-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RzJeydyld2DuDN+HIAED+2RJkbuAEDcCxg5VQR9/A44a1jiboSlgoW77Sz3tLZWA uSDHBaTNb7bwfHr5z0/46g== 0000922224-98-000034.txt : 19980817 0000922224-98-000034.hdr.sgml : 19980817 ACCESSION NUMBER: 0000922224-98-000034 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NYSE SROS: PHLX FILER: COMPANY DATA: COMPANY CONFORMED NAME: PP&L RESOURCES INC CENTRAL INDEX KEY: 0000922224 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 232758192 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11459 FILM NUMBER: 98691097 BUSINESS ADDRESS: STREET 1: TWO N NINTH ST CITY: ALLENTOWN STATE: PA ZIP: 18101 BUSINESS PHONE: 6107745151 MAIL ADDRESS: STREET 1: TWO NORTH NINTH ST STREET 2: TWO NORTH NINTH STREET CITY: ALLENTOWN STATE: PA ZIP: 181011179 10-Q 1 United States Securities and Exchange Commission Washington, DC 20549 Form 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Registrant; State of Incorporation; IRS Employer Number Address; and Telephone No. Identification No. 1-11459 PP&L Resources, Inc. 23-2758192 (Pennsylvania) Two North Ninth Street Allentown, PA 18101 (610) 774-5151 1-905 PP&L, Inc. 23-0959590 (Pennsylvania) Two North Ninth Street Allentown, PA 18101 (610) 774-5151 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. PP&L Resources, Inc. Yes X No PP&L, Inc. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: PP&L Resources, Inc. Common stock, $.01 par value, 168,266,320 shares outstanding at July 31, 1998 PP&L, Inc. Common stock, no par value, 157,300,382, shares outstanding and all held by PP&L Resources, Inc. at July 31, 1998 PP&L RESOURCES, INC. AND PP&L, INC. FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998 INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements PP&L Resources, Inc. Consolidated Statement of Income Consolidated Statement of Cash Flows Consolidated Balance Sheet PP&L, Inc. Consolidated Statement of Income Consolidated Statement of Cash Flows Consolidated Balance Sheet Notes to Financial Statements PP&L Resources, Inc. and PP&L, Inc. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PP&L Resources, Inc. and PP&L, Inc. PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K GLOSSARY OF TERMS AND ABBREVIATIONS SIGNATURES PP&L RESOURCES, INC. AND SUBSIDIARIES Part 1. FINANCIAL INFORMATION Item 1. Financial Statements In the opinion of PP&L Resources, the unaudited financial statements included herein reflect all adjustments necessary to present fairly the Consolidated Balance Sheet as of June 30, 1998 and December 31, 1997, and the Consolidated Statement of Income and Consolidated Statement of Cash Flows for the periods ended June 30, 1998 and 1997. PP&L Resources is the parent holding company of PP&L, PP&L Global, PP&L Spectrum, PP&L Capital Funding and H. T. Lyons. PP&L constitutes substantially all of PP&L Resources' assets, revenues and earnings. CONSOLIDATED STATEMENT OF INCOME (Unaudited) (Millions of Dollars, except per share data)
Three Months Six Months Ended June 30, Ended June 30, 1998 1997 1998 1997 Operating Revenues Electric operations.............................. $558 $550 $1,175 $1,204 Wholesale energy and trading activities.......... 259 136 504 267 Energy related businesses........................ 21 7 40 17 Total Operating Revenues......................... 838 693 1,719 1,488 Operating Expenses Operation Electric fuel.................................. 118 105 231 216 Energy purchases............................... 218 104 432 220 Other operating................................ 143 121 260 238 Maintenance...................................... 53 49 91 84 Depreciation and amortization.................... 94 93 189 185 Taxes, other than income ........................ 49 50 102 106 Energy related businesses........................ 15 5 29 9 Total Operating Expenses......................... 690 527 1,334 1,058 Operating Income................................... 148 166 385 430 Other Income and (Deductions)...................... 4 3 11 5 Income Before Interest and Income Taxes............ 152 169 396 435 Interest Expense................................... 54 55 106 110 Income Before Income Taxes and Extraordinary Items ............................. 98 114 290 325 Income Taxes....................................... 38 45 122 133 Income Before Extraordinary Items.................. 60 69 168 192 Extraordinary Items (net of $666 income taxes) (Note 4) ........................................ (948) (948) Income(Loss) Before Dividends on Preferred Stock... (888) 69 (780) 192 Preferred Stock Dividend Requirements.............. 6 4 13 11 Net Income(Loss)................................... ($894) $65 ($793) $181 Earnings Per Share of Common Stock Basic and Diluted (a): Income Before Extraordinary Items.............. $0.32 $0.39 $0.92 $1.11 Extraordinary Items (net of tax)............... (5.66) (5.67) Net Income(Loss)................................... $(5.34) $0.39 $(4.75) $1.11 Dividends Declared per Share of Common Stock....... $0.4175 $0.4175 $0.835 $0.835 (a) Based on average number of shares outstanding (thousands)........................ 167,436 164,068 167,106 163,660 See accompanying Notes to Financial Statements.
PP&L RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Millions of Dollars)
Six Months Ended June 30, 1998 1997 Net Cash Provided by Operating Activities.................... $281 $307 Cash Flows From Investing Activities Property, plant and equipment expenditures.................. (149) (143) Proceeds from sale of nuclear fuel to trust................. 15 23 Purchases of available-for-sale securities.................. (12) (52) Sales and maturities of available-for-sale securities....... 14 91 Investment in electric energy projects...................... (276) (19) Purchases and sales of other financial investments - net.... 4 76 Other investing activities - net............................ 2 Net cash used in investing activities................. (402) (24) Cash Flows From Financing Activities Issuance of long-term debt.................................. 260 10 Issuance of common stock.................................... 33 36 Issuance of company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely company debentures................................. 250 Retirement of long-term debt................................ (267) (210) Purchase of subsidiary's preferred stock (net of premium and associated costs)..................................... (369) Payments on capital lease obligations....................... (26) (33) Common and preferred dividends paid......................... (152) (150) Net increase in short-term debt............................. 260 147 Other financing activities - net ........................... (1) (20) Net cash provided by (used in) financing activities... 107 (339) Net Decrease In Cash and Cash Equivalents ................... (14) (56) Cash and Cash Equivalents at Beginning of Period ............ 50 101 Cash and Cash Equivalents at End of Period .................. $36 $45 Supplemental Disclosures of Cash Flow Information Cash paid during the period for: Interest (net of amount capitalized)....................... $111 $106 Income taxes............................................... $98 $131 See accompanying Notes to Financial Statements.
PP&L RESOURCES,INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Millions of Dollars)
June 30, December 31, 1998 1997 (Unaudited) (Audited) ASSETS Property, Plant and Equipment Electric utility plant in service - net (Notes 2 and 4) Transmission and distribution .......................... $2,171 $2,160 Generation ............................................. 1,632 4,022 General and intangible ................................. 216 232 4,019 6,414 Construction work in progress - at cost................... 97 185 Nuclear fuel owned and leased - net....................... 156 167 Electric utility plant - net............................ 4,272 6,766 Other property - net...................................... 53 54 4,325 6,820 Investments Electric energy projects - at equity ..................... 638 360 Nuclear plant decommissioning trust fund ................. 186 163 Financial investments..................................... 50 52 Affiliated companies - at equity ......................... 17 17 Other..................................................... 13 13 904 605 Current Assets Cash and cash equivalents ................................ 36 50 Accounts receivable (less reserve: 1998, $18; 1997, $16) Customers .............................................. 160 190 Other................................................... 79 48 Unbilled revenues Customers............................................... 84 90 Other................................................... 91 37 Fuel, materials and supplies - at average cost............ 175 200 Prepayments............................................... 89 28 Deferred income taxes .................................... 32 22 Other..................................................... 26 30 772 695 Regulatory Assets and Other Noncurrent Assets (Note 4) Recoverable transition costs.............................. 2,819 Other..................................................... 379 1,365 3,198 1,365 $9,199 $9,485 See accompanying Notes to Financial Statements.
PP&L RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Millions of Dollars)
June 30, December 31, 1998 1997 (Unaudited) (Audited) LIABILITIES Capitalization Common equity Common stock ........................................... $2 $2 Capital in excess of par value ........................ 1,702 1,669 Earnings reinvested (Note 4) ........................... 231 1,164 Capital stock expense and other ........................ (28) (26) 1,907 2,809 Preferred stock With sinking fund requirements ......................... 47 47 Without sinking fund requirements ...................... 50 50 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely company debentures...................................... 250 250 Long-term debt ........................................... 2,730 2,585 4,984 5,741 Current Liabilities Short-term debt........................................... 397 135 Long-term debt due within one year ....................... 150 Capital lease obligations due within one year ............ 58 58 Liability for above market NUG purchases due within one year (Note 4) ............................... 105 Accounts payable ......................................... 182 140 Taxes accrued ............................................ 59 40 Interest accrued ......................................... 62 62 Dividends payable ........................................ 76 76 Other .................................................... 99 108 1,038 769 Deferred Credits and Other Noncurrent Liabilities Deferred income taxes and ITC ............................ 1,556 2,221 Liability for above market NUG purchases (Note 4) ........ 775 Capital lease obligations ................................ 103 113 Other .................................................... 743 641 3,177 2,975 Commitments and Contingent Liabilities .................... $9,199 $9,485 See accompanying Notes to Financial Statements.
PP&L, INC. AND SUBSIDIARIES In the opinion of PP&L, the unaudited financial statements included herein reflect all adjustments necessary to present fairly the Consolidated Balance Sheet as of June 30, 1998 and December 31, 1997, and the Consolidated Statement of Income and Consolidated Statement of Cash Flows for the periods ended June 30, 1998 and 1997. All nonutility operating transactions are included in "Other Income and (Deductions)" in PP&L's Consolidated Statement of Income. CONSOLIDATED STATEMENT OF INCOME (Unaudited) (Millions of Dollars)
Three Months Six Months Ended June 30, Ended June 30, 1998 1997 1998 1997 Operating Revenues Electric operations............................. $558 $550 $1,175 $1,204 Wholesale energy and trading activities......... 259 136 504 267 Energy related businesses....................... 1 1 Total Operating Revenues 818 686 1,679 1,472 Operating Expenses Operation Electric fuel................................. 118 105 231 216 Energy purchases.............................. 218 104 432 220 Other operating............................... 143 121 260 238 Maintenance..................................... 53 49 91 84 Depreciation and amortization................... 94 93 189 185 Taxes, other than income ....................... 49 50 102 106 Energy related businesses....................... 1 1 Total Operating Expenses........................ 675 523 1,305 1,050 Operating Income ................................. 143 163 374 422 Other Income and (Deductions)..................... 9 8 21 8 Income Before Interest and Income Taxes........... 152 171 395 430 Interest Expense.................................. 49 54 98 106 Income Before Income Taxes and Extraordinary Items ............................ 103 117 297 324 Income Taxes...................................... 40 47 124 134 Income Before Extraordinary Items ................ 63 70 173 190 Extraordinary Items (net of $666 income taxes) (Note 4) ....................................... (948) (948) Net Income(Loss) Before Dividends on Preferred Stock................................. (885) 70 (775) 190 Dividends on Preferred Stock...................... 12 9 24 16 Earnings Available to PP&L Resources, Inc. ...... $(897) $61 $(799) $174 See accompanying Notes to Financial Statements.
PP&L, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Millions of Dollars)
Six Months Ended June 30, 1998 1997 Net Cash Provided by Operating Activities....................... $307 $308 Cash Flows From Investing Activities Property, plant and equipment expenditures.................... (149) (143) Proceeds from sales of nuclear fuel to trust.................. 15 23 Purchases of available-for-sale securities ................... (12) (52) Sales and maturities of available-for-sale securities ........ 14 69 Purchases and sales of other financial investments - net...... 4 76 Loan to parent................................................ (1) (375) Other investing activities - net.............................. 1 Net cash used in investing activities................... (128) (402) Cash Flows From Financing Activities Issuance of long-term debt.................................... 200 10 Issuance of Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely company debentures.......................................... 250 Retirement of long-term debt.................................. (266) (210) Payments on capital lease obligations......................... (26) (33) Common and preferred dividends paid........................... (163) (185) Net increase in short-term debt............................... 82 182 Other financing activities - net ............................. (1) (9) Net cash provided by (used in) financing activities..... (174) 5 Net Increase (Decrease) in Cash and Cash Equivalents 5 (89) Cash and Cash Equivalents at Beginning of Period................ 15 95 Cash and Cash Equivalents at End of Period...................... $20 $6 Supplemental Disclosures of Cash Flow Information Cash paid during the period for: Interest (net of amount capitalized)........................ $105 $102 Income taxes................................................ $102 $133 See accompanying Notes to Financial Statements.
PP&L, INC. COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Millions of Dollars)
June 30, December 31, 1998 1997 (Unaudited) (Audited) ASSETS Property, Plant and Equipment Electric utility plant in service - net (Notes 2 and 4) Transmission and distribution .......................... $2,171 $2,160 Generation ............................................. 1,632 4,022 General and intangible ................................. 216 232 4,019 6,414 Construction work in progress - at cost .................. 97 185 Nuclear fuel owned and leased - net ...................... 156 167 Electric utility plant - net ............................ 4,272 6,766 Other property - net ..................................... 51 54 4,323 6,820 Investments Loan to parent............................................ 376 375 Nuclear plant decommissioning trust fund ................. 186 163 Financial investments .................................... 49 52 Affiliated companies - at equity ......................... 17 17 Other .................................................... 13 13 641 620 Current Assets Cash and cash equivalents ................................ 20 15 Accounts receivable (less reserve: 1998, $18; 1997, $16) Customers .............................................. 158 188 Other .................................................. 81 64 Unbilled revenues Customers............................................... 81 90 Other................................................... 91 36 Fuel, materials and supplies - at average cost ........... 175 200 Prepayments............................................... 88 26 Deferred income taxes .................................... 32 22 Other .................................................... 23 29 749 670 Regulatory Assets and Other Noncurrent Assets (Note 4) Recoverable transition costs ............................. 2,819 Other..................................................... 364 1,362 3,183 1,362 $8,896 $9,472 See accompanying Notes to Financial Statements.
PP&L, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Millions of Dollars)
June 30, December 31, 1998 1997 (Unaudited) (Audited) LIABILITIES Capitalization Common equity Common stock ........................................... $1,476 $1,476 Additional paid-in capital ............................. 64 64 Earnings reinvested (Note 4) ........................... 153 1,092 Capital stock expense and other ....................... (20) (20) 1,673 2,612 Preferred stock With sinking fund requirements ......................... 295 295 Without sinking fund requirements ...................... 171 171 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely company debentures...................................... 250 250 Long-term debt ........................................... 2,568 2,483 4,957 5,811 Current Liabilities Short-term debt........................................... 127 45 Long-term debt due within one year ....................... 150 Capital lease obligations due within one year ............ 58 58 Liability for above market NUG purchases due within one year (Note 4) ............................... 105 Accounts payable ......................................... 181 148 Taxes accrued ............................................ 58 40 Interest accrued ......................................... 58 59 Dividends payable ........................................ 82 81 Other .................................................... 97 107 766 688 Deferred Credits and Other Noncurrent Liabilities Deferred income taxes and ITC ............................ 1,555 2,221 Liability for above market NUG purchases (Note 4) ........ 775 Capital lease obligations ............................... 103 113 Other .................................................... 740 639 3,173 2,973 Commitments and Contingent Liabilities .................... $8,896 $9,472 See accompanying Notes to Financial Statements.
PP&L Resources, Inc. and PP&L, Inc. Notes to Financial Statements Terms and abbreviations appearing in Notes to Financial Statements are explained in the glossary. 1. Interim Financial Statements Certain information in footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, has been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the SEC. These financial statements should be read in conjunction with the financial statements and notes included in PP&L Resources' and PP&L's Annual Reports to the SEC on Form 10-K for the year ended December 31, 1997. Certain amounts in the June 30, 1997 and December 31, 1997 financial statements have been reclassified to conform to the presentation in the June 30, 1998 financial statements. The most significant reclassifications have been made in the Consolidated Statement of Income. This Statement has been modified to better reflect the changing nature of the business from a regulated electric utility to a full-service provider of retail and wholesale energy and related products and services. The revenues and expenses of PP&L Global, PP&L Spectrum and H.T. Lyons are now reflected in "Operating Income." Previously, the results of these non-regulated affiliates were included in "Other Income and (Deductions)" in PP&L Resources' Statement of Income. In addition, the revenues generated by PP&L's wholesale energy and trading activities are now separately disclosed. Finally, income taxes are no longer reflected as "Operating Expense," which was the traditional disclosure used by utilities. On the Consolidated Balance Sheet, "Electric utility plant in service - net" at December 31, 1997 has been reclassified to separately disclose generation plant, which is no longer subject to the regulatory accounting provisions of SFAS 71, "Accounting for the Effects of Certain Types of Regulation." See Notes 2 and 4 for further information. 2. Summary of Significant Accounting Policies The PUC's order dated June 15, 1998 (see Note 3) impacted certain accounting policies of PP&L. Following are updates to the "Summary of Significant Accounting Policies" as detailed in PP&L Resources' and PP&L's Annual Reports to the SEC on Form 10-K for the year ended December 31, 1997. Refer to Note 4 for more information on the PUC restructuring charge. Management's Estimates These financial statements have been prepared using information which represents management's best estimates of existing conditions. Actual results could differ from these estimates. Significant estimates were required in recording the effect of the PUC's order. The impairment write-down of certain generation plant was dependent on projections of future cash flows and capacity factors. Cash flow projections and the resulting impact on the fair value determination of these generating facilities are subject to future re-evaluation. In addition, the liabilities recorded for above-market purchases from NUGs were based on estimated generation by the NUG facilities and estimated future market prices for this generation. Again, these recorded amounts are subject to revision if the underlying estimates change. Regulation Historically, PP&L accounted for its operations in accordance with the provisions of SFAS 71, which requires rate-regulated entities to reflect the effects of regulatory decisions in their financial statements. PP&L discontinued application of SFAS 71 for the generation portion of its business effective June 30, 1998. Utility Plant Following are the classes of Electric Utility Plant in Service, with associated accumulated depreciation reserves, at June 30, 1998 and December 31, 1997. Transmission General Electric Utility & & Plant In Distribution Generation Intangible Service June 30, 1998: Original Cost $3,353 $6,339 $372 $10,064 Accumulated Depreciation Reserve (1,182) (4,707) (156) (6,045) $2,171 $1,632 $216 $ 4,019 December 31, 1997: Original Cost $3,309 $6,306 $369 $ 9,984 Accumulated Depreciation Reserve (1,149) (2,284) (137) (3,570) $2,160 $4,022 $232 $ 6,414 Generation plant is reflected at the lower of cost or market value at June 30, 1998. As noted in the "Regulation" section of this note, PP&L discontinued application of SFAS 71 for the generation portion of its business effective June 30, 1998. In accordance with SFAS 101, "Regulated Enterprises-Accounting for the Discontinuation of Application of FASB Statement No. 71", impairment tests were performed on the individual generating facilities. These impairment tests used the provisions of SFAS 121, "Accounting For the Impairment of Long-Lived Assets and For Long-Lived Assets to Be Disposed Of". As a result, generation plant assets were written down by $2.357 billion. The other classes of Electric Utility Plant in Service continue to be carried at historical cost. Capitalized Interest Effective June 30, 1998, PP&L stopped capitalizing AFUDC on generation-related construction projects, since these assets are no longer subject to the provisions of SFAS 71. Instead, interest is being capitalized on generation-related projects in accordance with SFAS 34, "Capitalizing Interest Costs." Premium on Reacquired Long Term Debt In accordance with SFAS 71, PP&L deferred the premiums and expenses to redeem long-term debt and amortized these costs over the life of the new debt. If no new debt was issued to refinance the retired debt, these costs were amortized over the remaining life of the retired debt. Effective June 30, 1998, losses on reacquired debt attributable to the generation portion of PP&L's business will be recorded in accordance with SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt." Comprehensive Income During 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income." This statement required disclosure of "comprehensive income," defined as changes in equity other than from transactions with shareowners. Comprehensive income consists of net income, as well as holding gains and losses of certain assets (such as available-for-sale securities), foreign currency translation adjustments and the effects of certain accounting adjustments to earlier periods recognized during the current periods. The comprehensive income of PP&L Resources and PP&L is not materially different than net income for the three and six months ended June 30, 1998 or the corresponding periods in 1997. 3. PUC Restructuring Proceeding Reference is made to PP&L Resources' and PP&L's Annual Reports to the SEC on Form 10-K for the year ended December 31, 1997, regarding PP&L's April 1, 1997 filing of its restructuring plan with the PUC pursuant to the Customer Choice Act. Under the Customer Choice Act, the PUC is authorized to determine the amount of PP&L's stranded costs to be recovered through a Competitive Transition Charge (CTC) to be paid by all PUC-jurisdictional customers who receive transmission and distribution service from PP&L. Stranded (or transition) costs are defined in the Customer Choice Act as "generation- related costs which would have been recoverable under a regulated environment but which may not be recoverable in a competitive generation market and which the PUC determines will remain following mitigation by the electric utility." The Customer Choice Act also permits the issuance of "transition bonds" securitized by customer revenues from an Intangible Transition Charge (ITC) to finance the payment of transition costs. Proceeds of the transition bonds are required to be used "principally to reduce qualified stranded costs and related capitalization." The ITC is intended to recover the principal, interest and issuance, refinance and servicing costs and fees related to the transition bonds. In accordance with the Customer Choice Act, PP&L filed its restructuring plan with the PUC on April 1, 1997. PP&L's restructuring plan included a claim of $4.5 billion (on a net present value basis as of January 1, 1999) for transition costs. On June 15, 1998, the PUC entered an order in the restructuring proceeding. Under that order, PP&L estimated that it could recover about $2.5 billion in transition costs over the 8-1/2 year transition period prescribed by the order--i.e., through June 30, 2007. Numerous parties filed legal challenges to the PUC's June 15 order in state and federal court. PP&L filed an appeal of the order in the Pennsylvania Commonwealth Court, an action for Declaratory Judgment against the order in the Commonwealth Court, and a civil complaint action against the order in the U.S. District Court for the Eastern District of Pennsylvania. In July 1998, the PUC offered all parties to the restructuring proceeding the opportunity for substantive settlement discussions. On August 13, 1998, the PUC entered a Tentative Order approving a "Joint Petition for Full Settlement of PP&L, Inc.'s Restructuring Plan and Related Court Proceedings" (Joint Settlement Petition). The Tentative Order is subject to a public comment period, and final PUC action is expected on August 27, 1998. The terms and conditions of the Joint Settlement Petition represent a comprehensive resolution of all issues before the Pennsylvania Commonwealth Court and the U. S. District Court arising from challenges by certain parties, including PP&L, to the PUC's June 15 order. In the Joint Settlement Petition, the parties request that the PUC (i) approve the proposed settlement set forth in the Joint Settlement Petition; (ii) amend the June 15 order consistent with the proposed settlement; (iii) approve the supplements to PP&L's tariff necessary to implement the proposed settlement; (iv) issue a Qualified Rate Order authorizing PP&L to securitize up to $2.85 billion of transition and related costs; and (v) preapprove future transfers of PP&L generation assets at PP&L's discretion. The following are the major elements of the settlement: 1. PP&L is permitted to recover $2.97 billion (on a net present value basis) in transition costs over 11 years -- i.e., from January 1, 1999 through December 31, 2009. PP&L is permitted a return of 10.86% on the unamortized balance of these transition costs. 2. PP&L will reduce rates to all retail customers by 4% effective January 1, 1999 through December 31, 1999. 3. One-third of PP&L customers will be able to choose their electric supplier on January 1, 1999, one-third on January 2, 1999, and the remainder on January 2, 2000. Beginning on January 1, 1999, PP&L will unbundle its retail electric rates to reflect separate prices for the transmission and distribution charges, the CTC (and, if applicable, the ITC), and a "shopping credit" for customers choosing an alternate electric supplier. These shopping credits vary among customer classes and will increase over the transition period to reflect decreases in the CTC. The proposed settlement provides for the following unbundled rates over the transition period: SCHEDULE OF SYSTEM AVERAGE RATES CENTS/KWH Effective Transmission Shopping Generation Total Date & Distribution CTC(a) Credit(b) Rate Cap(c) Rate(d) Jan. 1, 1999 1.74 1.57 3.81 5.38 7.12 Jan. 1, 2000 1.74 1.55 4.13 5.68 7.42 Jan. 1, 2001 1.74 1.52 4.16 5.68 7.42 Jan. 1, 2002 1.74 1.45 4.23 5.68 7.42 Jan. 1, 2003 1.74 1.41 4.27 5.68 7.42 Jan. 1, 2004 1.74 1.35 4.33 5.68 7.42 Jan. 1, 2005 (e) 1.27 4.41 5.68 (e) Jan. 1, 2006 (e) 1.27 4.78 6.05 (e) Jan. 1, 2007 (e) 1.21 4.84 6.05 (e) Jan. 1, 2008 (e) 1.14 4.91 6.05 (e) Jan. 1, 2009(f) (e) 1.03 5.02 6.05 (e) (a) Average CTC rates are fixed, subject to reconciliation for actual sales and CTC collection. (b) The CTC and, as a result, the shopping credit figures will be adjusted to reflect changes due to the CTC reconciliation. (c) The Generation Rate Cap equals the sum of the CTC and Shopping Credit. The generation portion of bills for customers who continue to be supplied by PP&L as the supplier of last resort will not, on average, exceed the figures in this column. (d) The bundled rate equals the sum of Transmission & Distribution plus Generation Rate Cap. Customers who continue to be supplied by PP&L as the supplier of last resort will, on average, pay the total rate shown in the last column. The 1999 rate represents a 4% reduction from the existing rate cap of 7.42 cents/kWh. (e) The cap on PP&L's transmission and distribution rates under the Customer Choice Act is extended through 2004. Under the Customer Choice Act, T&D rates were capped until June 30, 2001. (f) Effective until December 31, 2009. In addition, the proposed settlement results in the following schedule for amortization of the transition costs over the transition period: ANNUAL STRANDED COST AMORTIZATION AND RETURN (a) Revenue Excluding GRT Annual CTC Amorti- Sales Cents/ Total Return zation Year mWh kWh ($000) ($000) ($000) 1999 33,108,701 1.57 $497,938 $310,396 $187,542 2000 33,605,332 1.55 498,027 290,796 207,231 2001 34,109,412 1.52 496,671 269,138 227,532 2002 34,621,053 1.45 481,095 245,359 235,736 2003 35,140,369 1.41 473,995 220,722 253,273 2004 35,667,474 1.35 461,682 194,252 267,430 2005 36,202,486 1.27 438,637 166,303 272,334 2006 36,745,524 1.27 447,326 137,841 309,485 2007 37,296,707 1.21 433,106 105,497 327,610 2008 37,856,157 1.14 411,419 71,258 340,161 2009(b) 38,424,000 1.03 377,373 35,708 341,665 (a) Subject to reconciliation of actual sales and collections. (b) Through December 31, 2009. 4. The cap on the generation component of rates is extended from December 31, 2005 until December 31, 2009. The cap on the transmission and distribution component of rates is extended from June 30, 2001 until December 31, 2004. 5. PP&L will recover its nuclear plant decommissioning costs through the CTC. PP&L may seek an exception to the rate cap for increases in these decommissioning costs, but agrees not to recover more than 96% of such increased amount. 6. PP&L will seek to securitize up to $2.85 billion in transition and related costs, and a proposed PUC Qualified Rate Order authorizing this securitization is included in the proposed settlement. The proposed settlement would require 75% of the savings from securitization to be passed back to customers, while 25% would be retained by PP&L. The costs of issuing the transition bonds and refinancing outstanding debt and equity will be reflected in the ITC to be charged to all customers. As with the CTC, the ITC must terminate by the end of the transition period; also, the ITC will offset the CTC on customer bills. 7. On January 1, 2002, 20% of all PP&L's residential customers will be assigned to a provider of last resort other than PP&L or an affiliate of PP&L. These customers will be selected at random, and the supplier will be selected on the basis of a PUC-approved bidding process. 8. Effective on January 1, 1999, alternate electric generation suppliers can provide metering and billing service to PP&L's commercial and industrial customers; effective on January 1, 1999, such alternate suppliers can provide certain metering service to PP&L's residential customers; and effective on January 1, 2000, PP&L's residential customers can choose their billing service as well from such alternate suppliers. 9. PP&L will transfer its retail marketing function to a separate, affiliated corporation by September 15, 1998. 10. PP&L is permitted, but not required, to transfer ownership and operation of its generating facilities to a separate corporate entity at book value. 11. PP&L will spend approximately $16 million annually on assistance and energy conservation for low-income customers. 4. Accounting for the Effects of Certain Types of Regulation PP&L prepares its financial statements for its regulated operations in accordance with SFAS 71, which requires rate-regulated companies to reflect the effects of regulatory decisions in their financial statements. PP&L has deferred certain costs pursuant to rate actions of the PUC and FERC and is recovering, or expects to recover, such costs in electric rates charged to customers. The FASB's EITF has addressed the appropriateness of the continued application of SFAS 71 by entities in states that have enacted restructuring legislation similar to Pennsylvania's Customer Choice Act. The EITF issued its statement No. 97-4, "Deregulation of the Pricing of Electricity - Issues Related to the Application of FASB Statements 71 and 101", which concluded that an entity should cease to apply SFAS 71, when a deregulation plan is in place and its terms are known. For PP&L, with respect to the generation portion of its business, this occurred on June 15, 1998 when the PUC entered its order on PP&L's restructuring filing. Effective June 30, 1998, PP&L adopted SFAS 101 for the generation side of its business. SFAS 101 requires a determination of impairment of plant assets under SFAS 121, and the elimination of all effects of rate regulation that have been recognized as assets and liabilities under SFAS 71. PP&L performed impairment tests of its electric generation assets on a plant specific basis and determined that $2.388 billion of its generation plant was impaired as of June 30, 1998. Impaired plant is the excess of the plant investment at June 30, 1998 over the present value of the net cash flows during the remaining lives of the plants. Annual net cash flows were determined by comparing estimated generation sustenance costs to estimated regulated revenues for the remainder of 1998, market revenues for 1999 and beyond, and revenues from bulk power contracts. The net cash flows were then discounted to present value. In addition to impaired generation plant, PP&L estimates that there will be other stranded costs totaling $1.989 billion at June 30, 1998. This primarily includes generation-related regulatory assets and liabilities and an estimated liability for above-market purchases under NUG contracts. The total estimated impairment to these assets is $4.377 billion. The PUC Tentative Order, approved on August 13, 1998, permits the recovery of $2.819 billion through the CTC on a present value basis, excluding amounts for nuclear decommissioning and consumer education, resulting in a net under-recovery of $1.558 billion. PP&L recorded an extraordinary charge at June 30, 1998 for this underrecovery of $1.558 billion. Under FERC Order 888, 16 small utilities which have power supply agreements with PP&L signed before July 11, 1994, requested and were provided with PP&L's current estimate of its stranded costs applicable to these customers if they were to terminate their agreements in 1999. Subject to certain conditions, these settlement agreements provide for continued power supply by PP&L to 15 of these small utilities through January 2004. These agreements were approved by FERC in May 1998. As a result, PP&L, in the second quarter of 1998, recorded an extraordinary charge in the amount of $56 million. The extraordinary items related to the PUC restructuring proceeding and the FERC settlement were reported on the Statement of Income, net of income taxes. Details of amounts written-off at June 30, 1998, in connection with the PUC Tentative Order, are as follows (millions of dollars): Impaired generation-related assets $2,388 Above-market NUG contracts 854 Generation-related regulatory assets and other 1,135 Total 4,377 Recoverable transition costs (2,819) Extraordinary item pre-tax - PUC 1,558 - FERC 56 1,614 Tax effects (666) Extraordinary items $ 948 PP&L believes that the electric transmission and distribution operations continue to meet the requirements of SFAS 71 and that regulatory assets associated with these operations will continue to be recovered through rates from customers. At June 30, 1998, $356 million of regulatory assets, other than the recoverable transition costs, remain on the books. The majority of these regulatory assets will continue to be recovered through regulated transmission and distribution rates over periods ranging from 2 to 31 years. 5. Sales to Other Electric Utilities PP&L provided Atlantic with 125,000 kilowatts of capacity (summer rating) and related energy from its wholly-owned coal-fired stations. Sales to Atlantic under that agreement expired in March 1998. PP&L will provide JCP&L with 378,000 kilowatts of capacity and related energy from all of its generating units during 1998. This amount will decline to 189,000 kilowatts in 1999. The agreement with JCP&L will terminate on December 31, 1999. PP&L expects to be able to resell the returning capacity and energy through the Energy Marketing Center. Under a separate agreement, PP&L is providing additional capacity and energy to JCP&L. This capacity and energy increased from 150,000 kilowatts to 200,000 kilowatts in June 1998, and will increase to 300,000 kilowatts in June 1999 through the end of the agreement in May 2004. Prices for this capacity and energy are market-based. 6. Credit Arrangements and Financing Activity From January through July 1998, PP&L Resources issued $47 million of common stock through the DRIP. In March 1998, the 364-day revolving credit agreement for PP&L and PP&L Capital Funding was increased from $150 million to $350 million. This increase, when added to the $300 million five-year revolving credit agreement of PP&L and PP&L Capital Funding, brings to $650 million the total amount of revolving credit available to PP&L and PP&L Capital Funding under these joint agreements. Additionally, in July 1998, PP&L Capital Funding entered into five separate $80 million, 364-day credit facilities with five banks. These additional credit facilities will initially be used to provide funding for PP&L Resources' Tender Offer (see discussion below). As of June 30, 1998, no borrowings were outstanding under any revolving credit agreements. In March 1998, PP&L Capital Funding sold $60 million of medium-term notes having a five-year term. The proceeds from this sale were used to repay $60 million of short-term borrowings which had provided interim financing for investments made by PP&L Global. As of June 30, 1998, $162 million of medium-term notes were outstanding. PP&L Capital Funding also established a commercial paper program in March 1998. As with all PP&L Capital Funding debt, this commercial paper is guaranteed by PP&L Resources. As of June 30, 1998, PP&L Capital Funding had $270 million of commercial paper outstanding. Of this amount, $170 million was issued to provide interim funding for PP&L Global's June acquisition of an additional 26% ownership share of SWEB. It is expected that this interim funding will be replaced by long-term debt during the second half of 1998. In April 1998, PP&L retired $150 million principal amount of First Mortgage Bonds, 5-1/2% series that matured on that date. In May 1998, PP&L issued $200 million First Mortgage Bonds, 6-1/8% Reset Put Securities Series due 2006. In connection with this issuance, PP&L assigned to a third party the option to call the bonds from the holders on May 1, 2001. These bonds will mature on May 1, 2006, but will be required to be surrendered by the existing holders on May 1, 2001 either through the exercise of the call option by the callholder or, if such option is not exercised, through the automatic exercise of a mandatory put by the trustee on behalf of the bondholders. If the call option is exercised, the bonds will be remarketed and the interest rate will be reset for the remainder of their term to the maturity date. If the call option is not exercised, the mandatory put will be exercised and PP&L will be required to repurchase the bonds at 100% of their principal amount on May 1, 2001. Proceeds from the sale of the bonds were used by PP&L to retire $116 million of its unsecured term loans and to reduce its outstanding commercial paper balances. On August 14, 1998, PP&L Resources announced a Tender Offer to purchase up to 17,000,000 shares of its common stock, or approximately 10% of the currently outstanding shares, from existing shareowners. The price paid for the shares will not be in excess of $27 nor less than $24.50 per share. PP&L Resources made this Tender Offer through the use of a procedure commonly referred to as a "Dutch Auction." This procedure allows the shareowners to select a specific price within the price range at which they are willing to sell their shares and submit (Tender) these Shares to PP&L Resources for possible sale at their designated price. At midnight on September 11, 1998 (unless the Tender Offer is extended to a later date), PP&L Resources will evaluate all Tenders received up until that date and determine the lowest price within the price range that will enable PP&L Resources to purchase up to 17,000,000 shares (the Purchase Price). This Purchase Price will then be paid for all Shares purchased pursuant to this Tender Offer, even for those shares that were Tendered at a lower designated price. Shares that have been Tendered a designated price that is above the Purchase Price will not be purchased and will be returned to the shareowners. PP&L Resources has developed a financial strategy that is intended to position PP&L Resources for the anticipated future competitive environment after giving effect to the PUC's Tentative Order, the related restructuring charge on PP&L's books and the collection of CTC revenues during the Transition Period. PP&L Resources' financial strategy and goals include: (a) a reduction in PP&L Resources' permanent capitalization to a level that is consistent with PP&L's restated asset values and the earning power of those assets; (b) a Common Stock dividend level based on a targeted payout ratio of 45%-55% designed to increase PP&L Resources' future financing flexibility; (c) the temporary use of a higher degree of leverage in PP&L Resources' capital structure during the Transition Period; and (d) maintenance of investment grade ratings on the senior debt securities of PP&L Resources and PP&L. As the electric utility industry transitions to a competitive environment, PP&L Resources anticipates the potential to achieve long-term returns on shareowner capital that exceed the returns that have been historically permitted in a fully regulated business environment. At the same time, PP&L Resources' business risks are expected to increase, resulting in an increase in the potential volatility in revenue and income streams. As such, PP&L Resources believes that a dividend payout ratio that is significantly lower than the 80%-90% payout ratio previously experienced by PP&L Resources and the electric utility industry in general is required to better position PP&L Resources to more effectively compete in the energy markets by increasing PP&L Resources' future financing flexibility. Accordingly, effective with the dividend payable October 1, 1998 to owners of record on September 10, 1998, PP&L Resources' quarterly Common Stock dividend will be reduced to $.25 per share ($1.00 annualized rate) from the previous level of $.4175 per share ($1.67 annualized rate). In addition to providing an increase in PP&L Resources' future financing flexibility, this dividend action positions PP&L Resources' Common Stock for potential increased growth in market value by retaining a proportionately higher level of earnings in the business for reinvestment. The Shares purchased pursuant to the Tender Offer will receive the October 1 dividend. The reduction in PP&L Resources' permanent capitalization, as well as the temporary increase in leverage, is being effected through this Tender Offer, which will be financed by PP&L Resources through the use of short- term debt. It is anticipated that the short-term debt used by PP&L Resources will be made available through the issuance of commercial paper by PP&L Capital Funding. Declaration of dividends on common stock are made at the discretion of the Boards of Directors of PP&L Resources and PP&L. PP&L Resources and PP&L will continue to consider the appropriateness of these dividend levels, taking into account the respective financial positions, results of operations, conditions in the industry and other factors which the respective Boards deem relevant. PP&L Resources and PP&L believe that, following completion of the Tender Offer, their anticipated cash flow from operations, access to credit facilities, cash and short-term investments will, taken together, be adequate for their capital needs for the foreseeable future. 7. Commitments and Contingent Liabilities There have been no material changes related to PP&L Resources' or PP&L's commitments and contingent liabilities since the companies filed their joint 1997 Form 10-K. For discussion pertaining to PP&L Resources' and PP&L's credit arrangements and financing activities, see Note 6. Nuclear Insurance PP&L is a member of certain insurance programs which provide coverage for property damage to members' nuclear generating stations. Facilities at the Susquehanna station are insured against property damage losses up to $2.75 billion under these programs. PP&L is also a member of an insurance program which provides insurance coverage for the cost of replacement power during prolonged outages of nuclear units caused by certain specified conditions. Under the property and replacement power insurance programs, PP&L could be assessed retroactive premiums in the event of the insurers' adverse loss experience. At April 1, 1998, the maximum amount PP&L could be assessed under these programs was about $29 million. PP&L's public liability for claims resulting from a nuclear incident at the Susquehanna station is limited to about $9 billion under provisions of The Price Anderson Amendments Act of 1988. PP&L is protected against this liability by a combination of commercial insurance and an industry assessment program. In the event of a nuclear incident at any of the reactors covered by The Price Anderson Amendments Act of 1988, PP&L could be assessed up to $151 million per incident, payable at a rate of $20 million per year, plus an additional 5% surcharge, if applicable. Environmental Matters Air The Clean Air Act deals, in part, with acid rain, attainment of federal ambient ozone standards and toxic air emissions. PP&L has complied with the 1995 Phase I acid rain provisions by installing continuous emission monitors on all units, burning lower sulfur coal and installing low nitrogen oxide burners on most units. To comply with the year 2000 Phase II acid rain provisions, PP&L plans to purchase lower sulfur coal and use banked or purchased emission allowances instead of installing FGD on its wholly-owned units. PP&L has met the 1995 ambient ozone requirements of the Clean Air Act by reducing nitrogen oxide emissions by nearly 50% through the use of low nitrogen oxide burners. Further seasonal (i.e., 5 month) nitrogen oxide reductions to 55% and 75% of 1990 levels for 1999 and 2003, respectively, are specified under the Northeast Ozone Transport Region's Memorandum of Understanding. The PA DEP has finalized regulations which require PP&L to reduce its ozone seasonal NOx by 57% beginning in 1999. PP&L plans to comply with this reduction with operational initiatives that rely, to a large extent, on the existing low nitrogen oxide burners. The EPA has finalized new national standards for ambient levels of ground-level ozone and fine particulates. Based in part on the new ozone standard, the EPA has proposed NOx emission limits for 22 states, including Pennsylvania, which in effect require approximately an 80% reduction from the 1990 level in Pennsylvania in the 2002-2004 timeframe. The new particulates standard may require further reductions in SO2 and may expand the planned seasonal NOx reductions to year round in the 2010-2012 timeframe. Under the Clean Air Act, the EPA has been studying the health effects of hazardous air emissions from power plants and other sources, in order to determine whether those emissions should be regulated. Recently, the EPA released a technical report of its findings to-date. The EPA concluded that mercury is the utility air toxic of greatest concern but that more evaluation is needed before it can determine whether regulation of air toxics from fossil fuel plants is necessary. In addition, the EPA has announced a new enforcement initiative against older coal-fired plants. Several of PP&L's coal-fired plants could fall into this category. These EPA initiatives could result in compliance costs for PP&L in amounts which are not now determinable but which could be material. Expenditures to meet the 2000 acid rain and 1999 NOx reduction requirements are included in the table of projected construction expenditures in the section entitled "Financial Condition - Capital Expenditure Requirements" in the Review of the Financial Condition and Results of Operations in the 1997 Form 10-K. PP&L currently estimates that additional capital expenditures and operating costs for environmental compliance under the Clean Air Act will be incurred beyond 2002 in amounts which are not now determinable but which could be material. Water and Residual Waste PP&L has installed dry fly ash handling systems at most of its power stations, which reduces waste water discharge. In other cases, PP&L has modified the existing facilities to allow continued operation of the ash basins under a DEP permit. Any groundwater contamination caused by the basins must also be addressed. Groundwater degradation related to fuel oil leakage from underground facilities and seepage from coal refuse disposal areas and coal storage piles has been identified at several PP&L generating stations. Remedial work related to oil leakage is substantially completed at two generating stations. At this time, the only other remedial work being planned is to abate a localized groundwater degradation problem associated with a waste disposal impoundment at the Montour plant. The final NPDES permit for the Montour plant contains stringent limits for iron and chlorine discharges. Depending on the results of a toxic reduction study, additional water treatment facilities or operational changes may be needed at this plant. Capital expenditures through the year 2002 to correct groundwater degradation at fossil-fueled generating stations, and to address waste water control at PP&L facilities are included in the table of construction expenditures in the section entitled "Financial Condition - Capital Expenditure Requirements" in the Review of the Financial Condition and Results of Operations in the 1997 Form 10-K. In this regard, PP&L currently estimates that $5.5 million of additional capital expenditures may be required in the next four years to close some of the ash basins and address other ash basin issues at various generating plants. Additional capital expenditures could be required beyond the year 2002 in amounts which are not now determinable but which could be material. Actions taken to correct groundwater degradation, to comply with the DEP's regulations and to address waste water control are also expected to result in increased operating costs in amounts which are not now determinable but which could be material. Superfund and Other Remediation In 1995, PP&L entered into a consent order with the DEP to address a number of sites where PP&L may be liable for remediation of contamination. This may include potential PCB contamination at certain PP&L substations and pole sites; potential contamination at a number of coal gas manufacturing facilities formerly owned and operated by PP&L; and oil or other contamination which may exist at some of PP&L's former generating facilities. As of June 30, 1998, PP&L has completed work on slightly more than half of the sites included in the consent order. At June 30, 1998, PP&L had accrued approximately $8 million, representing the amount PP&L can reasonably estimate it will have to spend to remediate sites involving the removal of hazardous or toxic substances, including those covered by the consent order mentioned above. Future cleanup or remediation work at sites currently under review, or at sites not currently identified, may result in material additional operating costs which PP&L cannot estimate at this time. In addition, certain federal and state statutes, including Superfund and the Pennsylvania Hazardous Sites Cleanup Act, empower certain governmental agencies, such as the EPA and the DEP, to seek compensation from the responsible parties for the lost value of damaged natural resources. The EPA and the DEP may file such compensation claims against the parties, including PP&L, held responsible for cleanup of such sites. Such natural resource damage claims against PP&L could result in material additional liabilities. General Due to the environmental issues discussed above or other environmental matters, PP&L may be required to modify, replace or cease operating certain facilities to comply with statutes, regulations and actions by regulatory bodies or courts. In this regard, PP&L also may incur capital expenditures, operating expenses and other costs in amounts which are not now determinable but which could be material. Loan Guarantees of Affiliated Companies In the second quarter of 1998, PP&L guaranteed a portion of a subsidiary's borrowings. As of June 30, 1998, $12 million of such borrowings were guaranteed by PP&L. Source of Labor Supply On June 29, 1998, IBEW members ratified a new labor agreement with PP&L. This new agreement expires on May 12, 2002. Among other things, the agreement provides for wage increases for IBEW members of 3.25% in 1998 (effective as of May 18) and 3% in each of the three remaining years. In addition, IBEW members received a lump-sum ratification bonus equal to 2% of base pay, or approximately $4 million. 8. New Accounting Standards In February 1998, the FASB issued SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which is effective for fiscal years beginning after December 15, 1997. The adoption of this statement is not expected to have a material impact on the financial statements of PP&L Resources or PP&L. In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for fiscal years beginning after June 15, 1999. This statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. PP&L Resources and PP&L intend to adopt this statement as of January 1, 2000. The impact of the adoption of this statement on the net income of PP&L Resources and PP&L is not yet determinable. 9. Acquisitions In July 1998, the PUC approved the acquisition of Penn Fuel Gas by PP&L Resources. In addition, in August 1998, the SEC approved the acquisition under the PUHCA. As a result, this acquisition is currently expected to close by August 31, 1998. In July 1998, PP&L Resources acquired McClure, a heating, ventilating and air-conditioning firm, in a cash transaction for an amount that is not material. PP&L Resources, Inc. and PP&L, Inc. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The financial condition and results of operations of PP&L are currently the principal factors affecting the financial condition and results of operations of PP&L Resources. Unless specifically noted, fluctuations are primarily due to activities of PP&L. This discussion should be read in conjunction with the section entitled "Review of the Financial Condition and Results of Operations of PP&L Resources, Inc. and PP&L, Inc." in PP&L Resources' and PP&L's Annual Report to the SEC on Form 10-K for the year ended December 31, 1997. Terms and abbreviations appearing in Management's Discussion and Analysis of Financial Condition and Results of Operations are explained in the glossary. Forward-looking Information Certain statements contained in this Form 10-Q concerning expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements which are other than statements of historical facts, are "forward-looking statements" within the meaning of the federal securities laws. Although PP&L Resources and PP&L believe that the expectations reflected in these statements are reasonable, there can be no assurance that these expectations will prove to have been correct. These forward-looking statements involve a number of risks and uncertainties, and actual results may differ materially from the results discussed in the forward-looking statements. The following are among the important factors that could cause actual results to differ materially from the forward-looking statements: state and federal regulatory developments; new state or federal legislation; national or regional economic conditions; weather variations affecting customer energy usage; competition in retail and wholesale power markets; the need for and effect of any business or industry restructuring; PP&L Resources' and PP&L's profitability and liquidity; new accounting requirements or new interpretations or applications of existing requirements; system conditions and operating costs; performance of new ventures; political, regulatory or economic conditions in foreign countries; foreign exchange rates; and PP&L Resources' and PP&L's commitments and liabilities. Any such forward- looking statements should be considered in light of such important factors and in conjunction with PP&L Resources' and PP&L's other documents on file with the SEC. Results of Operations The following discussion explains material changes in principal items on the Consolidated Statement of Income comparing the three months and six months ended June 30, 1998, to the comparable periods ended June 30, 1997. The Consolidated Statement of Income reflects the results of past operations and is not intended as any indication of the results of future operations. Future results of operations will necessarily be affected by various and diverse factors and developments. Furthermore, because results for interim periods can be disproportionately influenced by various factors and developments and by seasonal variations, the results of operations for interim periods are not necessarily indicative of results or trends for the year. Earnings Comparison of Earnings - June 30 Three Months Ended Six Months Ended 1998 1997 1998 1997 Earnings per share - excluding weather variances and one-time adjustments $0.35 $0.39 $1.06 $1.15 Weather variances on billed sales (0.03) (0.14) (0.04) One-time adjustments PUC Restructuring Charge (5.47) (5.48) FERC Municipalities Settlement (0.19) (0.19) Earnings per share - reported $(5.34) $0.39 $(4.75) $1.11 PP&L had two extraordinary items in June 1998 related to the PUC restructuring proceeding and a settlement with municipalities under FERC jurisdiction. Refer to Financial Note 4 for further information. Earnings per share, excluding weather variances and extraordinary items, were $.04 lower for the three months ended June 30, 1998, and $.09 lower for the first six months of 1998, when compared with the same periods in 1997. Earnings changes for these periods, excluding weather variances and extraordinary items, were primarily the net effect of the following: June 30, 1998 vs. June 30, 1997 Three Months Ended Six Months Ended (per share) o Higher revenues from electric operations, due to unbilled revenues and moderate growth in adjusted weather-normalized sales; $0.03 $0.01 o Higher other operating revenues, primarily due to increased sales of reservation of electrical output to other utilities; 0.02 0.08 o Net reduction in earnings due to the phase- down of the contract with JCP&L and the end of the contract with Atlantic; (0.02) (0.05) o Higher wages and benefits costs primarily due to the bargaining unit contract ratification bonus and higher overtime costs; (0.03) (0.03) o Higher other operating costs primarily due to the write-off of excess and obsolete inventory, additional provisions for uncollectable accounts, costs associated with meeting retail competition requirements and increased costs associated with computer information systems; and (0.06) (0.09) o Other 0.02 (0.01) Earnings Change $(0.04) $(0.09) The reduction in contractual bulk power sales to JCP&L and other major utilities will continue to adversely impact earnings over the next few years. However, the efforts of the Energy Marketing Center to resell the returning electric energy and capacity on the open market, along with its other energy trading activities, is expected to continue to offset the loss in revenues from declining contractual sales. Finally, the Customer Choice Act and the regulatory and business developments related thereto could have a major impact on the future financial performance of PP&L. PUC Restructuring Proceeding Refer to Financial Notes 3 and 4 for information regarding the PUC restructuring proceeding. Electric Energy Sales The increase (decrease) in PP&L's electric energy sales were attributable to the following: June 30, 1998 vs. June 30, 1997 Three Months Ended Six Months Ended Change % Change Change % Change (Millions of kWh) Electricity Delivered to Retail Customers(a) (146) (2.0)% (532) (3.3)% Electricity Supplied to Retail Customers(a) (189) (2.5)% (835) (5.1)% Wholesale Energy Sales 3,850 88.2% 8,808 106.9% (a) KWh for customers residing in PP&L's service territory who are receiving energy from PP&L will be reflected in both of these categories. Under Pennsylvania's competition pilot program, customers are allowed to choose the supplier of their electricity. Pilot customers will continue to have the utility that serves their territory deliver electricity from the supplier of choice. "Electricity Delivered to Retail Customers" is the amount of electricity delivered by PP&L to customers in its service territory. "Electricity Supplied to Retail Customers" represents the amount of electricity supplied to PP&L service territory customers who are not participating in the pilot program, and electricity supplied to customers within and outside PP&L service territory who are participating in the pilot program and have chosen PP&L as their energy supplier. Electricity delivered to retail customers decreased for the three and six months ended June 30, 1998 from the comparable periods in 1997. Due to the timing of certain large customer bills in June, approximately 100 million kWh were included in unbilled sales rather than billed sales. Excluding the effects of these timing differences in 1998 and weather variances in 1998 and 1997, electricity delivered to retail customers would have increased by 85 million kWh and 41 million kWh, respectively, for the three and six months ended June 30, 1998. Electricity delivered to industrial customers decreased from 1997 for both the three and six months ended June 30, 1998. This decrease was mainly due to a steel plant closing and the reduction of energy supplied to a paper mill. Electricity supplied to retail customers decreased for the three and six months ended June 30, 1998 from the comparable periods in 1997. This decrease was due to the mild weather experienced during the first half of the year and the impact of the competition pilot program. Electricity Trading Activities During June 1998, a number of unexpected events in the midwestern United States, including unplanned outages at generating units, higher summer temperatures and transmission constraints, caused extreme price volatility in the wholesale energy markets, particularly in the ECAR region. As a result of these events, several participants in wholesale energy markets requested the FERC to initiate an investigation into alleged market abuses during this period and consider the imposition of price caps during emergency conditions. The FERC has begun an informal investigation to determine whether any measures are needed in response to these events. PP&L, through its Energy Marketing Center, purchases and sells electric capacity and energy at the wholesale level under its FERC market- based tariff. PP&L's tariff was recently amended to permit the resale of transmission capacity at market-based rates. PP&L has entered into agreements to sell firm capacity or energy under its market-based tariff to certain entities located inside and outside of the PJM power pool, including entities located in the ECAR region. By being a net seller of electricity in the second quarter of 1998, PP&L profited from the unprecedented price spikes. Some of the profitability was offset, however, due to the transmission constraints that developed in the PJM and ECAR regions, which required PP&L to meet certain of its obligations by purchasing electricity in the ECAR spot market and selling into the PJM spot market electricity intended for sale in the ECAR region. If PP&L were unable to meet its obligations under these agreements to sell capacity and energy, under certain circumstances it would be required to pay damages equal to the difference between the market price to acquire replacement capacity or energy and the contract price of the undelivered capacity or energy. Depending on price volatility in the wholesale energy markets, such damages could be material in amount. Events that could affect PP&L's ability to meet its firm capacity or energy obligations or cause significant increases in the market price of replacement capacity and energy include the occurrence of extremely warm weather conditions, unplanned generating plant outages, transmission disruptions, non- performance by counterparties with which it has power contracts and other factors affecting the wholesale energy markets. Although PP&L attempts to mitigate these risks as described below, there can be no assurance that it will be able to fully meet its firm obligations, that it will not be required to pay damages for failure to perform, or that it will not experience counterparty non-performance in the future. PP&L's efforts to mitigate risks associated with open contract positions include maintaining generation capability to deliver electricity to satisfy its net firm sales contracts. To further mitigate supply and transmission risk, the Energy Marketing Center has assigned PP&L generating capacity to satisfy its commitments in ECAR for July and August and has purchased firm transmission service. In addition, the Energy Marketing Center adheres to established credit policies, and PP&L has not experienced non-performance by counterparties to date. Operating Revenues: Electric Operations The increase (decrease) in revenues from electric operations was attributable to the following: June 30, 1998 vs. June 30, 1997 Three Months Ended Six Months Ended (Millions of Dollars) Retail Electric Revenues Weather effect $(9) $(35) Sales volume and sales mix effect 5 (2) Unbilled revenues 11 5 Pilot shopping credit above market price (4) (8) Other, net 1 5 Other Electric Revenues 4 6 $ 8 $(29) Revenues from electric operations increased by $8 million, or 1.5%, for the three months ended June 30, 1998 when compared to the same period in 1997. Increased revenues from billed and unbilled sales were partially offset by the effects of milder than normal weather. For the six months ended June 30, 1998, revenues from electric operations decreased by $29 million, or 2.4%, when compared to the same period in 1997. Most of the decrease can be attributed to the milder-than- normal weather experienced during the first quarter of 1998. This period saw the largest weather impact on earnings in the 27 years PP&L has tracked weather effects. This decrease also reflects the mandatory "shopping credit" (see Financial Note 3) under the competition pilot program being higher than the market clearing price of generation. PP&L is deferring these losses for future recovery. These future recoveries are recorded as an offset to "Other Operating Expenses." Operating Revenues: Wholesale Energy and Trading Activities The increase (decrease) in revenues from wholesale energy and trading activities was attributable to the following: June 30, 1998 vs. June 30, 1997 Three Months Ended Six Months Ended (Millions of Dollars) Market-based transactions $ 95 $181 PJM 18 35 Cost-based contracts (11) (17) Reservation/capacity credits 9 23 Oil & gas sales 13 17 Other (1) (2) $123 $237 Revenues from wholesale energy and trading activities increased by $123 million and $237 million for the three and six months ended June 30, 1998, respectively, when compared to the same periods in 1997. Revenues in both periods increased despite the phase-down of the capacity and energy agreement with JCP&L and the end of the capacity and energy agreement with Atlantic. This increase reflects PP&L's continued emphasis on competing in wholesale markets. In recent months, the national energy trading market has experienced high prices and increased volatility. PP&L is actively managing its portfolio to attempt to capture the opportunities and limit its exposure to these volatile prices. Reference is made to "Electricity Trading Activities" for more information. Energy-Related Businesses Energy-related businesses contributed $6 million and $2 million to the operating income of PP&L Resources for the three months ended June 30, 1998 and 1997, respectively. For the six-month periods ended June 30, 1998 and 1997, these businesses contributed a total of $11 million and $8 million to operating income, respectively. These results are primarily from PP&L Global's investments in world-wide energy projects. Energy-related businesses -- i.e., PP&L Global, PP&L Spectrum, H.T. Lyons and McClure -- are expected to provide an increasing share of PP&L Resources' future earnings. Fuel Expense Fuel expense increased by $13 million and $15 million for the three and six months ended June 30, 1998, respectively, when compared to the same periods in 1997. This reflects increased generation at the coal and oil/gas-fired stations. These units were needed due to the extension of the Susquehanna Unit 1 refueling outage and the unplanned maintenance outage of Susquehanna Unit 2. Also, higher generation was necessary to meet the increased trading activities of the Energy Marketing Center. Energy Purchases Energy purchases increased by $114 million and $212 million for the three and six months ended June 30, 1998, respectively, when compared to the same periods in 1997. This increase was primarily due to greater quantities of energy purchased from others to meet the increased trading activities of the Energy Marketing Center and to offset the planned and unplanned outages at the Susquehanna station. Other Operating Expenses Other operating expenses increased by $22 million for both the three and six months ended June 30, 1998 when compared to the same periods in 1997. The increase reflects additional costs associated with computer information systems, and additional payroll, consultant services and other expenses to meet the requirements of retail competition. The increase also reflects higher overtime costs, a bonus paid to bargaining unit employees in ratifying the recent labor agreement, and additional provisions for uncollectible accounts. These increases were partially offset by credits recorded in connection with the competition pilot program. The PUC has authorized PP&L to seek future recovery of the revenue lost on the pilot program. PP&L has established a regulatory asset for the excess of the shopping credits provided to pilot customers over the market price of this generation. These credits totaled $4 million and $8 million for the three months and six months ended June 30, 1998, respectively, and were recorded as offsets to "Other Operating Expenses." Power Plant Operations In an effort to reduce operating costs and position itself for the competitive marketplace, PP&L, in August 1998, announced the closing of its Holtwood coal-fired generating station, effective May 1, 1999. The adjacent hydroelectric plant will continue to operate. At the same time, PP&L announced that it would attempt to sell its Sunbury coal-fired generating station. As a result of these plant closings and other previously announced staffing reductions, PP&L expects the size of its workforce to decrease by approximately 250 over the next year. Financial Condition Refer to Financial Notes 3, 4 and 6 for information concerning the PUC restructuring charge, PP&L's financial goals and strategies, the reduction of PP&L Resources' dividend and the Tender Offer for PP&L Resources' common stock. Financing Activities The following financing activities have occurred to date in 1998: o From January through July 1998, PP&L Resources issued $47 million of common stock through the DRIP. o In March 1998, the 364-day revolving credit agreement for PP&L and PP&L Capital Funding was increased from $150 million to $350 million. This increase, when added to the $300 million five-year revolving credit agreement of PP&L and PP&L Capital Funding, brings to $650 million the total amount of revolving credit available to PP&L and PP&L Capital Funding under these joint agreements. Additionally, in July 1998, PP&L Capital Funding entered into five separate $80 million, 364-day credit facilities with five banks. As of June 30, 1998, no borrowings were outstanding under any revolving credit agreements. o In March 1998, PP&L Capital Funding sold $60 million of medium- term notes having a five-year term. o In March 1998, PP&L Capital Funding established a commercial paper program. At June 30, 1998, $270 million of commercial paper was outstanding. o In April 1998, PP&L retired $150 million principal amount of First Mortgage Bonds, 5-1/2% series that matured on that date. o In May 1998 PP&L issued $200 million First Mortgage Bonds, 6-1/8% Reset Put Securities Series due 2006. In connection with this issuance, PP&L assigned to a third party the option to call the bonds from the holders on May 1, 2001. These bonds will mature on May 1, 2006, but will be required to be surrendered by the existing holders on May 1, 2001 either through the exercise of the call option by the callholder or, if such option is not exercised, through the automatic exercise of a mandatory put by the trustee on behalf of the bondholders. If the call option is exercised, the bonds will be remarketed and the interest rate will be reset for the remainder of their term to the maturity date. If the call option is not exercised, the mandatory put will be exercised and PP&L will be required to repurchase the bonds at 100% of their principal amount on May 1, 2001. Refer to Financial Note 6 for additional information on credit arrangements, financing activities and the Tender Offer for PP&L Resources' common stock. Financing and Liquidity The change in cash and cash equivalents for PP&L Resources for the six months ended June 30, 1998 increased $42 million from the comparable period in 1997. The reasons for this change were: o A $26 million decrease in cash provided by operating activities, partially due to a revenue loss associated with the energy credits mandated for competition pilot program customers, higher operating and maintenance expenses and payments for a buyout of a contract with a NUG. o A $378 million increase in cash used in investing activities, primarily due to an increase in the amount of investment in electric energy projects by PP&L Global. In addition, there were fewer sales and maturities of available-for-sale securities, as well as other financial investments in 1998 compared with 1997. o A $446 million increase in cash provided by financing activities, primarily due to PP&L Resources' purchase of PP&L preferred stock in 1997. In addition, the increase in short-term debt was $113 million greater for the six months ended June 30, 1998 than in the comparable period in 1997. PP&L's projected internally generated funds are expected to be sufficient to permit PP&L to retire about $275 million of its long-term debt during 1999-2002. Outside financing, in amounts not currently determinable, may be required over the next five years to finance investments in world-wide energy projects by PP&L Global. Financial Indicators The ratio of PP&L Resources pre-tax income to interest charges was 3.5 and 3.8 for the six months ended June 30, 1998 and 1997, respectively, excluding extraordinary items. The annual per share dividend rate on common stock remained unchanged during the first six months of 1998 at $1.67 per share. Refer to Financial Note 6 for information regarding the reduction of PP&L Resources' dividend and the Tender Offer for PP&L Resources' common stock. The ratio of the market price to book value of common stock was 199% at June 30, 1998, compared with 116% at June 30, 1997. Excluding extraordinary items, the ratio of market price to book value of common stock at June 30, 1998 was 133%. Unregulated Investments PP&L Global continues to pursue opportunities to develop and acquire electric generation, transmission and distribution facilities in the United States and abroad. As of June 30, 1998, PP&L Global had investments and commitments of approximately $638 million in distribution, transmission and generation facilities in the United Kingdom, Bolivia, Peru, Argentina, Spain, Portugal, Chile and El Salvador. PP&L Global's major investments to date are SWEB, Emel and DelSur. During the first six months of 1998, PP&L Global acquired an additional 561,000 shares of Emel at a cost of approximately $10 million, increasing its ownership interest to 28.9%. In February 1998, PP&L Global and Emel acquired a 75% interest in DelSur, an electric distribution company serving 193,000 customers in El Salvador, for approximately $180 million. Under the purchase agreement, PP&L Global directly acquired 37.5% of DelSur and Emel acquired the other 37.5%. DelSur is one of five electricity distribution companies in El Salvador that are being privatized by the government. During the second quarter of 1998, PP&L Global also acquired an additional 26% interest in SWEB for $170 million, increasing its equity interest to 51% and its voting interest to 49%. Acquisitions In July 1998, the PUC approved the acquisition of Penn Fuel Gas by PP&L Resources. In addition, in August 1998, the SEC approved the acquisition under the PUHCA. As a result, this acquisition is currently expected to close by August 31, 1998. In July 1998, PP&L Resources acquired McClure, a heating, ventilating and air-conditioning firm, in a cash transaction for an amount that is not material. Commitments and Contingent Liabilities There have been no material changes related to PP&L Resources' or PP&L's commitments and contingent liabilities since the companies filed their joint 1997 Form 10-K. Increasing Competition Background The electric utility industry has experienced and will continue to experience a significant increase in the level of competition in the energy supply market. PP&L has publicly expressed its support for full customer choice of electricity suppliers for all customer classes. PP&L is actively involved in efforts at both the state and federal levels to encourage a smooth transition to full competition. Pennsylvania Activities Reference is made to "PUC Restructuring Proceeding" for a discussion of the disposition of PP&L's restructuring plan under the Customer Choice Act. In February 1997, PP&L filed a proposed retail access pilot program with the PUC in accordance with the applicable provisions of the Customer Choice Act and PUC guidelines. A number of the major parties, including PP&L, entered into a joint settlement agreement resolving all of the issues in the Pennsylvania utilities' pilot proceedings. In August 1997, the PUC issued an order modifying this settlement and modifying and approving PP&L's pilot program. In October 1997, PP&L submitted its pilot program compliance filing to the PUC. Retail customers participating in the PP&L and other pilot programs began to receive power from their supplier of choice in November 1997. Under its pilot program, approximately 60,000 PP&L residential, commercial and industrial customers have chosen their electric supplier. PP&L will continue to provide all transmission and distribution, customer service and back-up energy supply services to participating customers in its service area. Only those alternative suppliers licensed by the PUC and in compliance with the state tax obligations set forth in the Customer Choice Act may participate in the pilot programs. To date, approximately 60 suppliers have obtained such licenses to participate in the pilot programs. In June 1997, the PUC approved PP&L's application for a license to act as an electric generation supplier. This license permits PP&L to participate in the various retail access pilot programs of PP&L and of the other Pennsylvania utilities, and PP&L currently is offering electric supply to the participating customers of those utilities throughout the state. At this time, PP&L has determined not to pursue additional residential customers in the competitive marketplace based on economic considerations. Federal Activities Reference is made to Financial Note 4 for a discussion of PP&L's settlement with 15 small utilities. Legislation has been introduced in the U.S. Congress that would give all retail customers the right to choose among competitive suppliers of electricity as early as 2000. In addition, in April 1996 the FERC adopted rules on competition in the wholesale electricity market primarily dealing with open access to transmission lines, recovery of stranded costs, and information systems for displaying available transmission capability (FERC Orders 888 and 889). These rules required all electric utilities to file open access transmission tariffs by July 9, 1996. The rules also provided that utilities are entitled to recover from certain wholesale requirements customers all "legitimate, verifiable, prudently incurred stranded costs." The FERC has provided recovery mechanisms for wholesale stranded costs, including stranded costs resulting from municipalization. Wholesale contracts signed after July 11, 1994 must contain explicit provisions addressing recovery of stranded costs if the utility wishes to seek such recovery. For requirements contracts signed before that date, a utility may seek recovery if it can show that it had a reasonable expectation of continuing to serve the customer after the contract term. Finally, the rules required that power pools file pool-wide open access transmission tariffs and modified bilateral coordination agreements reflecting the removal of discriminatory provisions by December 31, 1996. In March 1997, the FERC issued Orders 888-A and 889-A. Among other things, these orders required utilities to make certain changes to the non- rate terms and conditions of their open access transmission tariffs. In compliance with Order 888-A, in July 1997 PP&L filed a revised open access transmission tariff. In December 1996, the PJM companies submitted a compliance filing with the FERC, which proposed a pool-wide pro forma transmission tariff and a revised interconnection agreement and transmission owners agreement designed to accommodate open, non-discriminatory participation in the pool. The FERC accepted the PJM tariff and proposed rates, subject to refund, and they went into effect on March 1, 1997. In June 1997, all of the PJM companies except PECO (the PJM Supporting Companies) filed proposals with the FERC to amend the PJM tariff and restructure the PJM pool. PECO filed a separate request with the FERC to amend the PJM tariff. Furthermore, PECO and certain electric marketers submitted significantly different proposals to restructure the PJM pool. In November 1997, the FERC approved, with certain modifications, the PJM Supporting Companies' proposals for transforming the PJM into an ISO. In summary, the FERC order: (i) approved the PJM's open access transmission rates based on geographic zones, but required PJM to file a single PJM system-wide rate proposal by 2002; (ii) accepted the PJM Supporting Companies' methodology to price transmission when the system is congested and to charge these congestion costs to system users in addition to the open access transmission rates, but ordered PJM to file an additional proposal to address concerns raised over price certainty for buyers and sellers during periods of congestion; (iii) determined that the ISO is to operate both the transmission system and the power exchange which provides for the purchase and sale of spot energy within the PJM market; and (iv) accepted the PJM Supporting Companies' proposal regarding mandatory installed capacity obligations for all entities serving firm retail and wholesale load within PJM, but rejected their proposal for allocating the capacity benefits which result from PJM's ability to import power from other regional power pools. The PJM Supporting Companies and numerous other parties have filed requests for amendment and/or rehearing of virtually every portion of the FERC's PJM ISO order. PP&L also has filed its own request for amendment and/or rehearing. The FERC has not yet taken action on these filings. PP&L's primary issue with the FERC's order relates to a requirement that existing wholesale contracts for sales service and transmission service be modified to have the new PJM transmission tariff applied to service under these existing contracts and the requirement that PP&L modify these contracts to ensure that customers are not assessed multiple transmission charges. If PP&L were required to modify these existing contracts, PP&L could lose as much as $3-4 million in transmission revenues in 1998 -- but a lesser amount in the following years -- from several wholesale sales and transmission service contracts that were negotiated prior to the establishment of the PJM ISO. In an order issued in May 1998, the FERC allowed PP&L to request an increase in the revenue requirement applicable to transmission service over PP&L's transmission facilities to the extent that PP&L has otherwise unrecovered transmission costs as a result of the contract modifications. PP&L filed the proposed increase to its transmission revenue requirement in July 1998. Settlement discussions are currently underway with the FERC. In July 1997, the FERC accepted a new wholesale power tariff that permits PP&L to sell capacity and energy at market-based rates, both inside and outside the PJM area, subject to certain conditions. This tariff allows PP&L to become more active in the wholesale market with utilities and other entities, and removes pricing restrictions which in the past had limited PP&L to charging at or below cost-based rates. In September 1997, PP&L filed a request with the FERC to lower the applicable PP&L revenue requirement currently set forth in the PJM open access transmission tariff. The new revenue requirement results from PP&L's use of the same test year and cost support data used in the PUC restructuring proceeding. PP&L requested that the new revenue requirement take effect on November 1, 1997. In February 1998, the FERC accepted the proposed rates, subject to refund, and set the amount of the decrease in the revenue requirement for hearing. Settlement discussions are currently underway with the FERC. In September 1997, PP&L also filed a request with the FERC to approve new revenue requirements and rates for the PP&L open access transmission tariff under FERC Order 888. No customers currently take service under that tariff. As with the PJM tariff filing, the new revenue requirements and rates requested by PP&L are based on the same test year and cost support data used by PP&L in its PUC restructuring proceeding. In February 1998, the FERC rejected PP&L's tariff as unnecessary, in light of the PJM open access transmission tariff. In January 1998, the United States Department of Energy approved PP&L's application for an export license to sell capacity and/or energy to electric utilities in Canada. This export license allows PP&L to sell either its own capacity and energy not required to serve domestic obligations or power purchased from other utilities. Year 2000 Computer Issue PP&L Resources and its subsidiaries utilize computer-based systems throughout their businesses. In the year 2000, these systems will face a potentially serious problem with recognizing calendar dates. Without corrective action, this problem could result in computer shutdown or erroneous calculations causing less than optimal operation of the generating stations; diminished ability to monitor, control and coordinate generation with the transmission and distribution systems; and impact the operation of various monitoring and metering equipment utilized throughout PP&L. A company-wide Year 2000 coordination committee was formed to raise the awareness of the Year 2000 issue, share information and review the progress. A seven-step approach was developed to achieve Year 2000 compliance by assessing and remediating the problem in application software, hardware, plant control systems and devices containing embedded microprocessors. The seven steps in the plan include awareness, inventory, assessment, remediation, testing, implementation, and contingency planning. Efforts are also underway with respect to compliance by critical suppliers and business partners. As of June 30, 1998, approximately 50% of the critical mainframe applications and approximately 60% of the non-critical mainframe applications that will remain in production have been determined as being Year 2000 compliant. It is anticipated that this project will be completed on a timely basis, with all mission-critical mainframe computer applications to be compliant by March 31, 1999 and all mainframe computer systems to be fully Year 2000 compliant by mid-1999. PP&L has contingency plans to address issues such as blackouts on the electrical grid, cold starts of generating facilities and disaster recovery procedures for the computing environment. PP&L recognizes that additional contingency plans are necessary and, as part of the seven-step remediation process, is currently working on identifying additional contingency plans that may be needed. In May 1998, the NRC issued a notification requirement under which nuclear utilities are required to inform the commission, in writing, that they are working to solve the Year 2000 computer problem. In addition, nuclear utilities have until July 1, 1999 to inform the NRC that their computers are Year 2000 compliant or to submit a status report summarizing the on-going work. PP&L filed its written response to the NRC in August 1998. In July 1998, the PUC ordered an investigation to be conducted by the Office of Administrative Law Judge "to accurately assess any and all steps taken and proposed to be taken to resolve the Year 2000 compliance issue by all jurisdictional fixed utilities and mission-critical service providers such as the PJM Interconnection." The PUC is requiring all jurisdictional utilities to file a written response to a list of questions concerning Year 2000 compliance; and that, if mission-critical systems cannot be made Year 2000 compliant on or before March 31, 1999, to file a detailed contingency plan. PP&L filed its written response to these questions in August 1998. Based upon present assessments, PP&L Resources estimates that it will incur approximately $15 million in Year 2000 remediation costs. These costs are being expensed as incurred. PP&L RESOURCES, INC. AND PP&L, INC. AND SUBSIDIARIES PART II. OTHER INFORMATION Item 1. Legal Proceedings Reference is made to Notes to Financial Statements for information concerning PP&L's restructuring proceeding before the PUC under the Customer Choice Act. Reference is made to "Increasing Competition" in the Review of the Financial Condition and Results of Operation for information concerning proceedings before the FERC. In December 1995, PP&L filed a petition with the PUC for a declaratory order that it had acted properly in curtailing purchases from SER and other NUGs during minimum generation emergencies on the PJM system. The PUC has stayed a determination in this case pending a FERC decision regarding PP&L's request to decertify SER as a "qualifying cogeneration facility" (see discussion below). In November 1995, PP&L initiated a civil action against SER in the Lehigh County Court of Common Pleas. The principal issue is whether SER and an affiliate of SER properly used the steam generated by the plant in accordance with the terms of the contract. Under the contract, if the steam was used properly, SER is entitled to a rate of 6.6 cents/kWh; if not, it is entitled to a rate of only 5.0 cents/kWh. The total annual difference in PP&L's payment under the two rates is about $9 million. In April 1996, the Court concluded that PP&L must seek a determination by the FERC prior to reducing the rate paid to SER. Accordingly, in July 1996 PP&L filed a motion with the FERC to revoke SER's status as a "qualifying cogeneration facility". PP&L's motion alleges that SER has engaged in a conscious and continuing scheme to mislead PP&L and the FERC and that SER has never complied with the FERC's requirements for a qualifying cogeneration facility under PURPA. In May 1998, the FERC granted PP&L's motion to revoke SER's status as a qualified cogeneration facility for the years 1990-1995. Accordingly, in May 1998 the Lehigh County Court of Common Pleas permitted PP&L to reduce the rate paid to SER to 5.0 cents/kWh from 6.6 cents/kWh. SER is seeking rehearing and a stay of the FERC order. The total amount in dispute for past payments to SER (i.e., from 1990-1998) at the higher rate, including interest, equals approximately $97 million. SER also intervened in PP&L's restructuring proceeding before the PUC under the Customer Choice Act (see Financial Note 3). In conjunction with the settlement of that proceeding, PP&L, in August 1998, executed an agreement with SER providing that, effective January 1, 1999, the PP&L/SER power purchase agreement will be amended to provide that SER will receive 6.6 cents/kWh for generation up to 79.5 mW, as long as SER operates a "qualifying facility" under FERC rules. Generation in excess of 79.5 mW will continue to be sold at rates in the existing power purchase agreement. Subject to regulatory requirements, SER will be permitted, but not required, to sell generation above 80.5 mW to third parties. In a related matter, in June 1996 SER filed a lawsuit against PP&L in the Court of Common Pleas of Lehigh County, Pennsylvania. In this lawsuit, SER restates its allegations concerning PP&L's procedures for curtailing power deliveries from SER during periods of minimum generation emergencies declared by the PJM. SER's claims include breach of contract, fraud, negligent misrepresentation and breach of duty of good faith and fair dealing. In addition, SER claims that public statements by PP&L were libelous. In January 1997, the Court stayed SER's state law claims against PP&L pending consideration by the PUC of PP&L's minimum generation petition and dismissed SER's libel claims. The EPA has issued an order to PP&L and 12 other parites (mainly utilities) under Section 106 of Superfund requiring clean-up of PCBs at the Metal Bank Superfund site near Philadelphia. PP&L is complying with the order by joining the owner/operator of the site in performing the remedial design. A group of utilities has also offered to conduct the remedial design, but PP&L has not yet joined that group. PP&L challenged the DEP's right to collect air emission fees for hazardous air pollutants (HAPs) from PP&L's coal-fired units and air emission fees for emissions from PP&L's Phase I affected units from 1995 through 1999. (Phase I affected units are those units designated by the Clean Air Act, or which voluntarily opt into the requirement, to make certain reductions in SO2 and NOx emissions by 1995; all others must make these reductions by 2000.) The HAPs emissions fees are approximately $200,000 per year. The emission fees for Phase I affected units from 1995 through 1999 are estimated at $1.6 million. PP&L and the DEP have negotiated a settlement in principle of this litigation. PP&L expects the settlement to be finalized by year end. Item 4. Submission of Matters to a Vote of Security Holders At PP&L Resources' Annual Meeting of Shareowners held on April 24, 1998, the shareowners: (1) Elected all three nominees for the office of director. The vote for all nominees was 125,932,145. The votes for individual nominees were as follows: Number of Votes For Withhold Authority William F. Hecht 125,932,145 5,937,190 Stuart Heydt 126,961,339 4,907,996 Marilyn Ware Lewis 126,863,001 5,006,334 The vote to withhold authority for all nominees was 4,796,496. (2) Ratified the appointment of Price Waterhouse LLP as independent auditors for year ended December 31, 1998. The vote was 129,570,102 in favor and 1,062,482 against, with 1,236,751 abstaining. At PP&L's Annual Meeting of Shareowners held on April 24, 1998 the shareowners: (1) Elected all three nominees for the office of director. The vote for all nominees was 161,618,532. The votes for individual nominees were as follows: Number of Votes For Withhold Authority William F. Hecht 161,618,532 3,533 Stuart Heydt 161,618,644 3,421 Marilyn Ware Lewis 161,618,606 3,459 The vote to withhold authority for all nominees was 3,421. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10 - Form of severance agreement entered into between PP&L Resources and officers. 27 - Financial Data Schedule (b) Reports on Form 8-K Report dated April 7, 1998 Item 5. Other Events Information regarding the recommended decision of the Administrative Law Judge on PP&L's restructuring plan. Report dated April 28, 1998 Item 5. Other Events Information regarding the issuance of PP&L's First Mortgage Bonds, 6-1/8% Reset Put Securities Series Due 2006. Report dated May 14, 1998 Item 5. Other Events Information regarding the PUC's nonbinding motion approving a restructuring plan for PP&L. Report dated June 15, 1998 Item 5. Other Events Information regarding the PUC's June 15, 1998 order in PP&L's restructuring proceeding. Also, information regarding PP&L Global's acquisition of an additional ownership stake in SWEB. GLOSSARY OF TERMS AND ABBREVIATIONS AFUDC (Allowance for Funds Used During Construction) - the cost of equity and debt funds used to finance construction projects that is capitalized as part of construction cost. Atlantic - Atlantic City Electric Company CERCLA - Comprehensive Environmental Response, Compensation and Liability Act Clean Air Act (Federal Clean Air Act Amendments of 1990) - legislation enacted to address environmental issues including acid rain, ozone and toxic air emissions. CTC - Competitive transition charge Customer Choice Act - (Pennsylvania Electricity Generation Customer Choice and Competition Act) - legislation enacted to restructure the state's electric utility industry to create retail access to a competitive market for generation of electricity DelSur - Distributidora de Electricidad del Sur, an electric distribution company in El Salvador DEP - Pennsylvania Department of Environmental Protection District Court - United States District Court for the Eastern District of Pennsylvania DRIP (Dividend Reinvestment Plan) - program available to shareowners of PP&L Resources' common stock and PP&L preferred stock to reinvest dividends in PP&L Resources' common stock instead of receiving dividend checks. ECAR - East Central Area Reliability Council EITF - Emerging Issues Task Force Emel - Empresas Emel, S.A., a Chilean electric distribution holding company Energy Marketing Center - organization within PP&L responsible for marketing and trading wholesale energy EPA - Environmental Protection Agency FASB (Financial Accounting Standards Board) - a rulemaking organization that establishes financial accounting and reporting standards. FGD - Flue gas desulfurization equipment installed at coal-fired power plants to reduce sulfur dioxide emissions. FERC (Federal Energy Regulatory Commission) - federal agency that regulates interstate transmission and sale of electricity and related matters. H.T. Lyons - H.T. Lyons, Inc., a PP&L Resources unregulated subsidiary specializing in heating, ventilating and air-conditioning. IBEW - International Brotherhood of Electrical Workers ISO - Independent System Operator ITC - Investment tax credits JCP&L - Jersey Central Power & Light Company McClure - McClure Company, a PP&L Resources unregulated subsidiary specializing in heating, ventilating and air-conditioning. NOx - Nitrogen oxide NPDES - National Pollutant Discharge Elimination System NRC - Nuclear Regulatory Commission NUG (Non-Utility Generator) - generating plants not owned by regulated utilities. If the NUG meets certain criteria, its electrical output must be purchased by public utilities as required by PURPA. OCA - Pennsylvania Office of Consumer Advocate OTS - PUC Office of Trial Staff PCB (Polychlorinated Biphenyl) - additive to oil used in certain electrical equipment up to the late-1970s. Now classified as a hazardous chemical. PECO - PECO Energy Company Penn Fuel Gas - Penn Fuel Gas, Inc., a PP&L Resources regulated subsidiary, specializing in natural gas distribution, transmission and storage services, and the sale of propane. PJM (PJM Interconnection, L.L.C.) - operates the electric transmission network and electric energy market in the mid-Atlantic region of U.S. PP&L - PP&L, Inc. PP&L Capital Funding - PP&L Capital Funding, Inc., PP&L Resources' financing subsidiary PP&L Global - PP&L Global, Inc., a PP&L Resources unregulated subsidiary which invests in and develops world-wide power projects. PP&L Resources - PP&L Resources, Inc., the parent holding company of PP&L, PP&L Global, PP&L Spectrum and other subsidiaries PP&L Spectrum - PP&L Spectrum, Inc., a PP&L Resources unregulated subsidiary which offers energy-related products and services. PUC (Pennsylvania Public Utility Commission) - state agency that regulates certain ratemaking, services, accounting, and operations of Pennsylvania utilities PUHCA - Public Utility Holding Company Act of 1935 PURPA (Public Utility Regulatory Policies Act of 1978) - legislation passed by Congress to encourage energy conservation, efficient use of resources, and equitable rates. SEC - Securities and Exchange Commission SER - Schuylkill Energy Resources, Inc. SFAS (Statement of Financial Accounting Standards) - accounting and financial reporting rules issued by the FASB. SO2 - Sulfur dioxide Superfund - Federal and state legislation that addresses remediation of contaminated sites. SWEB - South Western Electricity plc, a British regional electric utility company. Year 2000 - A set of date-related problems that may be experienced by a software system or application. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature for each undersigned company shall be deemed to relate only to matters having reference to such company or its subsidiary. PP&L Resources, Inc. (Registrant) PP&L, Inc. (Registrant) Date: August 14, 1998 /s/ John R. Biggar John R. Biggar Senior Vice President - Financial (PP&L Resources, Inc. and PP&L, Inc.) /s/ Joseph J. McCabe Joseph J. McCabe Vice President & Controller (PP&L Resources, Inc. and PP&L, Inc.) EX-10 2 AGREEMENT THIS AGREEMENT, effective as of January 1, 1998, is made by and between PP&L Resources, Inc., a Pennsylvania corporation and ___________ (the "Executive"). WHEREAS, the Company considers it essential to the best interests of its shareowners to foster the continued employment of key management personnel; and WHEREAS, the Board of Directors of the Company (the "Board") recognizes that, as is the case with many publicly-held corporations, the possibility of a Change in Control (as defined in the last Section hereof) exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its shareowners; and WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control; [WHEREAS, the Executive and [the Company/insert other entity] have entered into a severance agreement dated as of [insert date of prior agreement] (the "Prior Severance Agreement"), which the Executive and the Company desire to terminate, in its entirety, effective as of the date hereof, and in lieu thereof, enter into this Agreement] 1); NOW THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. Defined Terms. The definitions of capitalized terms used in this Agreement are provided in the last Section hereof. 2. Term of Agreement. The Term of this Agreement shall commence on the date hereof and shall continue in effect through December 31, 1999; provided, however, that commencing on January 1, 1999 and each January 1 thereafter, the Term shall automatically be extended for one additional year unless, either the Company or the Executive gives at least 15 months advance notice of termination by, not later than September 30 of the year preceding the year in which the Term is then scheduled to expire, giving notice not to extend the Term; and further provided, however, that if a Change in Control shall have occurred during the Term, the Term shall expire no earlier than thirty-six (36) months beyond the month in which such Change in Control occurred. Notwithstanding the foregoing, and subject to any extensions pursuant to Section 7.3, in the event that prior to the occurrence of a Change in Control or Potential Change in Control, the Executive's employment is terminated for any reason, then this Agreement shall terminate as of the date that the Executive's employment is terminated. 3. Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 hereof, no Severance Payments shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed to in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 4. The Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six (6) months after the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. 5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period, until the Executive's employment is terminated by the Company for Disability. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's full base salary through the Date of Termination at the rate in effect immediately prior to the Date of Termination, or if higher, the rate in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation or benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination, or if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits due the Executive as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. 6. Severance Payments. 6.1 [Subject to Section 6.2 hereof,]2) [T]he Company shall pay the Executive the payments, and provide the Executive the benefits, described in this Section 6.1 (the "Severance Payments") upon the termination of the Executive's employment following a Change in Control and during the Term, in addition to the payments and benefits described in Section 5 hereof, unless such termination is (i) by the Company for Cause, (ii) by reason of death, Disability or Retirement, or (iii) by the Executive without Good Reason. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason if (A) the Executive's employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control or (B) if the Executive terminates his employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person, or (C) the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason and such termination or the circumstance or event which constitutes Good Reason is otherwise in connection with or in anticipation of a Change in Control (whether or not a Change in Control ever occurs). For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the Executive shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that such position is not correct. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefit otherwise payable to the Executive including any payments under the Executive Retirement Security Plan or the Displaced Managers Policy (SPM Policy 606) or any similar plan, policy or procedure or arrangement, [or the Executive's Prior Severance Agreement]3) or any employment agreement or arrangement between the Executive and the Company, to the extent provided in Section 11 of this Agreement, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three times the sum of (i) the Executive's base salary as in effect immediately prior to the Date of Termination or, if higher, in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, and (ii) the highest annual bonus earned by the Executive pursuant to any annual bonus or incentive plan maintained by the Company in respect of any of the last three fiscal years ending immediately prior to the fiscal year in which occurs the Date of Termination or, if higher, immediately prior to the fiscal year in which occurs the first event or circumstance constituting Good Reason (including as an amount so paid any amount that would have been so paid but for the Executive's request that the amount not be paid). For purposes of determining the value of the annual bonus earned by the Executive in any calendar year, with respect to any calendar year prior to 1998, the value of any restricted stock awards earned by the Executive in any such year (but not including any dividends distributed thereon) shall be included in the value of the annual bonus for such year, and with respect to the 1998 calendar year and any subsequent calendar year, the value of any restricted stock awards earned by the Executive in any such year shall not be included in the value of the annual bonus for such year; (B) For the thirty-six (36) month period immediately following the Date of Termination, the Company shall arrange to provide the Executive and his dependents, life, disability, accident and health insurance benefits substantially similar to those provided to the Executive and his dependents immediately prior to the Date of Termination (without giving effect to any reduction in such benefits subsequent to a Change in Control which reduction constitutes Good Reason) or, if more favorable to the Executive, those provided to the Executive and his dependents immediately prior to the first occurrence of an event or circumstance constituting Good Reason, at no greater cost to the Executive than the cost to the Executive immediately prior to such date or occurrence; provided, however, that, unless the Executive consents to a different method (after taking into account the effect of such method on the calculation of "parachute payments" pursuant to Section 6.2 hereof), such health insurance benefits shall be provided through a third-party insurer. Benefits otherwise receivable by the Executive pursuant to this Section 6.1(B) shall be reduced to the extent benefits of the same type are received by or made available to the Executive during the thirty-six (36) month period following the Date of Termination (and any such benefits received by or made available to the Executive shall be reported to the Company by the Executive); provided, however, that the Company shall reimburse the Executive for the excess, if any, of the cost of such benefits to the Executive over such cost immediately prior to the Date of Termination or, if more favorable to the Executive, the first occurrence of an event or circumstance constituting Good Reason. [If the Severance Payments shall be decreased pursuant to Section 6.2 hereof, and the Section 6.1(B) benefits that remain payable after the application of 6.2 hereof are thereafter reduced pursuant to the immediately preceding sentence, the Company shall, no later than five (5) business days following such reduction, pay to the Executive the least of (a) the amount of the decrease made in the Severance Payments pursuant to Section 6.2 hereof, (b) the amount of the subsequent reduction in these Section 6.1 benefits or (c) the maximum amount that can be paid to the Executive without being, or causing any other payment to be, nondeductible by reason of section 280G of the Code).]4) (C) Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any unpaid incentive compensation that has been allocated or awarded to the Executive for a completed fiscal year or other measuring period preceding the Date of Termination under any such plan and which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date, and (ii) to the extent not otherwise paid or deferred at the Executive's election, pursuant to the terms of the applicable plan, a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for all then uncompleted periods under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the level that would produce the maximum award, of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period. (D) In addition to the retirement benefits to which the Executive is entitled under each Pension Plan or any successor plan thereto, the Company shall pay the Executive a lump sum amount, in cash, equal to the excess of (i) the actuarial equivalent of the aggregate retirement pension (taking into account any early retirement subsidies associated therewith and determined as a straight life annuity commencing at the date (but in no event earlier than the third anniversary of the Date of Termination) as of which the actuarial equivalent of such annuity is greatest) which the Executive would have accrued under the terms of all Pension Plans (without regard to any amendment to any Pension Plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of retirement benefits thereunder), determined as if the Executive were fully vested thereunder and had accumulated after the Date of Termination thirty-six (36) additional months of service credit thereunder (reducing such thirty- six (36) additional months, but not below zero, to the extent necessary so that the total number of months of service credited thereunder, including the number of months credited pursuant to this Section 6.1(D), does not exceed 360) and had been credited under each Pension Plan during such period with compensation equal to the Executive's compensation (as defined in such Pension Plan) during the twelve (12) months immediately preceding the Date of Termination or, if higher, during the twelve months immediately prior to the first occurrence of an event or circumstance constituting Good Reason, over (ii) the actuarial equivalent of the aggregate retirement pension (taking into account any early retirement subsidies associated therewith and determined as a straight life annuity commencing at the date (but in no event earlier than the Date of Termination) as of which the actuarial equivalent of such annuity is greatest) which the Executive had accrued pursuant to the provisions of the Pension Plans as of the Date of Termination. For purposes of this Section 6.1(D), "actuarial equivalent" shall be determined using the same assumptions utilized under the Supplemental Executive Retirement Plan immediately prior to the Date of Termination, or, if more favorable to the Executive, immediately prior to the first occurrence of an event or circumstance constituting Good Reason. (E) If the Executive would have become entitled to benefits under the Company's post-retirement health care or life insurance plans, as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, had the Executive's employment terminated at any time during the period of thirty-six (36) months after the Date of Termination, the Company shall provide such post-retirement health care or life insurance benefits to the Executive and the Executive's dependents commencing on the later of (i) the date on which such coverage would have first become available and (ii) the date on which benefits described in subsection (B) of this Section 6.1 terminate. (F) The Company shall provide the Executive with outplacement services suitable to the Executive's position for a period of three years or, if earlier, until the first acceptance by the Executive of an offer of employment. [Gross Up Alternative 6.2] (A) Whether or not the Executive becomes entitled to the Severance Payments, if any of the payments or benefits received or to be received by the Executive in connection with a Change in Control or the Executive's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (such payments or benefits, excluding the Gross-Up Payment, being hereinafter referred to as the "Total Payments") will be subject to the Excise Tax, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. (B) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" (within the meaning of section 280G(b)(2) of the Code) unless, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of section 280G(b)(4)(B) of the Code) in excess of the Base Amount (within the meaning of Section 280G(b)(3) of the Code) allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. (C) In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, the Executive shall repay to the Company, within five (5) business days following the time that the amount of such reduction in the Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive, to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code). In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) within five (5) business days following the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. [Alternative 6.2 - "Valley"] (A) Notwithstanding any other provisions of this Agreement, in the event that any payment or benefit received or to be received by the Executive in connection with a Change in Control or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called "Total Payments") would be subject (in whole or part), to the Excise Tax, then the cash Severance Payments shall be reduced (if necessary to zero) to the extent necessary so that no portion of the Total Payments is subject to the Excise Tax (after taking into account any reduction in the Total Payments provided by reason of section 280G of the Code in such other plan, arrangement or agreement) and all other Severance Payments shall thereafter be reduced (if necessary, to zero) so that no portion of the Total Payments is subject to the Excise Tax, if (i) the net amount of such Total Payments, as so reduced, (and after deduction of the net amount of federal, state and local income tax on such reduced Total Payments) is greater than (ii) the excess of (x) the net amount of such Total Payments, without reduction (but after deduction of the net amount of federal, state and local income tax on such Total Payments), over (y) the amount of Excise Tax to which the Executive would be subject in respect of such Total Payments. Notwithstanding the foregoing paragraph, if the Executive's Severance Payments will be reduced pursuant to the foregoing paragraph, then the Executive may elect to have the noncash Severance Payments reduced (or eliminated) prior to any reduction of the cash Severance Payments. (B) For purposes of determining whether and the extent to which the Total Payments will be subject to the Excise Tax, (i) no portion of the Total Payments the receipt or enjoyment of which the Executive shall have waived at such time and in such manner as not to constitute a "payment" within the meaning of section 280G(b) of the Code shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which, in the opinion of tax counsel selected by the accounting firm that was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, (including by reason of section 280G(b)(4)(A) of the Code) and, in calculating the Excise Tax, no portion of such Total Payments shall be taken into account which constitutes reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, and (iii) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Company in accordance with the principles of sections 280G(d)(3) and (4) of the Code. Prior to the payment date set forth in Section 6.3 hereof, the Company shall provide the Executive with its calculation of the amounts referred to in this Section and such supporting materials as are reasonably necessary for the Executive to evaluate the Company's calculations. If the Executive objects to the Company's calculations, the Company shall pay to the Executive such portion of the Severance Payments (up to 100% thereof) as the Executive determines is necessary to result in the Executive receiving the greater of clauses (i) and (ii) of Section 6.2(A) hereof. (C) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section 6.2, the Total Payments paid to or for the Executive's benefit are in an amount that would result in any portion of such Total Payments being subject to the Excise Tax, then, if such repayment would result in (i) no portion of the remaining Total Payments being subject to the Excise Tax and (ii) a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, the Executive shall have an obligation to pay the Company upon demand an amount equal to the sum of (i) the excess of the Total Payments paid to or for the Executive's benefit over the Total Payments that could have been paid to or for the Executive's benefit without any portion of such Total Payments being subject to the Excise Tax; and (ii) interest on the amount set forth in clause (i) of this sentence at the rate provided in section 1274(b)(2)(B) of the Code from the date of the Executive's receipt of such excess until the date of such payment. 6.3 The payments provided in subsection 6.1(A), (C) and (D) hereof [and Section 6.2 hereof] 5) shall be made not later than the fifth day following the Date of Termination; provided, however, that if the amounts of such payments, [and the limitation on such payments set forth in Section 6.2 hereof,] 6) cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company, [or, in the case of payments under Section 6.2 hereof, in accordance with Section 6.2 hereof,] 7) of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth (5th) business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment hereunder or in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. 7.1 Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination", with respect to any purported termination of the Executive's employment after a Change in Control and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such thirty (30) day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 7.3 Dispute Concerning Termination. If within fifteen (15) days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. 7.4 Compensation During Dispute. If a purported termination occurs following a Change in Control and during the Term and the Date of Termination is extended in accordance with Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, as determined in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 or Section 7.4 hereof. Further, the amount of any payment or benefit provided for in this Agreement (other than in Section 6.1(B) hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 9. Successors; Binding Agreement. 9.1 In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, to the Executive at the last known address maintained in the Company's personnel records, and to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: PP&L Resources, Inc. Two North 9th Street Allentown, Pennsylvania 18101 Attention: Corporate Secretary 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof, which have been made by either party [including but not limited to, the Prior Severance Agreement] 8); provided, however, that this Agreement shall supersede any agreement setting forth the terms and conditions of the Executive's employment with the Company only in the event that the Executive's employment with the Company is terminated on or following a Change in Control, by the Company other than for Cause or by the Executive other than for Good Reason. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Pennsylvania. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement that by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7 hereof) shall survive such expiration. 12. Validity; Pooling. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. In the event that the Company is party to a transaction that is otherwise intended to qualify for "pooling of interests" accounting treatment then (a) this Agreement shall, to the extent practicable, be interpreted so as to permit such accounting treatment, and (b) to the extent that the application of the first sentence of this Section 12 does not preserve the availability of such accounting treatment, then, to the extent that any provision of this Agreement disqualifies the transaction as a "pooling" transaction (including, if applicable, the entire Agreement), such provision shall be null and void as of the date hereof. All determinations under this Section 12 shall be made by the accounting firm whose opinion with respect to "pooling of interests" is required as a condition to the consummation of such transaction. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes; Arbitration. The Board shall make all determinations as to the Executive's right to benefits under this Agreement. Any denial by the Board of a claim for benefits under this Agreement shall be stated in writing and delivered or mailed to the Executive and such notice shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon, and shall be written in a manner that may be understood without legal or actuarial counsel. In addition, the Board shall afford a reasonable opportunity to the Executive for a review of the decision denying the Executive's claim and, in the event of continued disagreement, the Executive may appeal within a period of 60 days after receipt of notification of denial. Failure to perfect an appeal within the 60-day period shall make the decision conclusive. Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Philadelphia, Pennsylvania in accordance with the rules of the American Arbitration Association then in effect; provided, however, that the evidentiary standards set forth in this Agreement shall apply. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Notwithstanding any provision of this Agreement to the contrary, the Executive shall be entitled to seek specific performance of the Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. (B) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. (C) "Board" shall mean the Board of Directors of the Company. (D) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company or its subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company, and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Board by clear and convincing evidence that Cause exists. (E) "Change in Control" means the occurrence of any one of the following events: (I) any change in the control of the Company of a nature that would be required to be reported in response to Item 1(a) of Form 8-K under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); (II) during any period of not more than two consecutive years, individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in clause (I), (III) or (IV) of this paragraph) whose election by the Board or nomination for election by the Company's shareowners was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved or recommended, cease for any reason to constitute at least a majority thereof; (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities entitled to vote generally in the election of directors; (IV) there is consummated any merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation or the sale or other disposition of all or substantially all of the assets of the Company to any other person or persons unless, after giving effect thereto, (1) holders of the Company's then outstanding securities entitled to vote generally in the election of directors will own a majority of the outstanding stock entitled to vote generally in the election of directors of the continuing, surviving or transferee corporation or any parent (within the meaning of Rule 12b-2 under the Exchange Act) thereof and (2) the incumbent members of the Board as constituted immediately prior thereto shall constitute at least a majority of the directors of the continuing, surviving or transferee corporation and any parent thereof; (V) the shareowners of the Company approve a plan of complete liquidation or dissolution of the Company; or (VI) the Board adopts a resolution to the effect that a "Change in Control" has occurred or is anticipated to occur. (F) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (G) "Company" shall mean PP&L Resources, Inc. and, except in determining, under Section 15(E) hereof, whether or not any Change in Control of the Company has occurred in connection with such succession, shall include its subsidiaries and any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise. (H) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof. (I) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six (6) consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (J) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (K) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (L) "Executive" shall mean the individual named in the first paragraph of this Agreement. (M) "Good Reason" for termination of the Executive's employment with the Company by such Executive shall mean the occurrence (without the Executive's express written consent) after a Change in Control, or prior to a Change in Control under the circumstances described in clauses (B) and (C) of the second sentence of Section 6.1 hereof (treating all references in paragraphs (I) through (VII) below to a "Change in Control" as references to a "Potential Change in Control"), of any one of the following acts by the Company, or failures by the Company to act: (I) the assignment to the Executive of any duties inconsistent with the Executive's status as an executive officer or key employee of the Company or a substantial adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to a Change in Control; (II) a reduction by the Company of the Executive's annual base salary as in effect on the date of this Agreement, or as the same may be increased from time to time, except for across-the-board decreases uniformly affecting management, key employees and salaried employees of the Company or the business unit in which the Executive is then employed; (III) the relocation of the Executive's principal work location to a location more than 30 miles from the vicinity of such work location immediately prior to a Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days of the date such compensation is due, except for across- the-board compensation deferrals uniformly affecting management, key employees and salaried employees of the Company or the business unit in which the Executive is then employed; (V) the failure by the Company to continue in effect any compensation or benefit plan in which the Executive participates immediately prior to a Change in Control which is material to the Executive's total compensation, or any substitute plans adopted prior to a Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Executive's participation relative to other participants, as existed immediately prior to the Change in Control, or (VI) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to a Change in Control, except for across-the-board changes to any such plans uniformly affecting all participants in such plans, the taking of any other action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy at the time of the Change in Control; or (VII) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof; For purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate his or her employment with the Company for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed correct unless the Company established to the Board by clear and convincing evidence that Good Reason does exist. (N) "Notice of Termination" shall have the meaning stated in Section 7.1 hereof. (O) "Pension Plan" shall mean any tax-qualified, supplemental or excess defined benefit pension plan maintained by the Company and any other agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits. (P) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof; provided, however, a Person shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. (Q) "Potential Change in Control" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) any Person publicly announces an intention to take or to consider taking actions which if consummated would constitute a Change in Control; (III) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 5% or more of the combined voting power of the Company's then outstanding securities entitled to vote generally in the election of directors; or (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (A) "Retirement" shall be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees. (S) "Severance Payments" shall have the meaning set forth in Section 6.1 hereof. (T) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein). (U) "Total Payments" shall mean those payments described in Section 6.2 hereof. PP&L RESOURCES, INC. By ________________________ Name: Title: ___________________________ [Name of Executive] FOOTNOTES 1) Include this section for Executives who have existing severance agreements. 2) Delete this section for Executives receiving a gross-up. 3) Include this section for Executives with existing severance agreements. 4) Include this section for Executives not receiving gross-up. 5) Include this section for Executive receiving a gross-up. 6) Include this section for Executive not receiving a gross-up. 7) Include this section for Executive receiving a gross-up. 8) Insert this section for Executives who have existing severance. EX-27 3
UT This schedule contains summary financial information extracted from the consolidated statement of income, consolidated balance sheet, and consolidated statement of cash flows for the form 10-Q dated June 30, 1998 and is qualified in its entirety by reference to such financial statements. 0000922224 PP&L RESOURCES, INC. 1,000,000 6-MOS DEC-31-1997 JUN-30-1998 PER-BOOK 4,272 957 772 3,198 0 9,199 2 1,674 231 1,907 47 50 2,980 0 0 397 0 0 103 58 3,657 9,199 838 38 690 728 110 4 114 54 (888) 6 (894) 140 0 281 (5.34) (5.34) Net income includes an extraordinary item of ($948) million ($1,614 million net of $666 million of income taxes) reflecting the effects of Pennsylvania Public Utility Commission Restructuring Order and the deregulation of PP&L's electric generation operations.
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