inc.

- Manufacturer of interior furnishings Aconsortium of 90 universities engaged inthe 9construction and operation of major research facilities and specialty products -

Age 60 Director since 1997 *Age 67, Director since 1991 Mr. Deaver retired from Armstrong in1998 after a career of 37 years in Dr. Bernthal has served as president of URA since 1994. Prior to joining that organization, he was deputy director of the National Science Foundation. a number of key management positions. He earned a bachelor of science He also has served as amember of the U.S. Nuclear Regulatory Commission degree inmechanical engineering from the University of Tennessee.

and as assistant secretary of state for Oceans, Environment and Science.

=Dr.Bernthal earned aB.S. in chemistryfrom Valparaiso University and a Ph.D.

innuclear chemistry from the University of California at Berkeley.

John R.Biggar -

Allentown, Pa. William F.Hecht Executive Vice President Allentown, Pa.

and Chief Financial Officer Chairman, President and Chief Executive Officer PPL Corporation - ,PPL Corporation Age 8,Director since 2001 - Age 60, Director since 1990 Mr. Biggar has served as executive vice president and chief financial officer of Mr. Hecht has served as PPL's top executive since 1995. Prior to that he PPL Corporation since 2001. He also serves as a director of PPL Electric Utilities served as president and chief operating officer for four years. He also serves

-Corporation. Before beginning his careervwith PPLin 1969, Mr. Biggar earned a as a director of PPL Electric Utilities Corporation, Dentsply International, Inc.

' bachelor's degree inpolitical science from Lycoming College and ajuris doctor and RenaissanceRe Holdings Ltd. Mr. Hecht, who earned bachelors and -

ddegree from Syracuse University. Prio r to being named to his current position, master's degrees inelectrical engineering from Lehigh University, joined -

Mr. Biggar served as senior vice president and chief financial officer as well PPLin'1964.

as vice president-Finance.

John W.Conw'ay' Philadelphia,Pa. Stuart Heydt Chairman of the Board, President and Chief Executive Officer Hershey, Pa.

Crown, Cork & Seal Company, Inc. Former Chief Executive Officer A leading international manufacturer of packaging Geisinger Health System forconsumergoods - A not-for-profit health care provider Age 57, Directorsince 2000 Age 63, Director since 1991 Dr. Heydt retired in 2000 as chief executive officer of the Geisinger Health Mr. Conway has served as Crown, Cork & Seal's top executive since 2001. -

'System, an institution that he directed for eight years. He ispast president Prior to that he had been president and chief operating officer of the company.

of the American College of Physician Executives and a director of Wilkes Mr. Conway joined Crown, Cork & Seal in 1991 as a result of its acquisition of

-University. Dr. Heydt attended Dartmouth College and received an M.D.

Continental Can International Corporation, where he served as president and in fromthe University of Nebraska. 5-various management positions. He earned a bachelor of arts degree ineconomics

-from the University of Virginia and a law degree from the Columbia University_

School of Law.

PPL Corporation 1-87

- 2002 Annual Report BOARD COMMITTEES Executive Committee William F.Hecht, Chair

'Frederick M.Bernthal W. Keith Smith E.Allen Deaver -

Pittsburgh. Pa.

Stuart Heydt Former Vice Chairman Mellon Financial Corporation Audit Committee Age 68, Directorsince 2000 Stuart Heydt, Chair Mr. Smith served as vice chairman of Mellon Financial Corporation and senior Frederick M.Bernthal

-vice chairman of Mellon Bank, N.A., before his retirement in 1998. He also is a W.Keith Smith director of Dentsply International, Inc., Allegheny General Hospital, Invesmart Susan M.Stalnecker Baytree Bancorp and several not-for-profit boards. Mr. Smith earned a bachelor of commerce degree from the University of Saskatchewan and an M.B.A.:

Compensation and Corporate from the University of Western Ontario.

Govemance Committee E.Allen Deaver, Chair John W.Conway, Susan M. Stalnecker StuartHeydt Wilmington. Del.

- a m.N Vice President - Government and Consumer Markets Finance Committee DuPont Safety &Protection W.Keith Smith, Chair El. duPont de Nemours and Company John W.Conway m l Manufacturer of pharmaceuticals, specialty chemicals, E Allen Deaver, biotechnology and high-performance materials Susan M.Stalnecker Age 50, Directorsince 2001 Ms. Stalnecker served inavariety of financial and management positions Nuclear Oversight Committee 0before being named to her present position in2003. She serves as a director of Frederick M. Bemthal, Chair Elwyn. Inc., and the Annual Fund Executive Committee of Duke University and E.Allen Deaver as atrustee of the Delaware Art Museum. Ms. Stalnecker earned abachelor's .Stuart Heydt degree from Duke University and her M.BA. from the Wharton School of Graduate Business atthe University of Pennsylvania.

t f I 11_ _

PPL Corporation 88 2002 Annual Report MANAGEMENT AND OFFICERS CORPORATE MAJOR BUSINESS LINE OFFICERS LEADERSHIP COUNCIL PRESIDENTS William F.Hecht Michael E. Bray James E.Abel Rick L Klingensmith Chairman, President and CEO PPL Electric Utilities VP - Finance and Treasurer VP - Finance PPL Corporation PPL Corporation PPL Global Paul T.Champagne John R.Biggar PPL EnergyPlus Richard L Anderson Michael E. Kroboth Executive VP and CFO VP - Nuclear Operations VP - Energy Services PPL Corporation James H.Miller PPL Susquehanna PPL EnergyPlus PPL Generation Lawrence E. De Simone Robert W. Burke Joseph J. McCabe Executive VP - Supply Roger L. Petersen VP and Chief Counsel VP and Controller PPL Corporation PPL Global PPL Global PPL Corporation Robert J. Grey John E Cotter Dennis J. Murphy Senior VP, General Counsel VP - Energy Marketing and Trading VP/COO - Eastern Fossil and Hydro and Secretary PPL EnergyPlus PPL Generation PPL Corporation Paul A. Farr Joanne H. Raphael VP and COO VP - External Affairs PPL Global PPL Services Robert M. Geneczko Ronald Schwarz VP - Customer Services VP - Human Resources PPL Electric Utilities PPL Services President James M. Seif PPL Gas Utilities VP - Corporate Services PPL Services Robert S. Gombos VP - Field Services Bryce L Shriver PPL Electric Utilities Senior VP/Chief Nuclear Officer PPL Susquehanna Michael D. Hill VP - Information Services Vijay Singh PPL Services VP - Risk Management PPL Services George T.Jones VP - Special Projects John F Sipics PPL Susquehanna VP - Asset Management PPL Electric Utilities David H.Kelley President Bradley E.Spencer PPLTelcom VP/COO -Western Fossil and Hydro PPL Generation

-SHAREOWNER INFORMATION i~; -Annual Meeting Lost Dividend Checks

-. ; Shareowners are invited to attend the annual meeting to be held on Friday, Dividend checks lost by investors, or those that may be lost in the mail,

-- April 25,2003, at Lehigh University's StablerArena in Bethlehem, Pa. The meet-'. will be replaced if the check has not been located by the 10th business ing will begin at 10 a.m. day following the payment date.

StoclkExchangeListings Transfer of Stock PPL ICorporation common stock is listed on the New York and Philadelphia Stock may be transferred from one name to another or to a new account Stocl k exchanges. The symbol is PPL. - in the name of another person. Please contact Investor Services regarding transfer instructions.

=Comnnon Stock Prices Dividends Lost Stock Certificates 2002 9High ;

Low - Declared - Please call the Shareowner Information Line or write to Investor Services 1 quarter Ist ::- - X~-$39.85 .S31.40 $.36 for an explanation of the procedure to replace lost stock certificates.

2nd qluarter 00~-; 39.95 28.97 .,36 -

_0':S:: 37.60 26.00 .36 DuplicateMailings

-3rd quarter 26.47 Annual reports and other investor publications are mailed to each investor -

-4th quarter o' ;:':'

C 36.26 account If you have more than one account, or if there is more than one Dividends investor inyour household, you may contact Investor Services to request 02001 I ;--: DM:- 0 h :: :- 0 - tXf-: High Low Declared that only one publication be delivered to your address.

tM $46.75 $33.88 $.265 1st qguarter FormnlO-K 2nd cluarter 62.36 -44.03 .265 PPL Corporation's annual report on Form 10-K, filed with the Securities and

-3rd quarter 56.50 30.99 .265 C_

Exchange Commissionis available about mid-March. Investors may obtain a 4th quarter 37.65 31.20 : .265 CJ copy, at no cost, by calling the Shareowner Information Line or by accessing thereportviathecompany'sWebsite.

-The company has paid quarterly cash dividends on its common stock in every cm year since 1946. The dividends declared per share in2002 and 2001 were Investor Services 0L $1.44 and $1.06, respectively. The most recent regular quarterly dividend paid For any questions you have or additional information you require about -I IL

-by the company was 36 cents per share, paid Jan. 1,2003. On Feb.28, 2003, the PPL Corporation and its subsidiaries, call the Shareowner Information Line, company increased its quarterly dividend to 38.5 cents per share (equivalent to orwriteto:

.$1.54 peryear), effecfve with the quarterly dividend payable April 1,2003,to Manager-InvestorServices holders of record on March 10, 2003. --

TWo North Ninth Street -

Allentown, PA 18101 Dividends co, The planned 2003 dates for consideration of the declaration of dividends by Internet Access -

the board of directors or its Executive Committee for the balance of 2003 are Registered shareowners can access their account information byvisiting May23, Aug.22 and Nov.21. Subjecttothe declaraton, dividends are paid on www.shareowneronline.com. For more information, visit our Web site at the first day of April, July, October and January. Dividend checks are mailed in www.pplweb.com or contact Investor Services via e-mail at advance of those dates with the intention thatthey arrive as close as possible invservApplweb.com. :

to the payment dates. The 2003 record dates for dividends for the balance of 2003 are expected to be June 10, Sept 10 and Dec. 10. Stock Transfer Agents and Registrars Wells Fargo Bank Minnesota, N.A.

Direct Deposit of Dividends Shareowner Services Shareowners may choose to have their dividend checks deposited directly 161 North Concord Exchange into their checking or savings account Quarterly dividend payments are South St Paul, MN 55075-1139 electronically credited on the dividend date, or the first business day thereafter.

PPL Investor Services Department Dividend Reinvestment Plan Shareowners may choose to have dividends on their PPL Corporation common -Dividend Disbursing Office and Dividend Reinvestment Plan Agent

'stock or PPL Electric Utilities preferred stock reinvested in PPL Corporation PPL Investor Services Department common stock instead of receiving the dividend by check.

Shareowner Information Line Certificate Safekeeping - 1-800-345-3085 Shareowners participating inthe Dividend Reinvestment Plan may choose to have their common stock certificates forwarded to the company for safekeeping.

PPL the PPL logo and PPL Project Earth are trademarks of PPL Corporation or an affiliate.

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CONTENTS 4 &5 About Continental Cooperative Services 6 &7 A Message From the Executive Committee and President & CEO ;

8-13 Year in Review g 14 Continental Cooperative Services Fact Sheet d 15 Continental Cooperative Services Board of DirectorsX 16 &17 Soyland Poxver Cooperative, Inc. Board of DirectorsX 18 Allegheny Electric Cooperative, Inc.X Board of DirectorsX 19 Financial Section Table of Contents S-20-45 2002 Allegheny Electric Cooperative, Inc.

Financial Review-X 46-62 2002 Soyland Power Cooperative, Inc.X Financial Review 3'

About Continental Cooperative Services LI I 11 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 25 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.

(CCS/Allegheny), the wholesale power supplier to electric cooperatives in Pennsylvania and New Jersey, and Illinois' Soyland Power Cooperative, Inc. (CCS/Soyland). CCS marks the first time two geographically non-contiguous generation and transmis-sion cooperatives 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 11 electric distribution Soyland Power cooperatives affiliated with CCS serve nearly one-third of the state's land Cooperative, Inc. Territory area across 44 counties. The 13 CCS-affiliated cooperatives in Pennsylvania 1. Adams Electric Cooperative 7. Menard Electric Cooperative own approximately 12 percent of the

2. Coles-Moultrie Electric Cooperative 8. Rural Electric Convenience state's electric distribution lines, span-

3. Eastern Illini Electric Cooperative Cooperative Company ning one-third of the Commonwealth in 41 counties. New Jersey's lone 4. Farmers Mutual Electric Cooperative 9. Shelby Electric Cooperative electric cooperative maintains roughly 5. Illinois Rural Electric Cooperative 10. Spoon River Electric Cooperative, Inc.

1 percent of the Garden State's total 6. McDonough Power Cooperative 11. Western Illinois Electrical Cooperative miles of line.

1.

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

3. Central Electric Cooperative, Inc. 7. REA Energy Cooperative, Inc. Cooperative, Inc.

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

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

5. New Enterprise Rural Electric 9. Sullivan County Rural Electric 14. Warren Electric Cooperative, Inc.

Cooperative, Inc. Cooperative, Inc.

c0?

:i~~~~~ A Message From the Executive and President &

o ~~~CEO During 2002, Continental Cooperative Services (CCS) once again demonstrated the wisdomn of generation and transmission (G&T) cooperatives working together through a strategic alliance.

Utilizing greater negotiating lever-age and efficiencies, CCS was able to achieve significantly lover prices for consumers of its affiliated electric distribution cooperatives than would have otherAise been possible.

Followving intense negotiations early in the year, newv power supply contracts wvere finalized wvith two companies CCS has worked wvith in the past - AmerenEnergy Marketing for the Illinois area and W~illiams Energy Marketing &

Trading for Pennsylvania and New Jersey. Both contracts, which run through the end of 2008, result in lower incremental purchased powver costs, reduce CCS's cost a ~~~~~risk and adgive organization some "breathing space" to consid-er building newv powver plants.

The successftil culmination of this effort showvs why two G&Ts' roughly 1,000 miles and a time zone apart -Harrisburg, Pa.-

based Allegheny Electric Cooperative (CCS/Allegheny) and Illinois' Soyland Powver Cooperative (CCS/Soyland)-

444 44 44 decided to join forces in March private power marketers if we just business for the betterment of 4..'44

'4'* >4' 2000. Simply put, in a deregulated worked together to take advantage cooperative consumers everywhere. 44 energy marketplace, the CCS con- of geographic and product diversi- Even better than this, they can also

4,4,,

cept represents the future - and ties. CCS - by operating in nvo establish strong bonds of friend- '44 survival - of electric cooperatives. time zones across three electric ship and teamwork. .4.4;.,

Many market watchers, in fact, reliability regions, with CCS/ Through vision and integrity, cJ' 4.4444 have warned that unless G&Ts Allegheny being a winter-peaking CCS wvill proactively identify and nationwide begin living a basic system and CCS/Soyland peaking manage risks inherent in our V 4.

electric cooperative operating prin- in the summer - does just this. business to provide reliable, V ciple - cooperation among coop- We firmly believe in the powver competitively priced electricity that eratives - they will not be able to of the CCS alliance. From our two maximizes value to those we serve.

survive in a vastly restructured full years of operation, we know By showing the power of "cooper-electric industry. These experts that electric cooperative directors ation among cooperatives," we will 4.44.

have also estimated that power from diverse backgrounds and continue to ensure a bright future a' 4' 4-.

supply cooperatives could be as regions can lay aside potential for consumers everywhere.

.4.

strong a market force as the largest rivalries and constructively handle 4'44' 4,44.44 4.' 444

'.4..,,',

4 '4,"' 444

?

444. .4 44 4.4, 444

.:,.,4.

4,4,4.4 44'44 444 K '.7 4 '444.4 4444 .

The CCS Executive Committee, from left to right: Lowell Friedline, at-large member; 44 4 Alston Teeter, vice chairman;James Coleman, secretary; David White,- chairman; "".444 4.444 Kathryn Cooper-Winters, treasu rer; Bradley Lu11dvig, at-largemember; -andFrank Betley, 2.

.4 president &' CEO. 44',

'44<444 44',.

'4444444<,

<1 '¶~:9",,~' 7;-xY ear Review

~~--~~"~'

~ """~~ Power Supply

~~~~. ~~~~~CCS entered 2002 examining

~~ ~~~

., ~~~~~ <'~~~~-'~~power supply possibilities detailed in a 240-page Integrated Resource Plan (IRP). The IRP provided a

~~j7',.

~~~~~~ technical and economic road map to help the board of directors answver

~~\K:~ ~-fi< two key questions:

-~~~~~w--.~~~~ 1. Should CCS build power

~~ -~~ ~ ,'.i ~ ~ ;'*-~~-W'~~~~

~ ~~ plants to meet the 50 percent of its

~~' ~ ~power

~ ,~~~ " requirements not being sup-plied by member-owvned facilities or should it continue to buy supple-

-~~T~~T~~ ~~ ~~ mental generation through contracts

- with other suppliers?

2. If CCS builds powver plants, what kind and what size should they

~~

~~'"

~ '~~ . ~~be

""- and when should they be built?

4 ~~~~~Drawving

~~~~~~~~~~~~~~~- upon updated energy

~~~~ ~~~rice data and insights garnered

~~~ ~~~~ ~from the U.S. Energy Information

~

4, ~ ~ ~ ' ~ ~Administration, it became clear early

~~~ A. ~~~~~~~~on that initial IRP recommendations 2 ~~~~~~~~~~favoring po'wer plant construction were not as attractive under revised market forecasts. As this evaluation was continuing, CCS received favor-

~~* ~~~-..', ~~~~~~. ~able pricing from separate Requests

~~~for

~~~~~ Proposals (RFPs) that had been

j~~ $~ ~~ '~' ~~'<"~--- ~~ issued in late 2001. The RFPs sought to provide all energy and capacity needs for CCS/Allegheny in western Pennsylvania starting on December 1, 2002 (when an exist-ing powver supply agreement wvith Allegheny Power ran out) and the Illinois needs of CCS/Soyland beginning on January 1, 2003, when a deal with AmerenEnergy Marketing (Ameren) expired.

W~hile the original RFP schedule anticipated having newv power supply contracts in place by summer, many

and capacity wholesale power rates for affiliated needs in electric distribution cooperatives in Illinois and also Illinois, New Jersey and assume fuel Pennsylvania.

cost responsi- "Fuel diversity" affords CCS bilities for better balance and increased lever- 4 CCS/Soyland's age in a competitive energy market generating easily shaped by national and global

'A plants' events. Crude oil prices, natural gas WEM&T will supplies, drought, even market jit-provide all sup- ters over regional power crises all plemental affect how electricity markets oper-cooperative ate and significantly impact power

[~* -, energy and prices.

> E < capacity needs During 2002, CCS's diversified in Pennsylvania generation portfolio played a key

-and New Jersey role in helping the organization

, (approximately negotiate attractive wholesale power 515 megawatts supply arrangements with Ameren of the bids contained competitive at present) As a result, power sup- and WEM&T for all CCS supple- ,

prices that were likely to last only a ply arrangements for affiliated elec- mental energy needs in Illinois and short time. The board directed staff tric distribution cooperative delivery Pennsylvania/New Jersey, respec-to quickly lock in new power supply points within the Penelec, Met-Ed, tively. Here is a look at CCS's arrangements that extended for a Jersey Central Power & Light and power plant portfolio:

longer rather than shorter term (to PPL Electric Utilities zones (roughly Alsey Generating Station:

provide greater rate stability for 450 megawatts) - previously set to Owned by CCS/Soyland and oper-electric cooperative consumers). expire on March 31, 2006 - were ated by CCS staff, the Alsey Following a period of intense extended nearly three years, with Generating Station is a five-unit, negotiations, advantageous new another 65 megawatts of load in the natural gas-fired peaking complex power supply arrangements were Allegheny Power zone added on located in Scott County, Ill., near signed with Ameren for the Illinois December 1, 2002. the village of Alsey. The facility area and Williams Energy Marketing entered service in July 1999 and has

& Trading (WEM&-T) for the entire Generation a nameplate rating of 125 Pennsylvania/New Jersey region. A diverse mix of self-owned megawatts. (The units can also Both contracts continue until the generation coupled with demand- operate on fuel oil, if necessary) end of 2008, a move that brings all side man-of the organization's supplemental agement power contracts into synch and capabili-secures a reasonable rate for power ties pro- ,,,

'-.44 over a relatively long period. vide the CCS has worked with both corner- 1 companies in the past. As noted, '.'- .@

Ameren previously provided power CCS to .4 supply and wheeling services for fulfill its CCS/Soyland. WEM&T had been core mis-serving roughly 87 percent of CCS/Allegheny's supplemental achieving power supply requirements under a stable five-year agreement signed in 2001. and Under terms of the new con- afford-tracts, Ameren will supply energy able 9

'% 4

I'll., I I 11 Alsey Station operates in con- federal hydroelectric projects located junction with a private power com- along the Niagara and St. Lawrence pany when it is more cost-effective rivers in upstate New York. Both are to run the combustion turbines operated by the New York Power than purchase power from other Authority (NYPA).

providers. It is designed to run Pennsylvania receives an alloca-during periods of peak electric use tion of 47.9 megawatts (MW) from

,InSeptember, 'th'e CCS Boaj - but no more than 937 hours0.0108 days 0.26 hours 0.00155 weeks 3.565285e-4 months . the Niagara Power Project and 20.3 hiSpukerng ' er '...'..

e.{*:. s; of DiDirectors honored one of its . The hour figure is based on U.S. MW from the St. Lawrence Power legal advisers' Illin6is'attorney Environmental Protection Agency Project. Out of this, CCS/

00 rs ?ois-a.ttone..-.s...

,:,s :iz limitations which state that the Allegheny and its member electric Frehch Fiaker' with the c'operas facility can emit no more than 250 cooperatives in the Commonwealth

.'tives Distinguished Service Awva tons of nitrogen oxide annually. receive nearly 42 MW (41 MW

,Anicon of the electric cooperatin Pearl Station: A 22-megawatt, from Niagara and 1 MW from St.

programn, Fraker had served as 5 coal-fired baseload power plant Lawrence). An additional 2 ME 5..counsel' to CCS distribuition aiffihi located in Pike County, Ill., along from the projects is allocated to Eastern IlhniElectric Cooperativ the Illinois River near the town of Sussex REC, a CCS affiliated electric gand its predecessor entities since; Pearl, Pearl Station - owned by distribution cooperative in New 1942. He helped to incorporate CCS/Soyland and operated by CCS Jersey.

CCS ember Soyland Power staff- first wvent on-line in 1968. CCS/Allegheny handles all con-Cooperative, Inc.: i 1963 and re In fiscal 2002, Pearl produced 154 tracts, billing and transmission

-resented the gene and tra million kilowatt-hours of electricity. arrangements for Pennsylvania util-00isoncoertv in official'an'4 Other Illinois Peaking Plants: ities that receive NYPA power in its

-'unofficial'capacities for the next. During times of peak electricity role as state NYPA Bargaining Agent.

years 7K;/<iXi& ei l; demand and system emergencies, Raystown Hydroelectric CGS' vishes French the best CCS/Soyland can call on a 20- Project: CCS/Allegheny's Raystown his well-earned retirement.eox-- >a megawatt oil-fired combustion tur- Hydroelectric Project, William F.

bine based at Pearl Station and nine Matson Generating Station, is a megawatts of diesel units located at tvo-unit, 21-megawatt, run-of-river Pittsfield in Pike County, Ill. hydropower facility located at Typically, both facilities run less Raystown Lake and Dam in than 200 hours0.00231 days 0.0556 hours 3.306878e-4 weeks 7.61e-5 months per year. Huntingdon County, Pa. Due to New York Power Authority: the effects of record drought Since 1966, CCS/Allegheny has impacting the Mid-Atlantic region, purchased power generated by Raystown in fiscal 2002 provided

- r. , t~~~~~~~~

~

thinking ,,GG and~.its 25 affih- compet;~~=ition~'~ in all~~' the states~I, CSis '! its genrain asesA

, ", , I/_. -.~.-,t-4 ' ,,

~"opeiio"an cdpeain" 'nt o' laeri ci~aiA' a addrssin th unctaitiesofI

.arendt mutually , ,, ,,, .," ,.,~

exclusive terms. ltl , ~., robus',1~t competitive retail electrici".

" ,r, ~,, ~,~ -~ty,,%;'t v~ copttvxakepaentby 2,, >

,- _111It11- 11j.- -~~~~'V , ..f .. ,, _. .' /

,/ 4/ / 1. I I ,

, ",11, ;I"I .. - 1~I

,'more ,th- c'ap,-ble of-accomplishing~-. .so tdower;

1. .. 1,I -, -,,,, I ".

for't 1A . ,

. However_,,;*.,, ,~t;~'there hasV , n'ua a-ie iaigcmlx2 I I

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ther -ma~ misin ~~~~;. ro dhg ~~ b 'e,,'ny iiiedmakein-b eec,-,lcaedinScttCont Il;eain t,~~~~,~~;~~~~.

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" ,I er-c w, t:- a reiil 7I- (E,)ii> <aai-GS/isriitii' rm Ic fflits a aIxe sorc co P'url", 4.,-.4-l fsu.owratanatrctv coprtie evie eri"re t 'ae.., n lini

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fore ;-. ...',,/ -ivat'e,, p Ilinois lect'rc cooerativs can

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I'll,,-~~~~~~~~~~~~~~~~ ,t ~ ~ ~ ~ ~ A , '.

~" ,.safeguard:~erl 200 afe tedCaIfoni ~,,~:. , -

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"generatio inc- maidrke, ~ '.- a grace~-,,~'

-f' '-,-,-,!survners. hSine EG" s usies -rein toelcted ~- o swch."

'A", ~,Js 44, period " that. _:- , gives

.- - ,..t"Itt,,"":,~`'~,and.

reguators:%

_ make mone th ak'o largeIt..,cor, .-1 "-

t,;-, ,,.., ,!~ _, _. I 1-1 11 't 4. -,~ "'A" -,

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4 ',A ' 4 ,,'~~~~~ _ ,,~ - ,,' 4 ',-t

".,~~

,~~,co "' 4 , _.,_,. it'cc a 'tn ~ :

Movire power',-isupl reoucs:2 Mthan,~"_ vmerycopetiive geneation prc -' . ~ ~ "

to relitnhiv int the' mantai fo an, alternate sup~;,lier to1

' - A , " , '- .-

- re. "Iu -, , . a ete deal Thi" fav r--

offer.,~V.":.'-~,

agains thm ntribuing in.log Oivchallengiitle head-rn 'and A ~ ,,,,C'a for customer di-i' oranigza-tffl eloc i'dlo eletri6g~'iratioh prices. S 4, 4 ~ ~ ~ ~ up ~ ~ reiutrn,_

tional: ," ..

'budget,%~ cu-z , ,-:,__, .:,,~..

_"I. I'

-. , - ,4~'`-,~"

, t!

woleal power price _

Whie ting and foiniig al--.ics, ll

--. ~ -. " ~ , . ~ ~, - _______I_____________,4'~_

- t. A. A44 .". , 4,

I I 11 SSES provided 1.71 billion kilowatt-hours of electricity at delivery to Pennsylvania and New Jersey electric cooperatives. The capacity factor of SSES Unit 1 wvas 82.0 percent; Unit 2 was 94.3 percent. This works out to an average annual composite capacity factor for the facility of 88.2 percent.

Both Unit 1 and Unit 2 run on a 24-month refueling cycle.

Load Management: In 1986, CCS/Allegheny, along with CCS affiliated distribution cooperatives in Pennsylvania and Newv Jersey, launched the Coordinated approximately 59.7 million kilowatt- Load hours at delivery, 26 percent below Management projections based on historic average / System water flow. Plant availability of (CLMS) to 99.6 percent wvas recorded, signifi- reduce cantly above the small hydro indus- demand peaks try average. at cooperative CCS staff operates the hydro substations.

project in close cooperation with the By shift-Baltimore District of the U.S. Army ing electricity Corps of Engineers. The Corps con- use of resi-trols water releases from Raystown, dential water the largest man-made lake in percent of the Susquehanna Steam heaters, electric thermal storage Pennsylvania. Electric Station (SSES), a 2,200- units, dual fuel home heating sys-Susquehanna Steam Electric megawvatt, two-unit nuclear powver tems and other special appliances Station: CCS/Allegheny owns 10 plant located in Luzerne County, from peak use periods to times of Pa. PPL lesser demand, CLMS improves sys-Susquehanna, tem efficiency, cuts costly demand a division of charges cooperatives must pay for Allentown, purchased power and reduces the Pa.-based PPL need for new generating capacity.

Corporation, CLMS has also been used during owns the summer peaks to reduce CCS capac-1*.X--bremaining ity obligations under procedures 90 percent established by the PJM and operates Interconnection.

' the boiling In 2002, CLMS reduced co-

_ water reactor operative purchased power costs jfacility. by $5.4 million, bringing total In 2002, power cost savings achieved since this 10 per- December 1986 to more than cent share of $64 million. Currently, 195

2 22 222222

/42 substations are equipped for CLMS and 44,900 load control receivers '

2.242.2/ 2

,4244$

'242.42 222 have been installed on appliances, '2 2'24 mostly water heaters, in the 2

homes of volunteer cooperative 4*"

'4'224224 consumers.

24' ' 2 CCS/Soyland employs a System .22 22.24,2.4 Control and Data Acquisition 24 (SCADA) system to monitor load "24 2224 levels, transmission facilities and 2' "'24*2 4' 222/2224 generating plant performance. 412 Through SCADA, real-time deci-iand politically~positlve',',, program '..:,. -.<: ess expensive gnoptropton '.'

'222422' 2222 4 sions about generation or purchased 2 422242222

.>Jla'unched by CCSd 2002. - renewable'ner'gy blen dcomprised 44 22224,4, power requirements and consumer 22,2242

.EcoEnergy uses grenticktf 50percentwsd v and 22222A94 load reductions can be made based 4h-he 'green energy'attributes of e ec-, 50p"e-iefthydrovpoiver'ge' '429 on forecasts, schedules and actual 2'22 system performance. This decision- 5' tricity (not actual urs at CCS/Allegheng's Raystox n -.

making capability is key in today's pouced inane mo r X 222/

""'42

'222442$

market-based electric utility industry. S

- fnendly lvay. Since the tickets do not . Any net margins from the green

.-5g¢.r i/S¢g>;

'St42 ' ./. S - ' . - S2., 'f.'~" " '

As part of an energy supply ,require physical scheduling;, trans- X~powver products 5will be split evenly ,.7a .

agreement with a local private powver -- .mission and delivery arra.ngements betwveen CCS and affliated electrc7 ,

company, remote terminal units or, importantly, any commitment to .t¢ distributidn iooperatives i propor-in, 2222*22.2 have been installed on 11 of the ;,-gencration onvnership, no changes in to each cooperative's'sales.,,,,;

.tion. 'U

'j -? i ',-'.' .' , o 2`S ¢¢¢¢.",,iSS' ¢'

cooperative's interconnection points .Coer sup- ., -. K , CCS's half 11v'i 2.2/494 22.222.4.

with another private power compa- "ply contracts are :- - be funneled into .22.42,222422 2 2 ny. These units, connected through 42' 2442 the SCADA system, allow CCS to 22A .

.4 /22 2422 furnish real-time load signals from 22 E. o '=coEnergy. - .2..22229 one control area to another as a way

-.'tions, C S'i',0.i=l, k S ~tpr's' to help minimize energy imbalance 2.2 442422 p~artnern~ng wit in2"ftre invest-costs incurred under transmission W,.A~ayne,'Pa.-based ut . -ment potential green generation.',

tariffs.

.eEnergy, Inc. (CEI), a renew~ able - .:,=-v The easy-to-implement, pay-as- "'22 LitigationDecks Cleared Y,marketer recognized by the environ-y:- 'you-go lprogram'ets"CCS afflliated. >4<4?

'22.2242444

'922' 4222 Through determined talks con- <mntal c'ommunity.

'.2 ~~~~~~ CEI a d~~~sde en dstributoopr perce~n.u,'t ~o,,n-c~ooperatives rive market 100 2S' 'Y" 2~~

ducted by CCS/Soyland directors, ,purchasing wid - produced 2 'ewable generaton to '4

'42,2 22 2222.242 2 42 2 22 legal settlements were reached dur- by P'ennsylvania wind farms andsell-by 2 2 m'~ 22~ 2 'their consumer-members at a retal thir/ b" 2 42229 ing the year with eight former f ing it to retail customers, including 'price below that of the nation's top 2

'4' 24 *9 22 4222 42 CCS/Soyland member distribution state uniiversities a C m -e powver sulr 'moranl,' 2.22

'22.4 cooperatives. The eight systems 2 2wealt2 The : p 2' the programi is consistent wvth ,feder- 2(22222k

'222, 2244 had filed lawsuits over issues relat- "6.lso'looiga buying powver from ...22a1 eland stat initiatives to "grow,'2' 2

'2222 4 222422 2 2S. .i ' Y .', ,; Y , 2 r=.

2 . ;

2 ,/. y' 2 :s, . ., , 2, ed to their previous withdrawal ¢i Y¢ ? s?

an Illinois wind project scheduled to renewable energy.resources as well 2- 422 from the generation and transmis- tcomne o6n-lin'e in 2003 'and investi- -:'. as core cooperative business values...,h 2 24""4? 42 sion cooperative. 22<4 Kgating various wind generation 9Since 2,,.t,;,<ji alternate electric generation ^.', .

As 2002 closed, only one lawsuit .2224(4 opportunities in;New-Jersey.S' 2 ' 222 ppliershave n s much2 2--'.... 4 2222

$422 42 involving a former CCS/Soyland 22 4

' Y. ; -In'praticetCCS Wvill buyiwind interest i 2grural consumers-member cooperative remained 222422 energy. tickets'from.CEI to'create'a 2 CCS will offer them a green power active. In that case, the Federal '2 42.22 Energy Regulatory Commission ;>100 percent wind power product. ,f~5/choice itself. .,.;,2aX 2. Si-s Z?> ,42 has already found in favor of SCCS 22 i fflate letic S ;. itibutio- .- > Z -o;-> f<$'>y8 < ;> / < < ;?:

22i~i.

2 2'.2 ~s t x, 22,

?, ;; 22 442242 Yh' n ,; .

22 22 "2 2 2 CCS/Soyland. 13

.242.2 4.24222/2 222222222

Continental Cooperative Illinois Rural Electric Cooperative, Winchester, Ill.

Services Fact Sheet McDonough Power Cooperative, Macomb, 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, Newv Jersey fired peaking facility in Scott Shelbyville, Ill.

and Pennsylvania County, Alsey, Ill. Spoon River Electric megawvatt 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 670 miles of transmission lines Sussex Rural Electric

588 miles of transmission Cooperative, Inc., Sussex, N.J.

Governance: 25-member board lines in Illinois of directors (one director repre-

42 miles of high-voltage Pennsylvania:

senting each affiliated electric transmission lines in Adams Electric Cooperative, Inc.,

distribution cooperative) Pennsylvania Gettysburg, Pa.

40 miles of other transmis- Bedford Rural Electric NERC Operating Regions: sion lines in Pennsylvania Cooperative, Inc., Bedford, Pa.

Mid-Atlantic Area Council operated at various voltages Central Electric Cooperative, (MAAC) in conjunction with member Inc., Parker, Pa.

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

East Central Area Reliability Other facilities Newv Enterprise Rural Electric Coordination Agreement

150 power delivery points in Cooperative, Inc., New (ECAR) Illinois Enterprise, Pa.

200 power delivery points in Northwestern Rural Electric Total 2002 System Peak Load: Pennsylvania, one in New Cooperative Association, Inc.,

1,020 megawatts Jersey Cambridge Springs, Pa.

Load management system REA Energy Cooperative, Inc.,

Generation and with maximum peak reduc- Indiana, Pa.

Transmission Facilities tion capabilities of 90 Somerset Rural Electric megawatts Cooperative, Inc.,

417 megawatts of generation Somerset, Pa.

263 megawatts of nuclear, coal Affiliated Electric Sullivan County Rural Electric and hydro baseload generation Distribution Cooperatives Cooperative, Inc.,

- 220 megawatts nuclear base- Forksville, Pa.

load (Susquehanna Steam Illinois: Tri-County Rural Electric Electric Station, Luzerne Adams Electric Cooperative, Cooperative, Inc.,

County, Berwvick, Pa.) Camp Point, Ill. Mansfield, Pa.

- 22 megawatts coal-fired Coles-Moultrie Electric United Electric Cooperative, baseload (Pearl Station, Pike Cooperative, Mattoon, Ill. Inc., DuBois, Pa.

County, Pearl, Ill.) Eastern Illini Electric Valley Rural Electric Cooperative,

- 21 megawatts hydro base- Cooperative, Paxton, Ill. Inc., Huntingdon, Pa.

load (Raystowvn Farmers Mutual Electric Warren Electric Cooperative, Hydroelectric Project at Company, Geneseo, Ill. Inc., Youngsville, Pa.

Michael Carls Menard Electric Cooperative Petersburg, Ill.

'4 Robert Gracey '4' New Enterprise Rural Electric 4' "So, Cooperative, Inc.

CCS Board of Directors New Enterprise, Pa.

0' James Harteis David White David Cowan REA Energy Cooperative, Inc.

Chairman Adams Electric Cooperative, Inc. Indiana, Pa.

Rural Electric Convenience Gettysburg, Pa.

Cooperative Company David Bergland Auburn, Ill. Wayne Hillegass Spoon River Electric Bedford Rural Electric Cooperative, Inc.

Alston Teeter Cooperative, Inc. Canton, Ill.

Vice Chairman Bedford, Pa.

Tri-County Rural Electric Curtin Rakestraw 11 A555',SS Cooperative, Inc. George (Bud) Francisco Jr. Sullivan County Rural Electric Mansfield, Pa. Central Electric Cooperative, Inc.

Cooperative, Inc. Forksville, Pa. *'"*5 lames Coleman Parker, Pa.

Secretary Jim Henderson Shelby Electric Cooperative John McNamara Sussex Rural Electric -

'-.4'S Shelbyville, Ill. Claverack Rural Electric Cooperative, Inc. *25, 45,'.-

Cooperative, Inc. Sussex, N.J.

Kathryn Cooper-Winters Wysox, Pa.

Treasurer Stephen Marshall Northwestern Rural Electric Mark Degler United Electric Cooperative Association, Inc. Coles-Moultrie Electric Cooperative, Inc. 5'S44

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t Cambridge Springs, Pa. Cooperative DuBois, Pa.

Bradley Ludwig At-Large Mattoon, Ill.

Murray Madsen Robert Holmes Valley Rural Electric 2 A; Eastern Illini Electric Cooperative Farmers Mutual Electric Cooperative, Inc.

Paxton, Ill. Company Huntingdon, Pa.

Geneseo, Ill.

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Somerset, Pa. Winchester, Ill.

Robert Willis William Pollock Haven Vaughn Western Illinois Electrical

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. ' I finaciaC Cotents ZO-45 2002 Allegheny Electric Cooperativc7 Inc, Financial Rev'ieW "O'°"'46-620 2002 SoYland Cooperative, Inc-Financial RevieWx,

Allegheny Electric Cooperative, Inc.

Accountants' Report and 44 Financial Statements December 31, 2002 and 2001 I

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55 TABLE OF CONTENTS 21 INDEPENDENT ACCOUNTANTS' REPORT FINANCIAL STATEMENTS 22 & 23 Balance Sheets 24 Statements of Income 25 Statements of Member Equities (Deficits) 26 Statements of Cash Flows

'5 V 27-45 Notes to Financial Statements

'5 V 20

225 North Water Street, Suite 400 P.O. Box 1580 cM Decatur, IL 62525-1580 217 429-2411 Fax217429-6109 bkd.com Independent Accountants' Report 4-,

Board of Directors Allegheny Electric Cooperative, Inc.

Harrisburg, Pennsylvania We have audited the accompanying balance sheet of Allegheny Electric Cooperative, Inc.

(Allegheny) as of December 31, 2002, and the related statements of income, members' equities (deficits), and cash flows for the year then ended. These financial statements are the responsibility of Allegheny's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Allegheny Electric Cooperative, Inc. as of December 31, 2001, were audited by other accountants whose report dated March 22, 2002, expressed an unqualified opinion on those statements. ,.,

We conducted our audit 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 4.-Xd.,,,

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 audit provides a reasonable basis for our opinion.

In our opinion, the 2002 financial statements referred to above present fairly, in all material respects, .I ,,,t W,,,t the financial position of Allegheny Electric Cooperative, Inc. as of December 31, 2002, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

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Allegheny Electric Cooperative, Inc.

Balance Sheets December 31, 2002 and 2001 (In Thousands)

Assets 2002 2001 Electric Utility Plant, at cost In service (see Note 2) $ 737,288 $ 728,656 Less accumulated depreciation (663.938) (654.744) 73,350 73,912 Construction work in progress 9,958 3,837 Nuclear fuel in process (see Note I and 3) 14.175 12,709 Net electric utility plant (see Note 1, 2 and 3) 97.483 90.458 Investments and Other Assets Investments in associated organizations (see Note 4) 972 957 Other investments (see Note I and 6) 39,385 36,525 Notes receivable, members, less current portion (see Note 5) 106 121 Non-utility property, at cost (net of accumulated depreciation of

$4,149 in 2002 and $3,897 in 2001) 4,267 4,297 Other non-current assets 191 574 44.921 42,474 Current Assets Cash and cash equivalents 16,991 11,422 Accounts receivable, members (see Note 1) 14,336 13,139 Other receivables 1,035 1,488 Inventories (see Note 1) 4,861 4,206 Other current assets 3,282 2,038 Total current assets 40.505 32.293 Restricted Investments (see Note I and 11) 15.315 18.261 Deferred Charges (see Note I and 7)

Capital retirement asset 167,289 201,268 Other 1.746 2.779 169,035 204.047 A=

See Notes to FinancialStatements.

?. g Members' Equities (Deficits) and Liabilities f.'

2002 2001 Members' Equities (see Note 1)

Membership fees $ 3 $ 3 Patronage capital 34,122 34,122 Donated capital 38 38 Retained earnings (deficit) (26.967) (30.041)

Total members' equities 7,196 4,122 Long-Term Debt (see Note 8) 261.377 293.123 Current Liabilities Current installments of long-term debt 33,246 35,395 Accounts payable and accrued expenses 22,220 13,485 Accounts payable to affiliated organizations 60 441 Total current liabilities 55,526 49.321 Other Liabilities and Deferred Revenue Accrued nuclear decommissioning (see Note 1) 37,550 34,690 j.

Accrued decontamination and decommissioning of nuclear fuel 925 1,233 Deferred income tax obligation from safe harbor lease (see Note

'I,

13) 3,073 3,395 Other deferred revenue (see Note 14) 1,612 1.649 43.160 40.967

$ 387,533 23

X

Allegheny Electric Cooperative, Inc.

Statements of Income Years Ended December 31, 2002 and 2001 (In Thousands) 2002 2001 Operating Revenues $ 155,286 $ 150.574 Operating Expenses Operations Purchased capacity and energy costs 52,388 46,152 Transmission Operation 18,524 20,700 Maintenance 136 26 Production Operation 22,615 25,742 Maintenance 7,959 8,859 Fuel 7,762 8.731 109,384 110,210 Depreciation 3,644 3,500 Amortization of capital retirement asset 33,979 35,842 Administrative and general 4,853 6,614 Property and other taxes 706 832 152.566 156.998 Operating MNargin Before Interest and Other Expenses 2,720 (6,424)

Other Expenses Interest expense 951 1,247 Other deductions, net 1.056 1.480 2,007 2.727 Operating Margin 713 (9,151)

Non-operating Margins Net non-operating rental income 1,199 1,248 Other income 17,900 Interest income 797 1,590 Allowance for doubtful accounts - non-operating (991)

Other 365 433 Net Income S 3,0 See Notes to FinancialStatements.

Allegheny Electric Cooperative, Inc.

Statements of Members' Equities (Deficits)

December 31, 2002 and 2001 (in Thousands)

Total "'.9' '9 Other Members' Membership Donated Patronage Equities Equities Fees Capital Capital (Deficits) (Deficits)

.X~9 Balance, January 1, 2001 $ 3 $ 38 $ 34,122 $ (41,070) $ (6,907)

Net income _ . - 11,029 11,029

9999.9 Balance, December 31, 2001 3 38 34,122 (30,041) 4,122 :99^99 Net income _ - 3.074 3.074 e 9499 Balance, December 31, 2002 $ -a $ - 3as $ 3 $ 2,97 $ 7,19j 6

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I .1 Allegheny Electric Cooperative, Inc.

Statements of Cash Flows December 31, 2002 and 2001 (In Thousands) 2002 2001 Operating Activities Net margin $ 3,074 S 11,029 Items not requiring (providing) cash Depreciation and fuel amortization 9,587 10,357 Amortization of deferred charges and deferred revenue 33,979 35,716 Gain on sale of other investments (233)

Change in Accounts receivable, members (1,197) 11,361 Other receivables 453 5,819 Inventories (655) (591)

Other current and non-current assets (873) (668)

Accounts payable and accrued expenses 8,735 (9,679)

Accounts payable to affiliated organizations (381) (977)

Other liabilities and deferred credits 3.226 3.102 Net cash provided by operating activities 55,948 65,236 Investing Activities Additions to electric utility plant and non-utility property, net (16,582) (9,889)

Payments received on notes receivable, members 12 27 Purchase of restricted investments (18,261)

Purchase of other investments (2,860) (21,678)

Proceeds from sale of restricted investments 2,946 Proceeds from sale of other investments 21.363 Net cash used in investing activities (16.484)

Financing Activity - Principal payments on long-term debt (33,895)

Net Increase (Decrease) in Cash and Cash Equivalents 5,569 (12,020)

Cash and Cash Equivalents, Beginning of Year 11.422 23,442 Cash and Cash Equivalents, End of Year _=UA Supplemental Cash Flows Information Interest paid $ 834 S 1,335 Income taxes paid - 1,481 See Notes to FinancialStatements.

Allegheny Electric Cooperative, Inc.

Notes to Financial Statements December 31, 2002 and 2001 Note 1: Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Allegheny Electric Cooperative, Inc. (Allegheny) is an 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 electric cooperative borrowers by RUS. Allegheny is a generation and transmission cooperative, providing power supply to 14 members that are electric distribution cooperatives providing electric power to consumers in certain areas of Pennsylvania and New.

Jersey. Allegheny extends unsecured credit to its members. Allegheny's primary operating asset is its 10 percent undivided interest in the Susquehanna Steam Electric Station (SSES), a 2,200 megawatt, two-unit nuclear power plant, co-owned by a subsidiary of PPL Corporation (PPL).

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

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

In accordance with FERC guidelines, Allegheny also maintains its accounts in accordance with Statement of Financial Accounting Standards No. 71, Accountingfor the Effects of Certain Types ofRegulations.

Deregulation On December 3, 1996, House Bill No. 1509, Pennsylvania's "Electricity Generation Customer Choice and Competition Act" (Act No. 138 of 1996) was signed by the Governor of Pennsylvania, with an effective date of January 1, 1997. This Act enabled retail electric customers, including consumer members of Pennsylvania's 13 electric distribution cooperatives, to choose the power supplier, or generator, from which they buy electricity. Allegheny management believes the Act will not significantly affect Allegheny's operations or its ability to recover its costs through the future rates charged to members.

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Allegheny Electric Cooperative, Inc.

Notes to Financial Statements December 31, 2002 and 2001 The Financial Accounting Standards Board (FASB) Emerging Issues Task Force (EITF) has issued EITF Issue No. 97-4, Deregulation of the Pricing of Electricity - Issues Related to the Application of FASB Statement No. 71, Accounting for the Effects of Certain Types of Regulation, and No.

101, Regulated Enterprises - Accounting for the Discontinuation of Application of FASB Statement No. 71. EITF No. 97-4 provides guidance for determining when an entity should cease applying SFAS No. 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 No. 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.

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.

> Electric Utility Plant Electric utility plant is carried at cost. Depreciation of electric utility plant is provided over the estimated useful lives of the respective assets on the straight-line basis, except for nuclear fuel, as follows:

Nuclear Utility Plant Production 39 years Transmission 2.75%

General plant 3% - 12.5%

Nuclear fuel Heat production Non-Nuclear Utility Plant 3% - 33%

Maintenance and repairs of property and replacements and renewals of items determined to be less than units of property are charged to expense. Replacements 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.

28 28

Allegheny Electric Cooperative, Inc.

Notes to Financial Statements December 31, 2002 and 2001 Nuclear Fuel Nuclear fuel is charged to fuel expense based on the quantity of heat produced for electric generation. Under the federal 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.

Other Investments Debt and equity securities for which Allegheny has no immediate plan to sell but that may be sold in the future are classified as available for sale and carried at fair value.

Realized gains and losses, based on the specifically identified cost of the security, are included in net income.

Cash Equivalents Cash and cash equivalents consist of bank deposits in federally insured accounts and temporary investments. 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.

Allegheny's cash and investments are 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.

Accounts Receivable and Notes Receivable Accounts receivable are stated at the amount billed to members. Accounts receivable are due in accordance with approved policies. An allowance for doubtful accounts has not been recorded as all accounts receivable are considered fully collectible.

Notes receivable are stated at their outstanding principal amount. An allowance for uncollectible notes has not been recorded as all notes receivable are considered fully collectible.

29X

Allegheny Electric Cooperative, Inc.

Notes to Financial Statements December 31, 2002 and 2001 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.

Restricted Investments Allegheny was required by the RUS to establish a trust account for the proceeds from the settlement of litigation (See Note I 1). 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. Restricted investments consist of interest bearing sweep accounts and are stated at market.

Patronage Capital and Other Margins and Equities (Deficiencies)

Allegheny had established an unallocated equity account, Other Equities (Deficits), as a result of charges against income. These charges against income were recorded as deficits in an unallocated equity account because the amount is not allocable to Allegheny's members. Subsequent net income recognized by Allegheny is required by RUS to be used to reduce the deficit.

Income Taxes Deferred tax assets and liabilities are recognized for the tax effects of differences between the financial statement and tax bases of assets and liabilities. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.

Cost of Decommissioning Nuclear Plant Allegheny's portion of the estimated cost of decommissioning SSES is approximately $104 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, 2002, and 2001 were $1.5 million and $1.4 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, 2002, and 2001 was $37.6 million and $34.7 million, respectively.

) -4 Allegheny Electric Cooperative, Inc.

Notes to Financial Statements December 31, 2002 and 2001 Revenue Recognition Revenue from the sale of electricity to members is recorded based on contracted power use.

Impairment of Long-Lived Assets Allegheny 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 2002 and 2001, no such circumstances were noted.

Change in Accounting Period Allegheny 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.

A 24 Note 2: Electric Utility Plant in Service A

2002 2001 (Inthousands)

Nuclear Utility Plant Production $ 547,481 $ 543,121 Transmission 41,570 41,570 General plant 1,314 1,301 Nuclear fuel 136,986 132,722 727,351 718,714 Non-Nuclear Utility Plant 9.937 9,942 Total $ 737,288 $ 728,656

Allegheny Electric Cooperative, Inc.

Notes to Financial Statements December 31, 2002 and 2001 Note 3: Susquehanna Steam Electric Station Allegheny owns a 10 percent undivided interest in SSES. PPL owns the remaining 90 percent. 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 $737

'A million and $729 million as of December 31, 2002, and 2001, respectively. Allegheny's share of anticipated costs for ongoing construction and nuclear fuel for SSES is estimated to be approximately $70.5 million over the next five years. Allegheny receives a portion of the total SSES output equal to its percentage ownership. SSES accounted for approximately 65 percent and 67 percent of the total kilowatt-hours sold by Allegheny during the years ended December 31, 2002, and 2001, respectively. The balance sheets and statements of operations reflect Allegheny's respective share of assets, liabilities and operations associated with SSES.

Note 4: Investments in Associated Organizations 2002 2001 (Inthousands)

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 $ 600 Other 372 357 W 972 $= 957 Allegheny is required to maintain these investments pursuant to certain loan and guarantee agreements. Such investments are carried at-cost.

Note 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 (3.35% and 3.95% as of December 31, 2002 and 2001, respectively) and mature on March 31, 2009. Notes receivable from members were

$123,000 and $148,000 as of December 31, 2002 and 2001, respectively.

32 K 1

Allegheny Electric Cooperative, Inc.

Notes to Financial Statements December 31, 2002 and 2001 Note 6: Other Investments Other investments consist of the following as of December 31, 2002 and 2001:

December 31, 2002 Gross Gross

4, Unrealized Unrealized Fair Cost Gains Losses Value Decommissioning Trust Fund A:

Cash $ 139 $ - $ - $ 139 U.S. Government securities 11,572 951 12,523 Corporate bonds 3,305 392 3,697 Corporate stocks 2,094 (546) 1,548 '.4'.

17,110 -

1,343 (546)

NRC mandated Decommissioning Trust Fund B:

Cash 493 493 U.S. Government securities 6,977 401 7,378 2j Corporate bonds 5,202 491 5,693 Other obligations 1,480 84 1,564 Common stocks 4,274 241 4.515 1,217 x Debt Service Reserve Fund -

U.S. Government securities

$ 37,371 $ 2,6 $ (546) $ 39,385

4 '4

"'-4' 33

I I Allegheny Electric Cooperative, Inc.

Notes to Financial Statements December 31, 2002 and 2001 1i December 31, 2001 Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value 1

Decommissioning Trust Fund A:

Cash $ 149 $ - $ 149 U.S. Government securities 8,883 332 9,215 4 Corporate bonds 5,144 261 5,405 Other obligations Corporate stocks 2,144 (213) 1,931 16,320 593 (213)

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 S. 3441 $ (213) S r

34

Allegheny Electric Cooperative, Inc.

Notes to Financial Statements December 31, 2002 and 2001 4- -.*

'44$ 44

,4, .- 4-4 Note 7: Deferred Charges Deferred charges consist of the following regulatory assets as of December 31, 2002, and 2001.

2002 2001 Capital retirement asset $ 167,289 $ 201,268 Accrued decontamination and decommissioning of -4 ,

nuclear fuel 1,628 1,917 Low-level radiation waste facility costs _ 599 Safe harbor lease closing costs 118 133 Preliminary surveys - 130

$ 169.035 $ 204,047

.4 -4' Based on membership agreements signed by the 14 member distribution cooperatives on March 29, 1999, with an effective date of January 1, 1999, a portion of the SSES impairment writedown, which took place in 1998, has been recognized as a regulatory asset, referred to as the capital 44 retirement asset. Under this agreement, Allegheny will recover from members certain financing costs related primarily to Allegheny's investment in SSES in the amount of $311,000,000 over a nine-year period.

44 4A 4

Note 8: Long-Term Debt 2002 2001 Debt settlement note payable to RUS at an interest rate '4-'-'

varying from 0.0% to 7.18%, due in varying amounts through 2007 $ 266,527 $ 299,054 6.00% replacement notes payable to RUS due in varying amounts through 2007 2,265 2,643 Pollution Control Revenue Bonds, payable semiannually, including interest through 2014. 444 Variable rates ranged from 1.9% to 1.10% in 2002 and 1.2% to 5.0% in 2001 20,200 21,000 5.00% mortgage notes payable to RUS due in varying amounts through 2019 5,631 5,821 294,623 328,518 Less current installments 33.246 35.395

444

$ 261,377 $ 293,123

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35

Allegheny Electric Cooperative, Inc.

Notes to Financial Statements December 31, 2002 and 2001 Long-term debt consisted 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.

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 RUS 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 7.1 8%. Allegheny, however, can receive an interest credit up to the amount of total interest expense based on the number of participating members. All of Allegheny's members are currently participating.

Long-Tern 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 that are backed by a two-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%. At

'g December 31, 2002, Allegheny is in negotiations with Rabobank Nederland for the renewal or replacement of the outstanding letters of credit. The indenture agreement contains various redemption provisions with redemption prices ranging from 100% to 103%. Included in other investments, at December 31, 2002 and 2001, are $1,835,000 of investments that relate to a debt service reserve fund required under the Bond indenture.

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

2003 $ 33,246 2004 29,914 2005 38,440 2006 36,630 2007 36,311 Thereafter 120,082 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, 2002, and 2001.

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

During 2002 and 2001, Allegheny incurred interest costs of $951,000 and S1,300,000, respectively.

Allegheny Electric Cooperative, Inc.

Notes to Financial Statements December 31, 2002 and 2001 Note 9: Income Taxes There was no provision for federal income taxes at December 31, 2002 and 2001. Allegheny is not subject to state income taxes.

At December 31, 2002, Allegheny had available non-member net operating loss carryforwards of approximately $101 million for tax reporting purposes expiring in 2003 through 2021, and AMT credit carryforwards of approximately $80,000 that carry forward indefinitely.

The effect Allegheny's restructuring has been considered in determining the deferred tax balances at December 31, 2002 and 2001. Specifically, Allegheny'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 had been established against 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.

Note 10: Pennsylvania Public Utility Realty Taxes In December 1998, the Pennsylvania Department of Revenue issued, pursuant to the Pennsylvania Public Utility Realty Tax Act (PURTA), additional assessments to PURTA taxpayers 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 '4 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.

Allegheny Electric Cooperative, Inc.

Notes to Financial Statements December 31, 2002 and 2001 Note 11: Power Supply Settlements During January 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. The agreement with Williams is scheduled to terminate on March 31, 2008, and included, starting in December 2002, power supply in all areas of Pennsylvania and New Jersey, including the Allegheny Power (West Penn) Area. As is required, 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 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. In February 2002, the 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.

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 required Allegheny to provide

$2 million of credit support for activities with PJM. In February 2002, the National Rural Utilities Cooperative Finance Corporation issued an irrevocable standby letter of credit on behalf of Allegheny in the amount of $2 million in favor of PJM. The letter of credit is valid until June 1, 2006. As a result, PJM remitted the cash collateral for $2 million plus interest to FDIC insured special interest-bearing accounts to be held in trust for RUS and with RUS as a named beneficiary.

Additionally, Allegheny reached a settlement agreement with 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 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.

The total restricted cash at December 31, 2002, is $S15.3million.

Allegheny Electric Cooperative, Inc.

Notes to Financial Statements December 31, 2002 and 2001

X Note 12: Related Party Transactions -

v%W 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, 2002 and 2001, 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 (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 $292,782 and $381,623 for the years ended December 31, 2002, and 2001, respectively. The costs for services provided by CCS were

$5,089,108 and $7,011,677 for the same two comparative periods, respectively.

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 Commonwealth of Pennsylvania.

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

Note 13: 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 to enter into any type of transaction. As of December 31, 2002, there were no ongoing transactions under these agreements.

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

New York Power Authority This contract meets a portion of Allegheny's base load requirements and its delivered cost to Allegheny's members is below market. The current contract terminates in October 2003.

39

.A S#

Allegheny Electric Cooperative, Inc.

Notes to Financial Statements December 31, 2002 and 2001 Allegheny Power (West Penn Power)

This contract supplied approximately 8 percent of Allegheny's load requirements through November 30, 2002. Beginning December 1,2002, Allegheny's load requirements were serviced by Williams as discussed below. Transmission service for this load was provided under the Allegheny Power Open Access Transmission Tariff (OATT) until PJM West became effective on April 1, 2002. Transmission service for this load is now provided under PJM OATT.

PPL Utilities Allegheny's agreement with PPL Utilities expired January 31, 2002. Power requirements for this load are being provided by Williams as discussed below. Transmission service for this load was 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 zones began taking power from Williams. 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.

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 contains certain hourly and monthly energy caps. Energy provided above these thresholds is purchased 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 was extended through December 31, 2002, and has an exercise strike price of S50/MWh. During 2002 and 2001, Allegheny paid Aquila approximately S1.7 million and $1.5 million in premiums for the contingent call option.

Subsequent to year's end, Allegheny replaced this existing coverage with a Replacement Power Insurance Policy effective through 2003 with an aggregate payout limit of S25 million.

Allegheny Electric Cooperative, Inc.

Notes to Financial Statements December 31, 2002 and 2001 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 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, as the 90 percent owner and sole operator of SSES, and Allegheny, as owner of a 10 percent 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 31, 2002, the maximum amount PPL and Allegheny could jointly be assessed under these programs ranged from $20 million to $40 million annually. X 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 Act amendment 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 gain was $3.1 and $3.4 million as of December 31, 2002, and 2001, respectively. Net proceeds and related interest were required by RUS to be used to retire outstanding FFB debt.

Xv-41.

Allegheny Electric Cooperative, Inc.

Notes to Financial Statements December 31, 2002 and 2001 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 31, 2002, was approximately $9.4 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.

Note 14: SalelLeaseback 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 that 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 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 percent 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 other deferred revenue and was $1. 19 million and $1.23 million as of December 31, 2002 and 2001, 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 to Ford, or its successor, as a result of any such loss.

Allegheny Electric Cooperative, Inc.

Notes to Financial Statements December 31, 2002 and 2001 The leaseback of the Facility is accounted for as an operating lease by Allegheny. As of December 31, 2002, 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):

2003 $ 2,361 2004 2,281 2005 1,932 2006 1,932 rt Thereafter 25,541 Total minimum lease payments $ 34,047 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 $2.0 million and $2.1 million in years ended December 31, 2002 and 2001.

Note 15: Concentrations of Credit Risk Allegheny is composed of member electric distribution cooperatives, whose operations are located in Pennsylvania and New Jersey. The member cooperatives' primary service areas are rural areas located throughout much of rural Pennsylvania and a portion of New Jersey.

Note 16: 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 X 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 over a period of 15 years. Allegheny recorded its share of the liability as a deferred charge that is being amortized to expense over 15 years, consistent with the rate-making treatment. The remaining liability to be amortized was $1.6 million and $1.9 million as of December 31, 2002, and 2001, respectively.

43

Allegheny Electric Cooperative, Inc.

Notes to Financial Statements 9 December 31, 2002 and 2001 Note 17: Fair Value of Financial Instruments The estimated fair value amounts have been determined by Allegheny, using available market information and appropriate valuation methodologies. However, considerable judgment is 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 Allegheny 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 4

Cash and Restricted Investments - The carrying amounts of these items are a reasonable estimate of their fair value due to the short-term nature of the 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 Receivablefromn 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.

Liabilities 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.

The estimated fair values of Allegheny's financial instruments at December 31, 2002, and 2001 are as follows (in thousands):

K 2002 2001 Ci ~>. Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value Cash and cash equivalents $ 16,991 $ 16,991 $ 11,422 S 11,422 Restricted investments 15,315 15,315 18,261 18,261 Other investments 39,385 39,385 36,525 36,525 Investment in associated organizations 972 972 957 957 Notes receivable from members 106 106 121 121 Long-term debt 294,623 226,422 328,518 216,446 E,

4;4 AL:j

Allegheny Electric Cooperative, Inc.

Notes to Financial Statements December 31, 2002 and 2001 Note 18: Future Change in Accounting Principle The Financial Accounting Standards Board recently issued Statement No. 143, Accountingfor Asset Retirement Obligations,which requires reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Allegheny expects to first apply the new statement during its fiscal year ending December 31, 2003. The impact of applying the new statement could result in a decrease in member equity of approximately $50 million.

45

Soyland Power Cooperative, Inc.

Accountants' Report and Financial Statements December 31, 2002 and 2001 TABLE OF CONTENTS 47 INDEPENDENT ACCOUNTANTS' REPORT FINANCIAL STATEMENTS 48 & 49 Balance Sheets 50 Statements of Income 51 Statements of Members' Equities (Deficits) 52 Statements of Cash Flows 53-62 Notes to Financial Statements

225 North Water Street, Suite 400 P.O. Box 1580 Decatur, IL 62525-1580 217 429-2411 Fax 217 429-6109 bkd.com -

4' ,-,

Independent Accountants' Report Board of Directors Soyland Power Cooperative, Inc.

44 Harrisburg, Pennsylvania We have audited the accompanying balance sheets of Soyland Power Cooperative, Inc. (Cooperative) as of December 31, 2002 and 2001, 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 .4- .-

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 4 statements. An audit also includes assessing the accounting principles used and significant estimates 44 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 y4 financial position of Soyland Power Cooperative, Inc. as of December 31, 2002 and 2001, 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 13, 2003 Solutions -,4-4',

for Success A member of/

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L'itema6mraf 47

Soyland Power Cooperative, Inc.

Balance Sheets December 31, 2002 and 2001 i~,jX Assets 2002 2001 Electric Utility Plant, at cost In service (See Note 2) S 74,555,198 $ 75,616,898 Less accumulated depreciation (36,456.623) (36.736.731)

M:

38,098,575 38,880,167 Construction work in progress 6,356,996 5,465,068 Plant site held for future use 3.921.195 3,921.195 I

Net electric utility plant 48.376,766 48,266,430 W;-4 Investments (See Notes 3 and 9) 11.085.851 12.144,715 Current Assets Cash 108,963 109,606 Temporary investments 2,042,874 1,754,131 Accounts receivable, members 8,931,963 8,755,472 Other receivables 223,334 346,737 Inventories 2,462,015 2,486,539 S~~4 Prepayments and other assets 264,332 321,344 Advance energy payments 249.050 359.050 4,.

Total current assets 14.282.531 14.132,879 I'

Deferred Charges (See Note 4)

Deferred loss on asset writedown 24,923,299 24,923,299 W4 Deferred opt-out fee 27,579,683 43,215,460 Deferred recoverable energy 10.116,620 12,000,000 62.619,602 80.138.759 S 136,364,7 S=J54 78 See Notes to FinancialStatements.

48

Soyland Power Cooperative, Inc.

Members' Equities and Liabilities 2002 2001 Members' Equities Membership fees $ 1,675 $ 1,675 Patronage capital 1,638,736 1,638,736 Retained earnings 8.030.628 1.996.756 Total members' equities 9.671.039 3,637.167 Long-Term Debt (See Notes 5 and 9) 75.806,484 93.580.738 Current Liabilities Current installments of long-term debt 13,289,456 21,117,789 Line of credit 9,846,615 11,350,000 .,?

Accounts payable 5,839,292 6,396,121 Member prepayments 2,236,387 1,964,676 Accrued interest 314,185 374,818 Accrued expenses 4,157,925 3,345.784 Total current liabilities 35.683.860 44,549,188 Deferred Revenue (See Note 1) 15.203,367 12,915,690

X

$ 136,364,7 49 m

4.

Soyland Power Cooperative, Inc.

s'1 "12 Statements of Income December 31, 2002 and 2001 2002 2001 Operating Revenues Electric energy sales $ 89,465,967 $ 87,200,149 l?

Distribution revenue 1,008,256 961,099 Rent of electric property 62,222 48,873 Other operating revenue 2,918.479 90.536,445 91,128,600 Operating Expenses Operations

'4, Purchased capacity and energy costs 54,070,342 48,892,011 Production - other 3,822,602 7,677,980 Transmission 653,734 963,279 Distribution 328.983 366.551 58,875,661 57,899,821 Maintenance 1,168,109 1,233,024 Administrative and general 2,441,617 3,166,888 Depreciation and amortization 16,655,790 13,976,126 Property and other taxes 65,600 508.008 79.206,777 76.783.867 Net Operating Margin 11,329,668 14,344,733

'A Other Revenue (Expense) 4' Interest and other patronage capital income 787,229 1,283,214 Gain on member buyout (see Note 6) 1,115,206 Other expense (see Note 6) (1,334.000)

Net Margin Before Interest Charges 11.898,103 15,627,947 Interest Charges Interest on long-term debt 5,094,108 7,751,419 Other 770,123 1,294,033 5.864,231 9.045.452 Net Income ; 6,033,872 $ =,52,495 50

.Y See Notes to FinancialStatements.

!V

Soyland Power Cooperative, Inc. .44

I'4 '

Statements of Members' Equities (Deficits)

December 31, 2002 and 2001

.*4 Total Retained Members' Membership Patronage Earnings Equities Fees Capital (Deficit) (Deficit)

Balance, January 1, 2001 $ 1,675 $ 1,638,736 $ (4,585,739) $ (2,945,328)

Net income - - 6.582,495 6,582,495 p Balance, December 31, 2001 1,675 1,638,736 1,996,756 3,637,167 V4 Net income 6.033,872 6.033,872 Balance, December 31, 2002 $ 9,671,03 44, .4.

4, *,,

V 44 4,4 See Notes to FinancialStatements.

51,,

Soyland Power Cooperative, Inc.

Statements of Cash Flows December 31, 2002 and 2001 2002 2001 Operating Activities Net income $ 6,033,872 $ 6,582,495 Items not requiring (providing) cash Gain on member buyout (1,115,206)

Depreciation of electric utility plant 3,027,786 2,953,228 Amortization of deferred charges 13,628,004 11,022,898 Gain on sale of investments (819,654)

Patronage capital allocations not received in cash (66,661)

Deferred recoverable energy charge (12,000,000)

Change in Accounts and other receivables (53,088) 1,009,831 Inventories 24,524 (21,378)

Prepayments and other assets 167,012 (164,597)

Excess recoverable energy costs 6,015,140 Accounts payable and accrued expenses (317,431) (5,797,554)

Deferred revenue (1.299,694) (5,250,332)

Net cash provided by operating activities 19.276.125 4,283,070 Investing Activities Additions to electric utility plant, net (3,963,401) (3,229,397)

Additions to investments (719,583) (752,186)

Proceeds from investments 2,586,101 358.007 Net cash used in investing activities (2,096,883) (3,623.576)

Financing Activities Net borrowings (payments) on line of credit (1,503,385) 2,600,000 Principal payments on long-term debt (25,602,587) (14,208,379)

Proceeds from member buyout 9,943,119 Proceeds from long-term debt 12,000,000 Change in member prepayments 271,711 (597,090)

Net cash used in financing activities (16,891,142) (205.469)

Net Increase in Cash and Cash Equivalents 288,100 454,025 Cash and Cash Equivalents, Beginning of Year 1,863,737 1.409.712 Cash and Cash Equivalents, End of Year S 2,1 35183$=

Supplemental Cash Flows Information Cash paid for interest $ 5,924,864 S 9,318,740 Proceeds from member buyout applied to:

Deferred charges 3,891,153 Accounts payable and accrued expenses 512,110 Deferred revenue 3,587,371 Investments 12,000 See Notes to FinancialStatements.

Soyland Power Cooperative, Inc.

Notes to Financial Statements December 31, 2002 and 2001 Note 1: Nature of Operations and Significant Accounting Policies 9 Nature of Operations Soyland Power Cooperative, Inc. (Cooperative) is a not-for-profit organization engaged in the generation and transmission of wholesale electric service to its 11 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 that 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 buy out 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, in accordance with 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.

Deregulation In 1997, the State of Illinois passed Public Act 90-561, Electric Service Customer Choice and Rate Relief Law of 1997 (Act). The Act is intended to bring competition to the electric industry in the X 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 the 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. 4 53

Soyland Power Cooperative Inc.

Notes to Financial Statements December 31, 2002 and 2001 4

N 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, Accountingfor the Effects of Certain Types of Regulation.

Electric UtilityPlant 4

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 %

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 that requires the maintenance of a compensating balance. At December 31, 2002, the Cooperative's cash accounts exceeded federally insured limits by approximately $2,150,000.

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.

Soyland Power Cooperative, Inc.

Notes to Financial Statements December 31, 2002 and 2001 Temporary Investments Temporary investments consist of an interest bearing sweep account and are stated at market.

Accounts Receivable Accounts receivable are stated at the amount billed to members. Accounts receivable are due in accordance with approved policies. An allowance for doubtful accounts has not been recorded because all accounts receivable are considered fully collectible.

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 future rates.

Member Prepayments A 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 $78,926 and

$169,078 for the years ended December 31, 2002 and 2001, respectively.

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

Income Taxes The Cooperative is exempt from income taxes under Section 501 of the Internal Revenue Code and X a similar provision of state law. However, the Cooperative is subject to federal income tax on any unrelated business taxable income. No income taxes were due or paid in 2002 and 2001.

'.55

Soyland Power Cooperative, Inc.

Notes to Financial Statements December 31, 2002 and 2001 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).

2002 2001 Member buyout payments $ 12,853,491 $ 11,140,157 Regulatory asset prepayments 2,349,876 1.775,533 Total S 15,203,367 $ 12,915.690 Revenue Recognition Revenue from the sale of electricity to members is recorded based on contracted power use.

Note 2: Electric Utility Plant in Service 2002 2001 Steam and other production plant $ 37,139,773 S 38,070,550 Transmission plant 24,604,319 23,572,834 Distribution plant 8,503,929 9,689,050 General plant 4.307,177 4,284.464 Total $ 74.555.198 Si61 8

Soyland Power Cooperative, Inc.

Notes to Financial Statements December 31, 2002 and 2001

.4. ,

Note 3: Investments 2002 2001 4 National Rural Utilities Cooperative Finance Corporation (CFC)

Membership fees $ 1,000 $ 1,000 Patronage capital 4,098,455 4,184,145 Subscription capital term certificates 2,252,049 2,252,049 Loan capital term certificates 4,408,651 4.800,439 Total 10,760,155 11,237,633 Other associated organizations 228,966 228,966 Investments in economic development organizations 96,730 175,930 Other investments 502,186

{..g4..

Total $ 11,085,851 $ 12,144,715 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, 2002 bear interest at 5 percent 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 *4 collected in the rate charged to members. V.-,

<>4 The remaining amount of the Opt-Out Fee paid to Illinois Power is expected to be recovered in future rates charged to members beginning in 2002 and has, therefore, been recorded as a

.. -t -.

regulatory asset at December 31, 2002 and 2001.

The recoverable energy amount is also expected to be recovered in future rates charged to members beginning in 2002 and has, therefore, been recorded as a regulatory asset at December 31, 2002 and 2001.

Amortization of regulatory assets totaled $13,628,004 and $11,022,898 in 2002 and 2001, respectively. K 57

Soyland Power Cooperative, Inc.

Notes to Financial Statements December 31, 2002 and 2001 Note 5: Long-Term Debt 2002 2001 CFC - fixed rates (ranging between 3.75% and 6.95%)

promissory notes payable, due in quarterly installments through 2022 $ 26,932,173 $ 27,598,841 CFC - fixed rate (3.75%) mortgage note payable, due in various quarterly installments through 2006 18,583,961 24,027,076 CFC - fixed rate (5.95%) capital addition loan note payable, due in quarterly installments through 2014 20,600,000 21,900,000 CFC - fixed rate (7.05%) promissory notes payable, due in quarterly installments through 2007 (') 14,090,736 29,172,610 CFC - fixed rate (5.25%) promissory note payable, due in quarterly installments through 2 0 1 1 (') 8,889.070 12,000.000 Total long-term debt 89,095,940 114,698,527 Less current installments 13.289.456 21,117,789 Long-term debt, excluding current installments $ 75.806,484 $==3.580,738 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.

Annual maturities of long-term debt at December 31, 2002 are as follows: 2003, $13,289,456; 2004, $12,184,951; 2005, $12,994,287; 2006, $6,819,986; 2007, $4,095,918, and thereafter,

$39,711,342.

The Cooperative had no unadvanced funds available at December 31, 2001 from long-term loans approved by CFC for capital additions and a $19,494,000 operating line of credit that expires December 15, 2003 approved by CFC, of which $9,846,615 and $11,350,000 had been borrowed at December 31, 2002 and 2001. The interest rate on the CFC line of credit fluctuates monthly based on CFC's cost of funds (3.65% at December 31, 2002).

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

Soyland Power Cooperative, Inc.

Notes to Financial Statements December 31, 2002 and 2001 Note 6: Member Buyout In December 2002, one member bought out of the wholesale power agreement and made a required buyout payment to the Cooperative of $9,943,119. Such payment represents the member's share of the Cooperative's outstanding debt and certain unavoidable future fixed costs, less the member's share of certain Cooperative assets and future capacity assignment credits. As a result of the member buyout, the Cooperative has made all contractually required payments to CFC under its loan agreements.

Payment amounts related to future unavoidable fixed costs of $3,587,371 in 2002 were deferred and are being amortized to income over the future periods in which the actual costs will be incurred and paid. Such periods range from one to ten years.

The Cooperative has recognized a gain in the 2002 statements of income related to the member buyout of$1,115,206 determined as follows:

2002 Member payment received $ 9,943,119 Gain on sale of fixed assets (473,928)

Deferred revenues (3,587,371)

Deferred recoverable energy (1,083,376)

Deferred opt-out-fee (2,807,777)

Other, net (875,461)

$ 1,115.206 During 2002, the Cooperative entered into certain negotiations with five former members related to their previous buyout payments. As a result, the Cooperative paid $1,334,000 to these previous members.

Note 7: Related Parties The Cooperative has an arrangement with an affiliated organization, Continental Cooperative Services (CCS). The organization provides the Cooperative with certain management, general and administrative services on a cost reimbursement basis. The costs for services provided by CCS were $3,506,747 and $4,494,133 for the years ended December 31, 2002, and 2001.

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, which is now based in Harrisburg, Pennsylvania. CCS is organized as a Non-Profit Electric Cooperative Corporation in the Commonwealth of Pennsylvania. >4 f*

Soyland Power Cooperative, Inc.

Notes to Financial Statements December 31, 2002 and 2001 CCS is governed by a board of directors, composed of one representative from each affiliated electric distribution cooperative in Pennsylvania, New Jersey, and Illinois as of December 31, 2002. Included in the Cooperative's investment in associated organizations is a $100,000 membership fee for CCS.

Note 8: 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 Investments - The investment balances comprise the following:

2002 2001 CFC capital term certificates (I)

Subscription certificates $ 2,252,049 $ 2,252,049 Loan certificates 4,408,651 4,800,439 6,660,700 7,052,488 Patronage capital certificates (1)

Other patronage 4,098,455 4,184,145 Memberships and miscellaneous patronage (2) 229,966 229,966 Other associated organizations (3) 96,730 175,930 Other investments (4) 502,186 Total S 11.085,851 $==2.144,715

Y' Soyland Power Cooperative, Inc. '-5" Notes to Financial Statements December 31, 2002 and 2001 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 items is not determinable and they are reflected at their carrying amount.

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

'K '44

3) Management was not able to estimate the fair value of instruments which represent the .44&

Cooperative's investment in economic development instruments and they remain at their 5"

-/4, carrying amount.

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 4.5-"

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.

2002 2001 5--.

S 'S' h' Carrying Estimated Carrying Estimated '"5-Amount Fair Value Amount Fair Value /4.4545 Assets Investments $ 11,085,851 (see above) $ 12,144,715 (see above)

Cash and temporary investments 2,151,837 2,151,837 1,863,737 1,863,737 Liabilities Long-term debt (including ""5-'- '4 current maturities) 89,095,940 89,095,940 114,698,527 114,698,527 5',

'5-1"'

,55-,

t5"Sk.

61 5'

K~~~~~~~~~~~~~

Soyland Power Cooperative, Inc.

Notes to Financial Statements December 31, 2002 and 2001 Note 9: Commitments The Cooperative owns generating capacity of 178 MW. Currently all additional energy requirements are being furnished through a power supply agreement.

Effective January 2003, the Cooperative has contracted with Ameren Energy Marketing Company to purchase energy at varying monthly minimum and maximum quantities of energy through December 2008. The contract commits the Cooperative to purchase an annual minimum of

$39,716,270. The members guarantee performance under this contract.

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.

Based upon FERC's final order Soyland was awarded approximately $1.8 million plus accrued interest. Soyland has not recorded this award on the accompanying financial statements because the FERC order has been appealed.

Note 11: SubsequentEvent The Cooperative has applied for a long-term loan from CFC in the amount of $20 million. Once approved by CFC, the loan application will be submitted to FERC for all required approvals. These funds will be used to finance capital additions and replenish working capital previously expended for capital additions.

V Note 12: Future Change in Accounting Principle The Financial Accounting Standards Board recently issued Statement No. 143 "Accountingfor Asset Retirement Obligations," which requires reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Cooperative expects to first apply the new statement during its fiscal year ending December 31, 2003. The impact of applying the new statement could result in a decrease in member equity of approximately SI million.

62W L

PLA-5641, Annual Financial Report

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PLA-5641, Annual Financial Report

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