-----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, OazgA5CPOfJ6QZUXXdcV2mBCengJeFbrw6ZiuCOYNCdTRU0PhiUHLmrDNLb8ReYc asb3SaggAydPl3KWAigBPg== 0000950172-98-000070.txt : 19980129 0000950172-98-000070.hdr.sgml : 19980129 ACCESSION NUMBER: 0000950172-98-000070 CONFORMED SUBMISSION TYPE: U-1 PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19980128 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: U-1 SEC ACT: SEC FILE NUMBER: 070-09165 FILM NUMBER: 98515483 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 U-1 1 FORM U-1 APPLICATION OR DECLARATION As filed with the Securities and Exchange Commission on January 28, 1998 File No . 70-____ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------------------- FORM U-1 APPLICATION OR DECLARATION UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 PP&L Resources, Inc. Two North Ninth Street Allentown, PA 18101 (Name of company or companies filing this statement and address of principal executive offices) None (Name of top registered holding company parent of each applicant or declarant) Robert J. Grey Senior Vice President General Counsel and Secretary PP&L Resources, Inc. Two North Ninth Street Allentown, PA 18101 (610) 774-5151 (Name and addresses of agents for service) -------------------------------------------- The Commission is requested to send copies of all notices, orders and communications in connection with this Application to: Clifford (Mike) M. Naeve, Esq. Skadden, Arps, Slate, Meagher & Flom LLP 1440 New York Avenue, N.W. Washington, D.C. 20005 INTRODUCTION AND REQUEST FOR COMMISSION ACTION Pursuant to Sections 9(a)(2) and 10 of the Public Utility Holding Company Act of 1935 (the "Act"), PP&L Resources, Inc. (the "Company"), which is an exempt intrastate holding company under the Act, hereby requests that the Securities and Exchange Commission (the "Commission") authorize the Company's acquisition of all of the issued and outstanding common stock of Penn Fuel Gas, Inc. ("Penn Fuel"), which is an exempt intrastate holding company under the Act (the "Transaction"). The Company also requests an order under Section 3(a)(1) of the Act declaring it and each of its subsidiary companies exempt from all provisions of the Act except Section 9(a)(2) following consummation of the Transaction. The Transaction will be governed by the terms of an Agreement and Plan of Merger dated as of June 26, 1997 (the "Merger Agreement"), by and among the Company, Keystone Merger Corp., a Pennsylvania Corporation ("Keystone") and a wholly-owned subsidiary of the Company, and Penn Fuel. Under the terms of the Merger Agreement, Keystone will be merged into Penn Fuel, with Penn Fuel surviving as a wholly-owned subsidiary of the Company. Penn Fuel's Board of Directors approved the Transaction on June 25, 1997, and the Company's Board of Directors approved the Transaction on June 26, 1997. The Transaction was approved by the shareholders of Penn Fuel on October 1, 1997. The Transaction does not require approval of the Company's shareholders. A registration statement on Form S-4, which includes a Prospectus (the "Registration Statement"), was filed with the Commission on August 13, 1997 and was declared effective on September 5, 1997. The Transaction is conditioned, among other things, upon approval by the Pennsylvania Public Utility Commission ("Pennsylvania PUC"). The Maryland Public Service Commission ("Maryland PSC") was notified of the Transaction and has determined not to institute proceedings on the matter at this time. In addition, the Transaction was subject to the 30-day waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (as amended) (the "HSR Act"). On October 7, 1997, the notices required pursuant to the HSR Act were filed by the Company and Penn Fuel, respectively. On October 24, 1997, the United States Department of Justice ("DOJ") granted early termination of the waiting period under the HSR Act with respect to the Transaction. The Company is the parent holding company of PP&L, Inc. (formerly Pennsylvania Power & Light Company) ("PP&L"), which provides regulated electric service in central eastern Pennsylvania. Penn Fuel is the parent holding company of PFG Gas, Inc. ("PFG Gas"), which provides regulated natural gas service in southern and eastern Pennsylvania and in a small portion of northern Maryland, and North Penn Gas Company ("North Penn"), which provides regulated natural gas service in northwestern and north central Pennsylvania. The Transaction is designed to create a merged company that will be able to compete effectively in the energy market -- which is being opened to competition at both the state and federal levels -- and to offer a broad array of energy services to customers of the merged company. For the Commission to approve the Transaction, Section 10 of the Act requires the Commission to find that the Transaction will tend towards the economical and efficient development of an integrated public-utility system and that state laws have been complied with. The Transaction clearly satisfies these requirements. While Section 10 also permits the Commission to disapprove an acquisition if certain adverse circumstances would result -- such as undue concentration of control or other harm to the public interest or the interests of investors or consumers -- these adverse circumstances are not present here. Accordingly, the Company submits that the Transaction meets all requirements of Section 10. With respect to the exemption requested under Section 3(a)(1), the holding company system must meet the intrastate requirements of the exemption and, in addition, the Commission must not find that the exemption would be detrimental to the public interest or the interests of investors or consumers. The Company submits that these criteria are satisfied as well. The Company requests expedited treatment of this application, so that upon receipt of other regulatory approvals, the Company and Penn Fuel will be in a position to consummate the Transaction promptly. Unless otherwise indicated, all financial information set forth herein is for the fiscal year ended December 31, 1996. ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION. A. DESCRIPTION OF THE PARTIES TO THE TRANSACTION. 1. THE COMPANY. The Company is a public utility holding company incorporated under the laws of the Commonwealth of Pennsylvania,* which is exempt from regulation by the Commission under the Act (except for Section 9(a)(2) thereof) pursuant to Section 3(a)(1) of the Act and by order of the Commission.** Through its subsidiaries, the Company provides electric utility services and other energy-related products and services. -------------------- * The Company was incorporated in 1994 by PP&L in a corporate reorganization. ** PP&L Resources, Inc., File No. 70-8104, Rel. No. 35- 26248 (issued March 10, 1995). PP&L, the Company's principal subsidiary, is an operating electric utility incorporated in 1920 under the laws of the Commonwealth of Pennsylvania. PP&L serves approximately 1.2 million customers in eastern and central Pennsylvania, sells retail electricity throughout Pennsylvania and markets wholesale electricity throughout the Eastern United States. A map of PP&L's service area is attached as Exhibit E-1. PP&L operates its generating and transmission facilities as part of the Pennsylvania- New Jersey-Maryland Interconnection Association. PP&L owns a 90% undivided interest in each of two nuclear-fueled generating units at its Susquehanna station, and Allegheny Electric Cooperative, Inc. owns a 10% undivided interest in each of those units. PP&L also owns undivided interests of 12.2% in the Keystone generating station, 11.3% in the Conemaugh generating station and 8.37% in the Merrill Creek Reservoir generating station. Overall, PP&L produced about 39.4 billion kwh in plants it owned in 1996. PP&L purchased 7.8 billion kwh under purchase agreements and received 1.7 billion kwh as power pool interchange. During the year, PP&L delivered about 1.3 billion kwh as pool interchange and about 6.3 billion kwh under purchase agreements. PP&L owns 33.3% of the capital stock and 50% of the voting stock of Safe Harbor Water Power Corporation ("Safe Harbor"), a Pennsylvania corporation, which owns and operates a hydroelectric plant on the Susquehanna river in south central Pennsylvania. The remaining interest in Safe Harbor is held by Baltimore Gas & Electric Company. Safe Harbor's plant has a total capacity of 417,500 kilowatts. PP&L is entitled by contract to one-third of this total capacity (139,000 kilowatts). In 1996, PP&L's purchases from Safe Harbor amounted to approximately $10 million; Safe Harbor's 1996 total operating revenues were approximately one percent of PP&L's 1996 utility operating revenues.* -------------------- * PP&L is exempt by order from the provisions of the Act (except for Section 9(a)(2)) pursuant to Section 3(a)(2). Pennsylvania Power & Light Company, Rel. No. 35-19725; SEC Docket 814 (1976). During 1996, 57% of the energy generated by PP&L's plants came from coal-fired stations, 38.5% from nuclear operations at the Susquehanna station, 2.5% from the Martins Creek oil and gas-fired steam station and 2.0% from hydroelectric stations. The Company is engaged in non-utility businesses, as well as certain other utility businesses that are not jurisdictional under the Act, through a number of other subsidiaries: PP&L Global, Inc. (formerly Power Markets Development Company) ("PP&L Global") engages in unregulated business activities through investments in electric generation, transmission and distribution facilities both overseas and domestically. As of July 31, 1997, PP&L Global had approximately $370 million of investments and commitments in such facilities in the United Kingdom, Bolivia, Peru, Argentina, Spain, Chile and Portugal. PP&L Spectrum, Inc. (formerly Spectrum Energy Services Corporation), an unregulated subsidiary, provides energy-related products and services both inside and outside of PP&L's service territory. Interstate Energy Company, a Delaware corporation, operates oil and gas pipeline facilities which supply fuel to PP&L's Martins Creek generating station. Realty Company of Pennsylvania and BDW Corporation own real estate and other interests related to the operation of PP&L's electric generating stations. PP&L Capital Funding, Inc., a Delaware corporation, engages in debt financing activities on behalf of the Company. CEP Group, Inc. holds passive investments in securities for investment purposes. PP&L is subject to regulation by the Pennsylvania PUC with respect to its rates for retail sales of electricity as well as terms of service, issuance of certain securities, the encumbering or disposition of public utility properties, and accounting and other matters. In addition, PP&L is subject to regulation by the Federal Energy Regulatory Commission ("FERC") under the Federal Power Act with respect to rates for the sale of electricity for resale and other matters. PP&L is subject to the jurisdiction of the Nuclear Regulatory Commission in connection with its ownership and operation of the Susquehanna station nuclear units. PP&L is also subject to applicable federal and state environmental regulations. The common stock of the Company, par value $0.01 per share ("Company Common Stock"), is listed on the New York Stock Exchange (the "NYSE") and the Philadelphia Stock Exchange (the "PhSE"). As of the close of business on December 31, 1997, there were 166,248,284 shares of Company Common Stock issued and outstanding. For the year ended December 31, 1996, the Company's operating revenues on a consolidated basis were approximately $2.910 billion, of which $64 million were attributable to non-utility activities. Consolidated assets of the Company and its subsidiaries at December 31, 1996 were approximately $9.824 billion, of which approximately $6.487 billion consisted of net electric plant and equipment. The Company's principal executive office is located at Two North Ninth Street, Allentown, Pennsylvania 18101. At December 31, 1996, PP&L, the Company's principal subsidiary, employed approximately 6,400 full-time employees. More detailed information concerning the Company and its subsidiaries is contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, which is incorporated herein by reference as Exhibit G-1. 2. PENN FUEL. Penn Fuel is a public utility holding company organized under the laws of the Commonwealth of Pennsylvania and exempt from regulation by the Commission under the Act (except for Section 9(a)(2) thereof) pursuant to Section 3(a)(1) of the Act and by order of the Commission.* Penn Fuel provides natural gas service in Pennsylvania and Maryland through its public utility subsidiaries and supplies liquid propane gas to customers in Pennsylvania and Maryland. Penn Fuel is a closely- held corporation whose common stock is not actively traded. -------------------- * Penn Fuel Gas, Inc., et al., File No. 70-8068, Release No. 35-26050 (issued May 9, 1994). PFG Gas and North Penn, Penn Fuel's principal subsidiaries, are Pennsylvania corporations which provide natural gas distribution and storage service to residential, commercial and industrial customers in 31 counties in Pennsylvania. PFG Gas provides gas sales and transportation service in southern and eastern Pennsylvania and a small portion of Maryland. Ninety- nine percent of PFG Gas customers are located in Pennsylvania. North Penn provides gas sales and transportation services to customers located in north and northwestern Pennsylvania. North Penn also owns storage capacity in two underground natural gas storage facilities located in Pennsylvania: the Wharton Storage Field and the Tioga-Meeker Storage Complex. Maps of the PFG Gas and North Penn service territories are attached as Exhibits E-2 and E-3, respectively. PFG Gas and North Penn are subject to regulation by the Pennsylvania PUC as public utilities with respect to rates for service, terms of service, issuance of certain securities, the encumbering or disposition of public utility properties, the design, installation, testing, construction, and maintenance of pipeline facilities, and accounting and other matters. Penn Fuel and its subsidiaries must also comply with federal, state and local regulations related generally to the discharge of materials into the environment. PFG Gas's Maryland utility business is similarly subject to the jurisdiction of the Maryland PSC. North Penn's storage operations are subject to the jurisdiction of FERC, although FERC has deferred rate authority for storage to the Pennsylvania PUC. The authorized capital stock of Penn Fuel consists of 2,000,000 shares of common stock, par value $1.00 per share ("Penn Fuel Common Stock"); 500,000 shares of unissued Penn Fuel Prior Preferred Stock, no par value ("Unissued Preferred Stock"); and 2,000,000 shares of $1.40 cumulative preferred stock ("Penn Fuel $1.40 Preferred Stock"). As of the close of business on July 31, 1997, there were 717,583 shares of Penn Fuel Common Stock issued and outstanding, no shares of Unissued Preferred Stock issued and outstanding and 717,583 shares of Penn Fuel $1.40 Preferred Stock issued and outstanding. For the year ended December 31, 1996, Penn Fuel's operating revenues on a consolidated basis were approximately $114 million, of which approximately $100 million were attributable to its gas utility operations, and $14 million from propane operations and merchandise sales. Consolidated assets of Penn Fuel and its subsidiaries as of December 31, 1996 were approximately $196 million, of which approximately $141 million consisted of property, plant and equipment, $29 million were current assets and $26 million were deferred regulatory assets. Penn Fuel's principal executive office is located at 55 South Third Street, Oxford, Pennsylvania 19363. As of August 31, 1997, Penn Fuel directly and indirectly employed approximately 500 people. More detailed information concerning Penn Fuel and its subsidiaries is contained in Penn Fuel's Annual Report to Shareholders for the year ended December 31, 1996, which is attached as Exhibit G-3. 3. KEYSTONE. Keystone is a direct, wholly-owned subsidiary of the Company, organized under the laws of the Commonwealth of Pennsylvania solely for the purpose of merging with Penn Fuel. Keystone is not engaged in any business operations. The mailing address for Keystone is the same as that for the Company. B. DESCRIPTION OF THE TRANSACTION. 1. REASONS FOR THE TRANSACTION. The Transaction will combine two companies with complementary operations and expertise, and provide important strategic, financial and other benefits to the merging companies, their shareholders and their customers. The Transaction will allow the Company to better serve all the customers in its newly enlarged customer base. Pennsylvania is opening its retail electricity markets to competition, and legislation has been proposed to further open its gas markets in the near future. Following the Transaction, the Company will be able to compete in both energy markets and to provide gas or electricity to customers, depending on their needs. As a result of the Transaction, the Company will expand its customer base into additional areas in Pennsylvania. PFG Gas and North Penn's service regions include certain geographic areas not presently served by the Company. The Company's presence in a larger geographic region and its ability to provide both gas and electricity will enhance its ability to offer "behind the meter" consulting services and will provide the Company increased opportunities to provide the benefits of energy management systems to residential and commercial customers. Penn Fuel will have access to opportunities in the deregulated energy market that would be less available with its stand-alone, limited resources. Also, because of the increased size and resources the combined entity will have in comparison to Penn Fuel standing alone, the merger will greatly strengthen the foundation supporting services to Penn Fuel's customers at a high quality level. The merger is expected to give Penn Fuel a broader access to management and business systems, enable potential operating and management efficiencies and provide increased stability and other benefits to Penn Fuel inherent in being part of a much larger organization. By acquiring Penn Fuel and its utility subsidiaries, the Company will obtain expertise concerning alternative forms of energy, which will enhance its ability to compete in the increasingly deregulated energy market. Due to the incomplete geographical overlap of the service territories of PFG Gas and North Penn with PP&L's service territory, and because PP&L provides only electric utility service and PFG and North Penn provide only gas utility service, there is limited potential in the short term for achieving direct efficiencies in day- to-day utility operations as a result of the Transaction. However, as discussed in Item 3 below, the Company expects over time to reap substantial efficiencies through consolidation and coordination of various support functions such as accounting, finance, information systems, environmental management, gas marketing, and procurement. Various direct cost reductions, such as, inter alia, those resulting from consolidation of meter reading in overlapping service territories, are also anticipated. Moreover, as noted above and explained below in Item 3, the combination of the merging companies' expertise and resources will enable the Company to, inter alia, better address competition in the energy markets and provide its customers with a range of electric and natural gas products and services. 2. MERGER AGREEMENT. The Merger Agreement provides that, as soon as practicable following the satisfaction or waiver of the conditions to each party's obligation to consummate the Transaction, Keystone will be merged with and into Penn Fuel, the separate corporate existence of Keystone will cease, and Penn Fuel will continue as the surviving corporation in the merger, operating as a wholly-owned subsidiary of the Company. Each share of Penn Fuel Common Stock outstanding prior to the merger will be converted into the right to receive between 6.968 and 8.516 shares of Company Common Stock, depending upon the market price of the Company Common Stock at the time of the closing of the merger. Penn Fuel common stock shareholders will become Company shareholders, and the Company will become the sole holder of all of the outstanding common stock of Penn Fuel. Penn Fuel is taking all necessary action to redeem shares of the Penn Fuel $1.40 Preferred Stock in accordance with the terms of the preferred stock. Preferred shareholders will have the option of receiving the cash redemption price or converting their preferred shares into the right to receive between 0.682 and 0.833 shares of the Company Common Stock, depending upon the market price of the Company Common Stock at the time of the closing of the Transaction. Thus, Penn Fuel preferred shareholders may become common shareholders of the Company, and there will no longer be any shares of Penn Fuel preferred stock outstanding. 3. BACKGROUND AND NEGOTIATIONS LEADING TO THE TRANSACTION. The Company and Penn Fuel recognize that the utility industry is currently undergoing unprecedented change, including deregulation of electric power generation, which will significantly impact the competitiveness and business opportunities of the companies in the near future. The Company has been examining strategic alternatives to position itself to compete more effectively in the energy market. One such strategy is to combine electric and gas services so that the Company can create efficiencies, control costs, increase services available to consumers and expand its customer base. At the same time, in light of the changing of the utility industry, Penn Fuel also has been considering several alternatives regarding its future, including partnership opportunities or combining with an electric utility to strengthen its competitive position in the energy market. In early 1997, the Company and Penn Fuel entered into a confidentiality agreement and began preliminary discussions regarding the possibility of a business combination. In the months that followed, the Company and Penn Fuel exchanged a limited amount of confidential, nonpublic information and determined that further investigation of a possible transaction, including due diligence, was warranted. More in-depth due diligence was conducted in May-June of 1997. During this time, the companies considered alternative structures for a possible business combination and negotiated terms of the Merger Agreement. Periodically throughout this process, the Boards of both Penn Fuel and the Company were updated as to the ongoing status of negotiations. On June 25, 1997, the Penn Fuel Board of Directors approved the transaction, and on June 26, 1997, the Company Board of Directors approved the Transaction and the companies finalized and entered into the Merger Agreement. C. MANAGEMENT AND OPERATIONS OF THE COMPANY FOLLOWING THE TRANSACTION. Upon completion of the Transaction, Penn Fuel will become a subsidiary of the Company, which will own all of the issued and outstanding common stock of Penn Fuel. Penn Fuel will continue to own and operate its primary subsidiaries, PFG Gas and North Penn. Following the Transaction, the officers, directors, corporate charter and bylaws of Keystone immediately before the merger will become the officers, directors, corporate charter and bylaws of Penn Fuel, the surviving corporation. The Company's principal corporate and executive offices will continue to be in Allentown, Pennsylvania. Those of Penn Fuel will continue to be in Oxford, Pennsylvania. ITEM 2. FEES, COMMISSIONS AND EXPENSES. The fees, commissions and expenses to be paid or incurred, directly or indirectly, by both the Company and Penn Fuel, in connection with the Transaction, including registration of securities of the Company under the Securities Act of 1933, and other related matters, are estimated as follows: Commission filing fee for the Company Registration Statement on Form S-4 . . . . . . $24,930 HSR filing fee . . . . . . . . . . . . . . . . . $45,000 Accountants' fees . . . . . . . . . . . . . . . . $44,000 Shareholder communication (including prospectus printing and distribution). . . . . . . . . . . $25,000 NYSE/PhSE listing fee . . . . . . . . . . . . . . $53,500 Exchanging, printing, and engraving of stock certificates . . . . . . . . . . . . . . . . . $1,000 Investment bankers' fees and expenses . . . . . . $2,720,000 Legal fees and expenses (including regulatory and antitrust). . . . . . . . . . . . . . . . . $2,182,000 Miscellaneous (including consultants) . . . . . . $228,000 TOTAL (estimated) . . . . . . . . . . . . . . . . $5,323,430 ITEM 3. APPLICABLE STATUTORY PROVISIONS. A. STATEMENT OF APPLICABLE PROVISIONS. The Company believes that Sections 9(a)(2), 10, and 3(a)(1) of the Act are directly or indirectly applicable to the proposed Transaction. Under Section 9(a)(2), it is unlawful, without approval of the Commission, under the standards of Section 10, for any person to acquire, directly or indirectly, the securities of a public utility company, if that person will, by virtue of the acquisition, become an affiliate of that public utility and any other public utility or holding company. The term "affiliate" for this purpose means any person that directly or indirectly owns, controls, or holds with power to vote, five percent or more of the outstanding voting securities of the specified company. Pursuant to the Transaction, the Company will acquire, indirectly through its acquisition of Penn Fuel, securities of two public utilities, PFG Gas and North Penn. Following the Transaction, the Company will be an affiliate of the following public utilities: PP&L, Penn Fuel, Safe Harbor, PFG Gas and North Penn. Accordingly, the Transaction requires Commission approval under the standards of Section 10. Following the Transaction, the Company believes, for reasons explained below, that it will qualify for the intrastate exemption under Section 3(a)(1) of the Act, and requests an order granting such exemption. Under this section, the Commission must exempt, by rule or order, any holding company if that holding company, and each material public utility subsidiary company from which the holding company derives any material part of its income, are predominantly intrastate in character, and carry on their business in the state in which they are organized, unless and except insofar as the Commission finds the exemption detrimental to the public interest or the interest of investors or consumers. B. THE STANDARDS OF SECTION 10. The statutory standards to be considered by the Commission in evaluating the Transaction are set forth in Sections 10(b), 10(c) and 10(f) of the Act. 1. SECTION 10(B). Under Section 10(b) of the Act, the Commission must approve the Transaction unless the Commission finds that: (1) such acquisition will tend towards interlocking relations or the concentration of control of public-utility companies, of a kind or to an extent detrimental to the public interest or the interest of investors or consumers; (2) in case of the acquisition of securities or utility assets, the consideration, including all fees, commissions and other remuneration, to whomsoever paid, to be given, directly or indirectly, in connection with the acquisition is not reasonable or does not bear a fair relation to the sums invested in or the earning capacity of the utility assets to be acquired or the utility assets underlying the securities to be acquired; or (3) such acquisition will unduly complicate the capital structure of the holding-company system of the applicant or will be detrimental to the public interest or the interest of investors or consumers or the proper functioning of such holding company system. a. DETRIMENTAL "INTERLOCKING RELATIONS" OR "CONCENTRATION OF CONTROL". The Company believes that the Transaction will not result in detrimental interlocking relations or concentration of control. There is one common director of the Company and Penn Fuel and following consummation of the Transaction there may be additional common directors and officers of the Company and PFG Gas and North Penn. Such interlocking relationships, however, would serve to integrate the merging companies, and are characteristic of virtually every merger transaction subject to Section 9(a)(2). Thus, any interlocking relations which do occur will be of the kind generally approved of by the Commission and will not be detrimental to interests of consumers, investors or the public. The Transaction will also not result in a detrimental concentration of control. Penn Fuel is a small company relative to the Company and its acquisition by the Company will not make the Company excessively large. The acquisition of Penn Fuel will increase the Company's revenues and total assets by less than 4% and 2.1%, respectively. Following the Transaction, the Company will have total utility assets of $10 billion, total utility revenues of $3.1 billion, and will serve approximately 1.2 million utility customers. The utility activities of the Company following the Transaction will be confined almost entirely to central and eastern Pennsylvania. The Commission has approved a number of transactions which resulted in holding companies of a much larger size.* Competition is not adversely affected by the Transaction since neither PP&L nor Penn Fuel can exercise market power in any unregulated energy market and the merger of the two will not result in an increase in market share in any relevant energy market. As of November 1, 1997, PP&L began offering competitive retail electric power to the 5 percent of Pennsylvania retail electricity consumers who are participating in the state's Retail Access Pilot Program, under the recently enacted Pennsylvania Electricity Generation Customer Choice and Competition Act, 66 Pa. C.S. Ch. 28. Under this new law, PP&L will be required by January, 2001 to transmit and distribute electricity to all of its retail distribution customers that choose suppliers of electricity other than PP&L.** PP&L also currently competes in the wholesale electric energy and capacity markets. The FERC has found that PP&L does not possess market power in the electric energy generation markets in which it competes. Pennsylvania Power & Light Co., 80 F.E.R.C. paragraph 61,053 (1997). In addition, the FERC determined that PP&L could not exercise market power over the transmission of electricity since it had filed an open access transmission tariff pursuant to FERC Order No. 888 and 888a.*** -------------------- * See, e.g., TUC Holding Co., File No. 70-8953, Rel. No. 35-26749 (issued August 1, 1997). TUC Holding has utility assets of approximately $19.6 billion, operating utility revenues of approximately $6.9 billion and approximately 2.7 million utility customers. See also Entergy Corp., 51 S.E.C. 869 (combined utility assets after Gulf States acquisition of $21 billion). ** The local distribution of both electricity and gas in Pennsylvania will remain franchised regulated monopolies subject to the jurisdiction of the Pennsylvania PUC. *** See Promoting Wholesale Competition Through Open Access Nondiscriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, Order No. 888, 61 Fed. Reg. 21,540 (1996), FERC Stats. & Regs. paragraph 31,036 (1996), order on reh'g, Order No. 888-A, 62 Fed. Reg. 12,274 (1997), FERC Stats. & Regs. paragraph 31,048 (1997), reh'g pending. Penn Fuel is a relatively small local gas distribution system. It provides gas and distribution services to small commercial and residential customers subject to regulation by the Pennsylvania PUC. Industrial distribution customers of Penn Fuel may buy gas from the company or use the company's regulated distribution system to transport gas purchased from other suppliers. Penn Fuel does not regularly engage in sales of natural gas at wholesale. Its share of natural gas sales at retail is insignificant compared to other large systems in Pennsylvania and nearby regions, such as Columbia Gas System, Inc., Consolidated Natural Gas Company, or UGI Utilities, Inc. Because the market shares of PP&L in electric markets and of Penn Fuel in gas markets are not sufficient to raise competitive concerns, it follows that in a hypothetical market embracing both fuels, their respective market shares would be even less significant. Combined electric and gas markets would necessarily include large electricity generators in the Pennsylvania- New Jersey-Maryland Interconnection ("PJM"), but also the countless marketers of natural gas that can reach the region through its numerous large open access interstate pipelines that operate under FERC Order No. 636.* Accordingly, the merger cannot lessen competition in a combined energy market. The Federal Trade Commission and the United States Department of Justice apparently reached the same conclusion when they both decided to grant early termination of the 30-day waiting period under the HSR Act. The Direct Testimony of Scott T. Jones, submitted to the Pennsylvania PUC** and attached as Exhibit D-2 to this Application, explains in detail why the Transaction will not harm competition. -------------------- * Pipeline Service Obligations and Revisions to Regulations Governing Self-Implementing Transportation Under Part 284 of the Commission's Regulations, Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol, and Order Denying Rehearing in Part, Granting Rehearing in Part, and Clarifying Order No. 636 (Order No. 636-A), 57 Fed. Reg. 36,128 (August 12, 1992) (Citations omitted). ** Testimony filed in support of Application of PP&L and PFG Gas, and North Penn in Docket Nos. A- 1206SOF0006, A-1220SOF0003. On the contrary, the Transaction will provide important competitive benefits. By expanding its customer base, entering into the gas markets, and acquiring the expertise and experience of Penn Fuel in gas markets, the Company will be better positioned to compete with larger utilities in an evolving and increasingly competitive energy marketplace. This will enable the Company to provide its customers with expanded energy options. Additionally, the Transaction will result in efficiencies and economies for consumers, investors and the public. These benefits are outlined in Item 3(B)(2) of this Application, and are benefits which the Commission has weighed against any concerns about concentration of control it has had in other transactions. See American Electric Power Co., 46 S.E.C. 1299 (1978). For all of these reasons, the Company believes that the Transaction will not result in a concentration of control which is detrimental to the public interest. b. FAIRNESS OF CONSIDERATION. Section 10(b)(2), as applied to the Transaction, provides that the Commission shall approve the Transaction unless it finds that the consideration paid by the Company to the shareholders of Penn Fuel is not reasonable or does not bear a fair relation to the earning capacity of the utility assets underlying the Penn Fuel shares. In its determination as to whether or not consideration for an acquisition meets the fair and reasonable test of Section 10(b)(2), the Commission has considered whether the price was decided as the result of arm's-length negotiations* and whether each party's Board of Directors has approved the purchase price.** The Commission also considers the opinions of investment bankers*** and the earnings, dividends, and book and market value of the shares of the company to be acquired.**** -------------------- * American National Gas Co., 43 S.E.C. 203 (1966). ** Consolidated National Cas Co., 45 S.E.C. 672 (1990). *** Id. **** Northeast Utilities, 42 S.E.C. 963 (1966). Upon consummation of the Transaction, (i) Penn Fuel common stock shareholders would receive between 6.968 and 8.516 shares of the Company Common Stock for each share of Penn Fuel common stock and (ii) holders of Penn Fuel $1.40 Preferred Stock would receive the cash redemption price applicable to their shares, or, at the individual shareholder's option, between 0.682 and 0.833 shares of the Company Common Stock for each share of Penn Fuel $1.40 Preferred Stock. The exact exchange ratio would depend upon the closing price of the Company Common Stock prior to the closing of the Transaction. Based on the applicable exchange ratio, the aggregate value of the consideration to be issued upon consummation of the Transaction is expected to be approximately $121 million. The consideration to be paid by the Company was the result of arm's-length negotiations between the management and financial and legal advisors of the Company and Penn Fuel over a period of several months. The Boards of Directors of each of the Company and Penn Fuel approved the Transaction in meetings held on June 26, 1997 and June 25, 1997, respectively. In addition, nationally-recognized investment banking firms for each of the Company and Penn Fuel have reviewed extensive information concerning the companies and analyzed the respective conversion ratios employing several valuation methodologies. In connection with the approval of the Merger Agreement, (i) the Company's Board of Directors considered the opinion of its financial advisor, Morgan Stanley & Co. Incorporated ("Morgan Stanley"), to the effect that the consideration to be paid by the Company upon consummation of the Transaction is fair to the Company from a financial point of view, and (ii) the Penn Fuel Board of Directors considered the opinion of its financial advisor, First Union Capital Markets ("First Union"), to the effect that the consideration to be received by Penn Fuel common shareholders in connection with the Transaction is fair to such holders from a financial point of view. Each of the fairness opinions of Morgan Stanley and First Union are attached hereto as Exhibits H-1 and H-2, respectively, and incorporated herein by reference. In determining the consideration, the Company examined certain gas companies considered to be comparables as well as the consideration paid in other acquisitions in the gas utility industry. When examined in terms of multiples of earnings ("Earnings Multiple") and book value ("Book Value Multiple"), the consideration to be paid by the Company is reasonable when compared to the consideration offered in comparable acquisitions. Examples of such acquisitions are shown below. BOOK EARNINGS VALUE COMPARABLE COMPANIES MULTIPLE MULTIPLE -------------------- -------- -------- Southwest Gas 17.2x 1.2x Atmos Energy 14.8 2.1 Public Service Co. of NC 13.1 1.8 Connecticut National Gas 12.7 1.3 North Carolina National Gas 12.3 1.9 Connecticut Energy Corporation 12.4 1.4 MEAN 13.8 1.6 PRECEDENT TRANSACTIONS ---------------------- PanEnergy/Duke (11/96) 22.1x 3.2 Pacific Ent./Enova (10/96) 14.9 2.1 NorAm/Houston Industries (8/96) 31.6 2.4 United Cities Gas/Atmos Energy (7/96) 24.1 2.1 ENSERCH/Texas Utilities (4/96) 29.5 -- Washington Energy/Puget Sound (10/95) -- 3.7 Grand Valley Gas/Associated Natural Gas (2/94) 24.7 3.7 MEAN 24.5 2.6 IMPLIED MULTIPLES FOR THIS TRANSACTION 16.0X 1.6X Also significant is that Penn Fuel shareholders, as a result of the Transaction, will receive Company Common Stock which is listed on the NYSE, thus providing the Penn Fuel shareholders with a public market for their securities that they do not have as Penn Fuel shareholders. In addition, the Company's dividend is currently set at $1.67 per share per annum, which is substantially higher than Penn Fuel's current dividend payout, as adjusted for the exchange ratio. Moreover, the stock consideration to be received by Penn Fuel shareholders upon consummation of the Transaction is expected to be tax-free. The Transaction was approved by all of the shareholders of PFG who voted. There were no dissenters. In light of these fairness opinions and considering all relevant factors, the Company believes that the consideration to be paid for the Penn Fuel shares is reasonable and bears a fair relation to the earnings capacity of the utility assets underlying the Penn Fuel shares. Accordingly, the consideration to be paid by the Company meets the standards of Section 10(b)(2). c. REASONABLENESS OF FEES. The Company believes that the overall fees, commissions, and expenses incurred and to be incurred in connection with the Transaction are reasonable and fair in light of the size and complexity of the Transaction relative to other transactions and the anticipated benefits of the Transaction to the public, investors, and consumers; that they are consistent with recent precedent; and that they meet the standards of Section 10(b)(2). As stated at Item 2 above, the Company and Penn Fuel together expect to incur a combined total of approximately $5.3 million in fees, commissions, and expenses in connection with the Transaction. This amount is substantially less than the fees associated with recent transactions approved by the Commission,* and is clearly consistent with the standards of Section 10(b)(2). d. CAPITAL STRUCTURE AND THE PUBLIC INTEREST. Section 10 (b)(3) requires the Commission to determine whether the Transaction will unduly complicate the Company's capital structure or would be detrimental to the public interest, the interests of investors or consumers, or the proper functioning of the Company's system. Following the Transaction, the Company will have a capital structure which is substantially similar to capital structures which the Commission has approved in other orders.** After consummation of the Transaction, the Company will own 100 percent of the shares of Penn Fuel Common Stock, and indirectly will own 100 percent of Penn Fuel's two wholly-owned public utility subsidiaries, PFG Gas and North Penn. All outstanding preferred stock of Penn Fuel will be redeemed for either cash or the Company's Common Stock. Penn Fuel and its subsidiaries may continue to hold their debt, which will have no material effect on the Company's capital structure. The only issued and outstanding voting securities of the Company will be the Company Common Stock. For these reasons, the Company believes that the Transaction will not unduly complicate its capital structure. -------------------- * See TUC Holding Co., supra. (estimated fees and expenses of $37 million); Kansas Power & Light Co., Rel. No. 35-25465 (issued February 5, 1992) (estimated fees and expenses of approximately $30 million); New Century Energies, Inc., Rel. No. 35- 26748 (issued August 1, 1997) (estimated fees and expenses of $23.5 million). ** See, e.g., TUC Holding Co., supra; CINergy Corp., File No. 70-8427, Rel. No. 35-26146 (issued October 21, 1994); Entergy Corp., File No. 70-8059, Rel. No. 35-25952 (issued December 17, 1993). In each of these orders, the Commission approved mergers which resulted in a holding company acquiring 100 percent of a utility operating company's common stock. Set forth below are summaries of the historical capital structures (excluding short-term debt) of the Company and Penn Fuel as of June 30, 1997 and the pro forma consolidated capital structure of the Company as of the same date: The Company and Penn Fuel Historical Capital Structures (In Millions) Company Penn Fuel $ % $ % Long-term debt 2,632 45 54 40 Preferred and preference stock 347 611 11 8 Common equity 2,805 49 71 52 ------------------------ ----- --- --- --- Total Capitalization 5,784 100 136 100 The Company's Pro Forma Consolidated Capital Structure (In Millions) (unaudited) Company $ % Long-term debt 2,687 45 Preferred and preference stock 358 6 Common equity 2,875 49 ------------------------ ----- --- Total Capitalization 5,921 100 The ratio of consolidated common equity to total capitalization of the Company will be, on an unaudited pro forma basis, 49 percent. This figure substantially exceeds the traditionally acceptable ratio of approximately 30 percent. As discussed earlier in Item 1(B)(1), the Company believes that the Transaction, by achieving efficiencies and economies, will benefit the interests of the public, consumers and investors and will not impair the proper functioning of the holding company system. 2. SECTION 10(C). a. SECTION 10(C)(1). Under Section 10(c)(1), the Commission must not approve an acquisition which is "unlawful under the provisions of Section 8" or "detrimental to the carrying out of the provisions of Section 11." Section 8 prohibits an acquisition by a registered holding company of an interest in an electric utility and a gas utility serving substantially the same territory without the express approval of the state commission when state law prohibits or requires approval of the acquisition. Section 8 applies only to registered holding companies and is thus inapplicable to the Transaction. In any event, the Transaction will be consummated only if approval is received from the Pennsylvania PUC. Section 11(b)(1) requires a registered holding company, with limited exceptions, to limit its operations to a "single integrated public-utility system, and to such other businesses as are reasonably incidental, or economically necessary or appropriate to the operations of such integrated public-utility system." Section 2(a)(29) provides separate definitions for "integrated public-utility system" for gas and electric companies. For electric utility companies, the term means: a system consisting of one or more units of generating plants and/or transmission lines and/or distributing facilities, whose utility assets, whether owned by one or more electric utility companies, are physically interconnected or capable of physical interconnection and which under normal conditions may be economically operated as a single interconnected and coordinated system . . . . For gas utilities, the term means: a system consisting of one or more gas utility companies which are so located and related that substantial economies may be effectuated by being operated as a single coordinated system. With respect to either type of company, the system must be confined in its operations to a single area or region, in one or more States, not so large as to impair (considering the state of the art and the area or region affected) the advantages of localized management, efficient operation, and the effectiveness of regulation[.]* -------------------- * For gas companies, utilities deriving natural gas from a common source of supply may be deemed to be included in a single area or region. Section 11(b)(1) permits the acquisition and retention of more than one integrated utility system only if the requirements of Section 11(b)(1)(A)(C) are satisfied. The Commission has consistently recognized that compliance with the standards of Section 11 is not required where the resulting holding company is exempt under Section 3. See, e.g., Gaz Metropolitan, Inc., Holding Co. Act Release No. 26170 (Nov. 23, 1994). In applying Section 10(c)(1) to an exempt holding company, the Commission focuses upon whether the acquisition would be detrimental to the core concerns of Section 11, namely the protection of the public interest and the interests of investors and consumers. WPL Holdings, 49 S.E.C. 761 (1988), aff'd in part and rev'd in part sub nom. Wisconsin Environmental Decade, Inc. v. S.E.C., 882 F.2d 523 (D.C. Cir. 1989) (authorizing combination electric and gas exempt holding company); Dominion Resources Inc., Holding Co. Act Release No. 24618 (Apr. 5, 1988) (noting that the "only question" regarding acquisition of additional gas system is impact on public interest and investors and consumers, and emphasizing that Section 10(c)(1) "would bring Section 11(b)(1) into consideration only if Dominion Resources were not entitled to an exemption"). The Commission has also emphasized that an exempt holding company can acquire utility assets that would not, when combined with the acquiring company's existing utility assets, comply fully with the requirements of Section 11(b)(1), provided there is "de facto integration" of contiguous utility properties.* -------------------- * TUC Holding Co., supra; see also Gaz Metropolitan, Inc., supra. The Transaction is fully consistent with the standards of Section 10(c)(1) as applied to exempt holding companies. The merger will produce a combined enterprise which will better serve the needs of its customers and the interests of its investors by offering energy supply in competitive markets. The Transaction will not impede the ability of the Pennsylvania PUC or the Maryland PSC to carry out their statutory responsibilities with respect to the utility activities of PP&L, North Penn or PFG Gas. As noted above, the Transaction will not be finalized until approval is obtained from the Pennsylvania PUC, and the utility operations of the combined enterprise will continue to be regulated by the Pennsylvania PUC and the Maryland PSC after the merger. The Transaction also fully satisfies the "de facto" integration standard set forth in TUC Holding Co., even though following the merger PP&L and Penn Fuel will remain separate integrated public utility systems. The service territories of the PP&L and Penn Fuel public utility systems are largely located in adjacent or nearby geographic areas and will overlap to some degree. As discussed below, the systems of PP&L and Penn Fuel will be coordinated with respect to a number of operational, administrative, and support functions. Moreover, as noted above, the Transaction will produce a combined entity that will be able to compete more efficiently and effectively in providing energy services to customers. Thus, the Commission should find that the Transaction would not be detrimental to the interest of Section 11, and thereby satisfies the requirements of Section 10(c)(1). b. SECTION 10(C)(2). Section 10(c)(2) requires that the Commission not approve an acquisition unless "the Commission finds that such acquisition will serve the public interest by tending towards the economical and efficient development of an integrated public-utility system." The Commission has interpreted Section 10(c)(2) to permit the approval of acquisitions resulting in more than one integrated system. "[W]e have indicated in the past that acquisitions may be approved even if the combined system will not be a single integrated system. Section 10(c)(2) requires only that the acquisition tend 'towards the economical and the efficient development of an integrated public-utility system.'"* The Commission has held that "where a holding company will be exempt from registration under Section 3 of the Act following an acquisition of non-integrating utility assets, it suffices for purposes of Section 10(c)(2) to find benefits to one integrated system."** -------------------- * Gaz Metropolitan, Inc., 58 S.E.C. Docket 189, 192, Rel. No. 35-26170 (Nov. 23, 1994) (quoting Union Electric Company, 45 S.E.C. 489, 504-06 (1974), aff'd without op. sub nom. City of Cape Girardeau v. SEC, 521 F.2d 324 (D.C. Cir. 1975)). ** TUC Holding Co., supra. In this case, both integrated utility systems will realize a number of benefits from the Transaction. The Transaction will combine two companies with complementary operations and expertise, and provide important strategic, financial and other benefits to the merging companies, shareholders and customers. The Transaction will have a number of operational benefits that will result in economic efficiencies for the Company as a whole and for both integrated utility systems. The Company will experience economies by combining and coordinating operations with Penn Fuel with respect to accounting, finance, information systems, environmental management, gas marketing, and procurement. In addition, the Company expects that the Transaction will result in various direct operational cost reductions. For example, after the Transaction, PP&L and Penn Fuel distribution customers can be served out of common service centers, and separate after-hours answering systems can be consolidated. The operational benefits and efficiencies associated with the Transaction are discussed in detail in the testimony of Scott T. Jones, Paul T. Champagne, and John J. Hilyard, Jr., submitted in conjunction with the Application of PP&L, PFG Gas, and North Penn before the Pennsylvania PUC (Docket Nos. A-1206SOF0006, A- 1220SOF0003) (attached as Exhibit D-2). The Transaction will also allow the Company to offer a greater range of services to customers, making it more competitive, and will provide significantly increased financial and other resources to Penn Fuel's integrated gas utility system, making it better able to meet customer needs. See Exhibit D-2. Although the amount of such benefits cannot be specifically quantified, the Commission has recognized that "specific dollar forecasts of future savings are not necessarily required; a demonstrated potential for economies will suffice even when these are not precisely quantifiable." Centerior Energy Corp., Rel. No. 35-24073 (issued April 29, 1986). The Commission has previously found that similar benefits satisfied the affirmative finding required under Section 10(c)(2). See, e.g., Union Electric Company, supra, 45 S.E.C. at 494 (provision of substantial resources made available by acquiring entity to acquired company demonstrated "efficiencies and economies by virtue of the affiliation"); WPL Holdings, Inc., 50 S.E.C. 233, 237 (1990) (benefits supporting Section 10(c)(2) finding include "[a] structure that could more effectively address the growing national competition in the energy industry, refocus various utility activities, facilitate selective diversification into non-utility business . . . and provide additional flexibility for financing . . ."). Accordingly, the Commission should find that the requirements of Section 10(c)(2) are satisfied with regard to the Transaction. 3. SECTION 10(F) -- COMPLIANCE WITH STATE REQUIREMENTS. To approve an acquisition, the Commission is required, under Section 10(f), to find that the acquisition has complied with all applicable state laws. The Transaction is expressly conditioned on receipt of all required regulatory approvals, including that of the Pennsylvania PUC. The Company has filed an Application with the Pennsylvania PUC, a copy of which is filed as Exhibit D-1 hereto, and a copy of the Pennsylvania PUC's determination pursuant thereto will be filed as Exhibit D-3 by amendment hereto. C. SECTION 3(A)(1). The Company believes that, following consummation of the Transaction, it and each of its subsidiary companies will be entitled to exemption under Section 3(a)(1) from all provisions of the Act (except for Section 9(a)(2) thereof).* Section 3(a)(1) authorizes the Commission to exempt any holding company: if such holding company, and every subsidiary company thereof which is a public-utility company from which such holding company derives, directly or indirectly, any material part of its income are predominantly intrastate in character and will carry on their businesses substantially within a single State in which such holding company and every such subsidiary company thereof are organized. Following the Transaction, the Company and each of its public utility subsidiaries will be organized in Pennsylvania. Each such public utility subsidiary will also earn all of its utility income in Pennsylvania with the exceptions of PFG Gas, which earns approximately 99% of its utility revenues in Pennsylvania, and Safe Harbor, which contributes only a de minimis amount of revenues to the Company. -------------------- * Following the transaction, PP&L will continue to meet the requirements for exemption under Section 3(a)(2), and Penn Fuel will continue to meet the requirements for an exemption under Section 3(a)(1). Under such circumstances, the Company will qualify as an exempt holding company, "unless and except insofar as [the Commission] finds the exemption detrimental to the public interest or the interest of investors or consumers . . . ." As discussed in Item 1(B)(1), the Company believes that the Transaction will result in efficiencies and economies which will benefit the interest of the public, investors and consumers. As noted above, the combination of electric and gas utility business resulting from the Transaction raises no public interest concerns. Therefore, the Company believes it is qualified for the Section 3(a)(1) exemption upon consummation of the Transaction, and requests an order from the Commission granting such exemption. ITEM 4. REGULATORY APPROVAL. The Transaction is conditioned on approval by the Pennsylvania PUC, which must approve the transfer of ownership of Penn Fuel to the Company through the Transaction. The Pennsylvania PUC will approve such a transfer if it finds or determines that granting approval is necessary or proper for the service, accommodation, convenience or safety of the public. An application seeking the Pennsylvania PUC's approval was filed with the Pennsylvania PUC on August 7, 1997. The Transaction is also subject to the expiration or termination of the 30-day waiting period under the HSR Act and no action having been instituted by the DOJ or the Federal Trade Commission ("FTC") that is not withdrawn or terminated prior to the effective time of the Transaction. The HSR Act, and the rules and regulations thereunder, provide that certain merger transactions (including the Transaction) may not be consummated until required information and materials have been furnished to the DOJ and the FTC and certain waiting periods have expired or been terminated. On October 7, 1997, Penn Fuel and the Company made their respective filings with the DOJ and the FTC. On October 24, 1997, the DOJ granted early termination of the waiting period with respect to the Transaction. A Penn Fuel subsidiary, PFG Gas, has less than 300 customers in the State of Maryland. The Maryland PSC has been duly notified of the proposed transfer by merger, but has determined not to institute any proceedings on the matter at this time. ITEM 5. PROCEDURE. The Commission is respectfully requested to issue and publish not later than February 6, 1998 the requisite notice under Rule 23 with respect to the filing of this Application, such notice to specify a date not later than March 6, 1998 by which comments may be entered and a date not later than March 9, 1998 as a date after which an order of the Commission granting and permitting this Application to become effective may be entered by the Commission. It is submitted that a recommended decision by a hearing or other responsible officer of the Commission is not needed for approval of the proposed Transaction. The Division of Investment Management may assist in the preparation of the Commission's decision. There should be no waiting period between the issuance of the Commission's order and the date on which it is to become effective. ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS. a. EXHIBITS. Tab A-1 Articles of Incorporation of the Company (incorporated by reference to Exhibit B to the Proxy Statement of PP&L and Registration Statement of the Company, dated March 9, 1995) . . . . . . . 1 A-2 By-Laws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement No. 33-5794) . . . . . . . . . . . . . . . . . . . . . . . . 2 A-3 Articles of Incorporation of Penn Fuel . . . . . . . . . . . 3 A-4 By-Laws of Penn Fuel . . . . . . . . . . . . . . . . . . . . 4 B-1 Agreement and Plan of Merger (filed as Annex I to the Registration Statement of the Company on Form S-4, filed on August 13, 1997, File No. 333-33565, and incorporated herein by reference). . . . . . . . . . . . . . 5 C-1 Registration Statement of the Company on Form S-4 (filed on August 13, 1997, as amended to date (File No. 333-33565) and incorporated herein by reference) . . . . . . . . . . . . . . . . . . . . . . . . . 6 D-1 Application to the Pennsylvania PUC, dated August 7, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 D-2 Direct Testimony of Scott T. Jones, Paul T. Champagne, and John J. Hilyard, Jr. submitted to the Pennsylvania PUC . . . . . . . . . . . . . . . . . . . . . . 8 D-3 Determination of Pennsylvania PUC (to be filed by amendment) . . . . . . . . . . . . . . . . . . . . . . . . . 9 E-1 Map of PP&L's service territory . . . . . . . . . . . . . . 10 E-2 Map of PFG Gas service territory . . . . . . . . . . . . . . 11 E-3 Map of North Penn service territory . . . . . . . . . . . . 12 E-4 Map showing the overlap of the service territories of PP&L with those of PFG Gas and North Penn . . . . . . . . 13 F-1 Opinion of Counsel [to be filed by amendment] . . . . . . . 14 F-2 Past Tense Opinion of Counsel [to be filed by amendment] . . . . . . . . . . . . . . . . . . . . . . . . . 15 G-1 The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (filed on February 28, 1997 (File No. 1-11459) and incorporated herein by reference). . . . . . . . . . . . . . 16 G-2 The Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 (filed November 10, 1997 (File No. 1-11459) and incorporated herein by reference) . . . . . . . . . . . . . . . . . . . . . . . . . 17 G-3 Penn Fuel's Annual Report to Shareholders for the fiscal year ended December 31, 1996. . . . . . . . . . . . . 18 H-1 Opinion of Morgan Stanley & Co., Incorporated. . . . . . . . 19 H-2 Opinion of First Union Capital Markets . . . . . . . . . . . 20 I-1 Proposed Form of Notice . . . . . . . . . . . . . . . . . . 21 b. FINANCIAL STATEMENTS. FS-1 Company Consolidated Balance Sheet as of December 31, 1996 (previously filed with the Commission in the Company Annual Report on Form 10-K for the year ended December 31, 1996 (Exhibit G-1 hereto), filed on February 28, 1997, File No. 1-11459, and incorporated herein by reference) . . . . . . . . . . . . . 22 FS-2 Company Consolidated Balance Sheet as of September 30, 1997 (previously filed with the Commission Company Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 (Exhibit G-2 hereto), filed on November 10, 1997, File No. 1-11459, and incorporated herein by reference) . . . . . . . . . . . . . . . . . . . . 23 FS-3 Company Consolidated Statement of Income for the 12 months ended December 31, 1996 (previously filed with the Commission in the Company Annual Report on Form 10-K for the year ended December 31, 1996 (Exhibit G-1 hereto), filed on February 28, 1997, File No. 1-11459, and incorporated herein by reference) . . . . . . . . . . . 24 FS-4 Company Consolidated Statement of Income for the 9 months ended September 30, 1997 (previously filed with the Commission in the Company Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 (Exhibit G-2 hereto), filed on November 10, 1997, File No. 1-11459, and incorporated herein by reference) . . . . . . . . . . . 25 FS-5 Penn Fuel Consolidated Balance Sheet as of December 31, 1996 (previously filed with the Commission in the Registration Statement of the Company on Form S-4 (Exhibit C-1 hereto), filed on August 13, 1997, as amended to date (File No.333-33565) and incorporated herein by reference) . . . . . . . . . . . . . . . . . . . . 26 FS-6 Penn Fuel Consolidated Balance Sheet as of June 30, 1997 (previously filed with the Commission in the Registration Statement of the Company on Form S-4 (Exhibit C-1 hereto), filed on August 13, 1997, as amended to date (File No. 333-33565) and incorporated herein by reference) . . . . . . . . . . . . . . . . . . . . 27 FS-7 Penn Fuel Consolidated Statement of Income for the 12 months ended December 31, 1996 (previously filed with the Commission in the Registration Statement of the Company on Form S-4 (Exhibit C-1 hereto), filed on August 13, 1997, as amended to date (File No. 333-33565) and incorporated herein by reference) . . . . . . 28 FS-8 Penn Fuel Consolidated Statement of Income for the 6 months ended June 30, 1997 (previously filed with the Commission in the Registration Statement of the Company on Form S-4 (Exhibit C-1 hereto), filed on August 13, 1997, as amended to date (File No. 333-33565) and incorporated herein by reference) . . . . . . 29 FS-9 Pro Forma Combined Financial data for the Company and Penn Fuel (previously filed with the Commission in the Registration Statement of the Company on Form S-4 (Exhibit C-1 hereto), filed on August 13, 1997, as amended to date (File No. 333-33565) and incorporated herein by reference) . . . . . . 30 ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS. The Company believes that the Transaction will not involve major federal action significantly affecting the quality of the human environment as those terms are used in Section 102(2)(C) of the National Environmental Policy Act, 42 U.S.C. Section 4321 et seq. ("NEPA"). First, no major federal action within the meaning of NEPA is involved. Second, consummation of the Transaction will not result in changes in the operations of the subsidiaries of the Company or Penn Fuel that would have any significant impact on the environment. To the Company's knowledge, no federal agency is preparing an environmental impact statement with respect to this matter. SIGNATURE Pursuant to the requirements of the Public Utility Holding Company Act of 1935, the undersigned company has duly caused this Application to be signed on its behalf by the undersigned thereunto duly authorized. PP&L RESOURCES, INC. By: /s/ Robert J. Grey Date: 1/28/98 ------------------------------ ------- Name: Robert J. Grey ------------------------------ Title: Senior Vice President, General Counsel and Secretary ------------------------------ EX-99 2 EXHIBIT A-3 EXHIBIT A-3 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF PENN FUEL GAS, INC. ARTICLE I. The name of the corporation is: Penn Fuel Gas, Inc. ARTICLE II. The address of the registered office of the corporation in this Commonwealth is: 55 South Third Street Oxford, Chester County Pennsylvania 19363 ARTICLE III. The purpose or purposes for which the corporation is incorporated under the Business Corporation Law of 1988 are to engage in, and to do any lawful act concerning, any or all lawful business for which corporations may be incorporated under said Business Corporation Law, including but not limited to, manufacturing, processing, acquiring, owning, using, dealing in and disposing of personal property of every class and description, engaging in research and development, furnishing services, and acquiring, improving, owning, using and disposing of real property of any nature whatsoever. ARTICLE IV. The term for which the corporation is to exist is perpetual. ARTICLE V. The aggregate number of shares which the corporation shall have authority to issue is 4,500,000 shares of which 2,000,000 shares shall be Common Stock of the par value of $1.00 per share, 500,000 shares shall be shares of Prior Preferred Stock, without par value, and 2,000,000 shares shall be shares of Preferred Stock, without par value. The board of directors shall have the full authority permitted by law to fix by resolution full, limited, multiple or fractional or no voting rights, and such designations, preferences, limitations and special rights of any class or any series of any class that may be desired. Except as may be expressly provided by the board of directors, shares of Prior Preferred Stock shall rank senior to shares of Preferred Stock with respect to payment of dividends and distributions in liquidation. ARTICLE VI. No holder of any class or series of capital stock of the corporation shall have preemptive rights, and the corporation shall have the right to issue and to sell to any person or persons any shares of its capital stock or any option rights or any securities having conversion or option rights with respect to its capital stock, without first offering such shares, rights or securities to the holders of any class or series of its then outstanding capital stock. ARTICLE VII. The shareholders of the corporation shall not have the right to cumulate their votes for the election of directors of the corporation. ARTICLE VIII. Any action which may be taken at a meeting of shareholders or of a class of shareholders may be taken without a meeting if a consent or consents in writing to such action, setting forth the action so taken, shall be signed by shareholders entitled to cast the minimum number of votes that would be necessary to authorize the action at a meeting at which all shareholders entitled to vote thereon were present and voting. ARTICLE IX. (a) Directors and officers as fiduciaries. A director or officer of the corporation shall stand in a fiduciary relation to the corporation and shall perform his or her duties as a director or officer, including his or her duties as a member of any committee of the board upon which he or she may serve, in good faith, in a manner he or she reasonably believes to be in the best interests of the corporation, and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. In performing his or her duties, a director or officer shall be entitled to rely in good faith on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by one or more officers or employees of the corporation whom the director or officer reasonably believes to be reliable and competent with respect to the matters presented, counsel, public accountants or other persons as to matters that the director or officer reasonably believes to be within the professional or expert competence of such person, or a committee of the board of directors upon which the director or officer does not serve, duly designated in accordance with law, as to matters within its designated authority, which committee the director or officer reasonably believes to merit confidence. A director or officer shall not be considered to be acting in good faith if he or she has knowledge concerning the matter in question that would cause his or her reliance to be unwarranted. Absent breach of fiduciary duty, lack of good faith or self-dealing, actions taken as a director or officer of the corporation or any failure to take any action shall be presumed to be in the best interests of the corporation. (b) Personal liability of directors. A director of the corporation shall not be personally liable, as such, for monetary damages (including, without limitation, any judgment, amount paid in settlement, penalty, punitive damages or expense of any nature (including, without limitation, attorneys' fees and disbursements)) for any action taken, or any failure to take any action, unless the director has breached or failed to perform the duties of his or her office under these articles of incorporation, the bylaws of the corporation or applicable provisions of law and the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. (c) Personal liability of officers. An officer of the corporation shall not be personally liable, as such, to the corporation or its shareholders for monetary damages (including, without limitation, any judgment, amount paid in settlement, penalty, punitive damages or expense of any nature (including, without limitation, attorneys' fees and disbursements)) for any action taken, or any failure to take any action, unless the officer has breached or failed to perform the duties of his or her office under these articles of incorporation, the bylaws of the corporation or applicable provisions of law and the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. (d) Interpretation of article. The provisions of sections(b) and (c) of this article shall not apply to the responsibility or liability of a director or officer, as such, pursuant to any criminal statute or for the payment of taxes pursuant to local, state or federal law. The provisions of this article have been adopted pursuant to the authority of the Pennsylvania Business Corporation Law of 1988, shall be deemed to be a contract with each director or officer of the corporation who serves as such at any time while this article is in effect, and such provisions are cumulative of and shall be in addition to and independent of any and all other limitations on the liabilities of directors or officers of the corporation, as such, or rights of indemnification by the corporation to which a director or officer of the corporation may be entitled, whether such limitations or rights arise under or are created by any statute, rule of law, bylaw, agreement, vote of shareholders or disinterested directors or otherwise. Each person who serves as a director or officer of the corporation while this article is in effect shall be deemed to be doing so in reliance on the provisions of this article. No amendment to or repeal of this article, nor the adoption of any provisions of these articles of incorporation inconsistent with this article, shall apply to or have any effect on the liability or alleged liability of any director or officer of the corporation for or with respect to any acts or omissions of such director or officer occurring prior to such amendment, repeal or adoption of an inconsistent provision. In any action, suit or proceeding involving the application of the provisions of this article, the party or parties challenging the right of a director or officer to the benefits of this article shall have the burden of proof. ARTICLE X. These articles of incorporation may be amended in the manner at the time prescribed by statute, and all rights conferred upon shareholders herein are granted subject to this reservation. EX-99 3 EXHIBIT A-4 Exhibit A-4 BYLAWS OF PENN FUEL GAS, INC. (a Pennsylvania Corporation) ...oo0oo... (as amended and restated by action of the shareholders on May 28, 1996) ARTICLE I Offices and Fiscal Year Section 1.1 Registered Office.--The registered office of the corporation in the Commonwealth of Pennsylvania shall be at 55 South Third Street, Oxford, Chester County, Pennsylvania 19363, until otherwise established by an amendment of the articles of incorporation (the "articles") or by the board of directors and a record of such change is filed with the Pennsylvania Department of State in the manner provided by law. Section 1.2 Other Offices.--The corporation may also have offices at such other places within or without the Commonwealth of Pennsylvania as the board of directors may from time to time appoint or the business of the corporation may require. Section 1.3 Fiscal Year.--The fiscal year of the corporation shall begin on the first day of January in each year. ARTICLE II Notice--Meetings Generally Section 2.1 Notice of Meetings of Board of Directors.--Notice of a regular meeting of the board of directors need not be given. Notice of every special meeting of the board of directors shall be given to each director by telephone or in writing at least 24 hours (in the case of notice by telephone, telex, TWX or facsimile transmission) or 48 hours (in the case of notice by telegraph, courier service or express mail) or five days (in the case of notice by first class mail) before the time at which the meeting is to be held. Every such notice shall state the time and place of the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board need be specified in a notice of the meeting. Section 2.2 Notice of Meetings of Shareholders (a) General Rule.--Except as otherwise provided in the Business Corporation Law, written notice of every meeting of the shareholders shall be given by, or at the direction of, the secretary or other authorized person to each shareholder of record entitled to vote at the meeting at least (1) ten days prior to the day named for a meeting (and, in case of a meeting called to consider a merger, consolidation, share exchange or division, to each shareholder of record not entitled to vote at the meeting) called to consider a fundamental change under 15 Pa.C.S. Chapter 19 or (2) five days prior to the day named for the meeting in any other case. In the case of a special meeting of shareholders, the notice shall specify the general nature of the business to be transacted. (b) Notice of Action by Shareholders on Bylaws.--In the case of a meeting of shareholders that has as one of its purposes action on the bylaws, written notice shall be given to each shareholder that the purpose, or one of the purposes, of the meeting is to consider the adoption, amendment or repeal of the bylaws. There shall be included in, or enclosed with, the notice a copy of the proposed amendment or a summary of the changes to be effected thereby. (c) Notice of Action by Shareholders on Fundamental Change.--In the case of a meeting of the shareholders that has as one of its purposes action with respect to any fundamental change under 15 Pa.C.S. Chapter 19, each shareholder shall be given, together with written notice of the meeting, a copy or summary of the amendment or plan to be considered at the meeting in compliance with the provisions of Chapter 19. (d) Notice of Action by Shareholders Giving Rise to Dissenters Rights.--In the case of a meeting of the shareholders that has as one of its purposes action that would give rise to dissenters rights under the provisions of 15 Pa.C.S. Subchapter 15D, each shareholder shall be given, together with written notice of the meeting: (1) a statement that the shareholders have a right to dissent and obtain payment of the fair value of their shares by complying with the provisions of Subchapter 15D (relating to dissenters rights); and (2) a copy of Subchapter 15D. Section 2.3 Waiver of Notice. (a) Written Waiver.--Whenever any written notice is required to be given under the provisions of the Business Corporation Law, the articles or these bylaws, a waiver thereof in writing, signed by the person or persons entitled to the notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of the notice. Neither the business to be transacted at, nor the purpose of, a meeting need be specified in the waiver of notice of the meeting. (b) Waiver by Attendance.--Attendance of a person at any meeting shall constitute a waiver of notice of the meeting except where a person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting was not lawfully called or convened. Section 2.4 Use of Conference Telephone and Similar Equipment.--Any director may participate in any meeting of the board of directors, and the board of directors may provide by resolution with respect to a specific meeting or with respect to a class of meetings that one or more persons may participate in a meeting of the shareholders of the corporation, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in a meeting pursuant to this section shall constitute presence in person at the meeting. ARTICLE III Shareholders Section 3.1 Place of Meeting.--All meetings of the shareholders of the corporation shall be held at the registered office of the corporation or such other place as may be designated by the board of directors in the notice of a meeting. Section 3.2 Annual Meeting.--The board of directors may fix and designate the date and time of the annual meeting of the shareholders, but if no such date and time is fixed and designated by the board, the meeting for any calendar year shall be held on the fourth Monday of May in such year, if not a legal holiday under the laws of Pennsylvania, and, if a legal holiday, then on the next succeeding business day, not a Saturday, at 10:00 o'clock A.M., and at said meeting the shareholders then entitled to vote shall elect directors and shall transact such other business as may properly be brought before the meeting. Section 3.3 Special Meetings. (a) Call of Special Meetings.--Special meetings of the shareholders may be called at any time: (1) by the board of directors; or (2) by the president; or (3) unless otherwise provided in the articles, by shareholders entitled to cast at least 20% of the votes that all shareholders are entitled to cast at a particular meeting. (b) Fixing of Time for Meeting.--Upon written request of any person who has called a special meeting, it shall be the duty of the secretary to fix the time of the meeting, which shall be held not more than 60 days after the receipt of the request. The secretary has no independent right or authority to call a special meeting of the shareholders, and may only do so in response to the written request of another person who is authorized under this Section 3.3 to call a special meeting. Section 3.4 Quorum and Adjournment. (a) General Rule.--A meeting of shareholders of the corporation duly called shall not be organized for the transaction of business unless a quorum is present. The presence of shareholders entitled to cast at least a majority of the votes that all shareholders are entitled to cast on a particular matter to be acted upon at the meeting shall constitute a quorum for the purposes of consideration and action on the matter. Shares of the corporation owned, directly or indirectly, by it and controlled, directly or indirectly, by the board of directors of this corporation, as such, shall not be counted in determining the total number of outstanding shares for quorum purposes at any given time. (b) Withdrawal of a Quorum.--The shareholders present at a duly organized meeting can continue to do business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum. (c) Adjournments Generally.--Any regular or special meeting of the shareholders, including one at which directors are to be elected and one which cannot be organized because a quorum has not attended, may be adjourned for such period and to such place as the shareholders present and entitled to vote shall direct, except that any meeting at which directors are to be elected shall be adjourned only from day to day or for such longer periods not exceeding 15 days each as the shareholders present and entitled to vote shall direct. (d) Electing Directors at Adjourned Meeting.--Those shareholders entitled to vote who attend a meeting called for the election of directors that has been previously adjourned for lack of a quorum, although less than a quorum as fixed in this section, shall nevertheless constitute a quorum for the purpose of electing directors. (e) Other Action in Absence of Quorum.-- Those shareholders entitled to vote who attend a meeting of shareholders that has been previously adjourned for one or more periods aggregating at least 15 days because of an absence of a quorum, although less than a quorum as fixed in this section, shall nevertheless constitute a quorum for the purpose of acting upon any matter set forth in the notice of the meeting if the notice states that those shareholders who attend the adjourned meeting shall nevertheless constitute a quorum for the purpose of acting upon the matter. Section 3.5 Action by Shareholders.--Except as otherwise provided in the Business Corporation Law or the articles or these bylaws, whenever any corporate action is to be taken by vote of the shareholders of the corporation, it shall be authorized upon receiving the affirmative vote of a majority of the votes cast by all shareholders entitled to vote thereon and, if any shareholders are entitled to vote thereon as a class, upon receiving the affirmative vote of a majority of the votes cast by the shareholders entitled to vote as a class. Section 3.6 Organization.--At every meeting of the shareholders, the chairman of the board, if there be one, or, in the case of vacancy in office or absence of the chairman of the board, the vice chairman of the board, if there be one, or one of the following officers present in the order stated: the president, the vice presidents in their order of rank and seniority, or a person chosen by vote of the shareholders present, shall act as chairman of the meeting. The secretary or, in the absence of the secretary, an assistant secretary, or, in the absence of both the secretary and assistant secretaries, a person appointed by the chairman of the meeting, shall act as secretary of the meeting. Section 3.7 Voting Rights of Shareholders.-- Unless otherwise provided in the articles, every shareholder of the corporation shall be entitled to one vote for every share standing in the name of the shareholder on the books of the corporation. Section 3.8 Voting and Other Action by Proxy. (a) General Rule.-- (1) Every shareholder entitled to vote at a meeting of shareholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person to act for the shareholder by proxy. (2) The presence of, or vote or other action at a meeting of shareholders, or the expression of consent or dissent to corporate action in writing, by a proxy of a shareholder shall constitute the presence of, or vote or action by, or written consent or dissent of, the shareholder. (3) Where two or more proxies of a shareholder are present, the corporation shall, unless otherwise expressly provided in the proxy, accept as the vote of all shares represented thereby the vote cast by a majority of them and, if a majority of the proxies cannot agree whether the shares represented shall be voted or upon the manner of voting the shares, the voting of the shares shall be divided equally among those persons. (b) Execution and Filing.--Every proxy shall be executed in writing by the shareholder or by the duly authorized attorney-in-fact of the shareholder and filed with the secretary of the corporation. A telegram, telex, cablegram, datagram or similar transmission from a shareholder or attorney-in-fact, or a photographic, facsimile or similar reproduction of a writing executed by a shareholder or attorney-in-fact: (1) may be treated as properly executed for purposes of this subsection; and (2) shall be so treated if it sets forth a confidential and unique identification number or other mark furnished by the corporation to the shareholder for the purposes of a particular meeting or transaction. (c) Revocation.--A proxy, unless coupled with an interest, shall be revocable at will, notwithstanding any other agreement or any provision in the proxy to the contrary, but the revocation of a proxy shall not be effective until written notice thereof has been given to the secretary of the corporation. An unrevoked proxy shall not be valid after three years from the date of its execution unless a longer time is expressly provided therein. A proxy shall not be revoked by the death or incapacity of the maker unless, before the vote is counted or the authority is exercised, written notice of the death or incapacity is given to the secretary of the corporation. (d) Expenses.--The corporation shall pay the reasonable expenses of solicitation of votes, proxies or consents of shareholders by or on behalf of the board of directors or its nominees for election to the board, including solicitation by professional proxy solicitors and otherwise. Section 3.9 Determination of Shareholders of Record. (a) Fixing Record Date.--The board of directors may fix a time prior to the date of any meeting of shareholders as a record date for the determination of the shareholders entitled to notice of, or to vote at, the meeting, which time, except in the case of an adjourned meeting, shall be not more than 90 days prior to the date of the meeting of shareholders. Only shareholders of record on the date fixed shall be so entitled notwithstanding any transfer of shares on the books of the corporation after any record date fixed as provided in this subsection. The board of directors may similarly fix a record date for the determination of shareholders of record for any other purpose. When a determination of shareholders of record has been made as provided in this section for purposes of a meeting, the determination shall apply to any adjournment thereof unless the board fixes a new record date for the adjourned meeting. (b) Determination When a Record Date is Not Fixed.--If a record date is not fixed: (1) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day immediately preceding the day on which the meeting is held. (2) The record date for determining shareholders entitled to express consent or dissent to corporate action in writing without a meeting, when prior action by the board of directors is not necessary, to call a special meeting or to propose an amendment of the articles shall be the close of business on the day on which the first written consent or dissent, request for a special meeting or petition proposing an amendment of the articles is filed with the secretary of the corporation. (3) The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. Section 3.10 Unanimous Consent of Shareholders in Lieu of Meeting.--Any action required or permitted to be taken at a meeting of the shareholders or of a class of shareholders may be taken without a meeting if, prior or subsequent to the action, a consent or consents thereto by all of the shareholders who would be entitled to vote at a meeting for such purpose shall be filed with the secretary of the corporation. ARTICLE IV Board of Directors Section 4.1 Powers; Personal Liability. (a) General Rule.--Unless otherwise provided by statute, all powers vested by law in the corporation shall be exercised by or under the authority of, and the business and affairs of the corporation shall be managed under the direction of, the board of directors. (b) Personal Liability of Directors.-- (1) A director shall not be personally liable, as such, for monetary damages (including, without limitation, any judgment, amount paid in settlement, penalty, punitive damages or expense of any nature (including, without limitation, attorneys' fees and disbursements)) for any action taken, or any failure to take any action, unless: (i) the director has breached or failed to perform the duties of his or her office under Subchapter 17B of the Business Corporation Law (or any successor provision); and (ii) the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. (2) The provisions of paragraph (1) shall not apply to the responsibility or liability of a director pursuant to any criminal statute, or the liability of a director for the payment of taxes pursuant to local, state or federal law. (The provisions of this subsection (c) were adopted by the shareholders of the corporation on _______ __, 1996; the predecessor provisions of this subsection (c) were first adopted as Section 3.01(b) of the By-Laws of the corporation, retroactive to January 27, 1987. The provisions of this subsection (c) shall not apply to any action filed prior to January 27, 1987 or to any breach of performance of duty or any failure of performance of duty by a director occurring prior to that date.) Section 4.2 Qualifications and Selection of Directors. (a) Qualifications.--Each director of the corporation shall be a natural person of full age who need not be a resident of the Commonwealth of Pennsylvania or a shareholder of the corporation. No person who is 72 years of age or older, or will attain the age of 72 years during the year in which such person might be nominated as a director, shall be eligible to be nominated or selected as a director of the corporation. (b) Power to Select Directors.--Except as otherwise provided in these bylaws, directors of the corporation shall be elected by the shareholders. Any shareholder may nominate as many persons for the office of director as there are positions to be filled. If nominations for the office of director have been called for as provided in this section only candidates who have been so nominated shall be eligible for election. (c) Election of Directors.--In elections for directors, voting need not be by ballot, unless required by vote of the shareholders before the voting for the election of directors begins. The candidates receiving the highest number of votes from each class or group of classes, if any, entitled to elect directors separately up to the number of directors to be elected by the class or group of classes shall be elected. Section 4.3 Number and Term of Office. (a) Number.--The board of directors shall consist of such number of directors, not less than three nor more than eleven, as may be determined from time to time by resolution of the board of directors. (b) Term of Office.--Each director shall hold office for one year and until a successor has been selected and qualified or until his or her earlier death, resignation or removal. A decrease in the number of directors shall not have the effect of shortening the term of any incumbent director. (c) Resignation.--Any director may resign at any time upon written notice to the corporation. The resignation shall be effective upon receipt thereof by the corporation or at such subsequent time as shall be specified in the notice of resignation. (d) Chairman and Vice Chairman of the Board.--The board of directors may elect from among the members of the board a chairman of the board and a vice chairman of the board. The chairman of the board, if there be one, and vice chairman of the board, if there be one, are not officers of the corporation. Section 4.4 Vacancies. (a) General Rule.--Vacancies in the board of directors, including vacancies resulting from an increase in the number of directors, may be filled by a majority vote of the remaining members of the board though less than a quorum, or by a sole remaining director, and each person so selected shall be a director to serve until the next selection of the class for which such director has been chosen, and until a successor has been selected and qualified or until his or her earlier death, resignation or removal. (b) Action by Resigned Directors.--When one or more directors resign from the board effective at a future date, the directors then in office, including those who have so resigned, shall have power by the applicable vote to fill the vacancies, the vote thereon to take effect when the resignations become effective. Section 4.5 Removal of Directors. (a) Removal by the Shareholders.--The entire board of directors, or any class of the board, or any individual director may be removed from office by vote of the shareholders entitled to vote thereon without assigning any cause. In case the board or a class of the board or any one or more directors are so removed, new directors may be elected at the same meeting. (b) Removal by the Board.--The board of directors may declare vacant the office of a director who has been judicially declared of unsound mind or who has been convicted of an offense punishable by imprisonment for a term of more than one year or if, within 60 days after notice of his or her selection, the director does not accept the office either in writing or by attending a meeting of the board of directors. Section 4.6 Place of Meetings.--Meetings of the board of directors may be held at such place within or without the Commonwealth of Pennsylvania as the board of directors may from time to time appoint or as may be designated in the notice of the meeting. Section 4.7 Organization of Meetings.--At every meeting of the board of directors, the chairman of the board, if there be one, or, in the case of a vacancy in the office or absence of the chairman of the board, the vice chairman of the board, if there be one, or one of the following officers present in the order stated: the president, the vice presidents in their order of rank and seniority, or a person chosen by a majority of the directors present, shall act as chairman of the meeting. The secretary or, in the absence of the secretary, an assistant secretary, or, in the absence of the secretary and the assistant secretaries, any person appointed by the chairman of the meeting, shall act as secretary of the meeting. Section 4.8 Regular Meetings.--Regular meetings of the board of directors shall be held at such time and place as shall be designated from time to time by resolution of the board of directors. Section 4.9 Special Meetings.--Special meetings of the board of directors shall be held whenever called by the chairman or by two or more of the directors. Section 4.10 Quorum of and Action by Directors. (a) General Rule.--A majority of the directors in office of the corporation shall be necessary to constitute a quorum for the transaction of business and the acts of a majority of the directors present and voting at a meeting at which a quorum is present shall be the acts of the board of directors. (b) Action by Written Consent.--Any action required or permitted to be taken at a meeting of the directors may be taken without a meeting if, prior or subsequent to the action, a consent or consents thereto by all of the directors in office is filed with the secretary of the corporation. Section 4.11 Executive and Other Committees. (a) Establishment and Powers.--The board of directors may, by resolution adopted by a majority of the directors in office, establish one or more committees to consist of one or more directors of the corporation. Each committee of the board shall serve at the pleasure of the board. Any committee shall have and may exercise such powers and authority of the board of directors as are provided in the resolution of the board of directors and otherwise permitted by applicable law. (b) Alternate Committee Members.--The board may designate one or more directors as alternate members of any committee who may replace any absent or disqualified member at any meeting of the committee or for the purposes of any written action by the committee. In the absence or disqualification of a member and alternate member or members of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not consisting a quorum, may unanimously appoint another director to act at the meeting in the place of the absent or disqualified member. (c) Committee Procedures.--The term "board of directors" or "board," when used in any provision of these bylaws relating to the organization or procedures of or the manner of taking action by the board of directors, shall be construed to include and refer to any executive or other committee of the board. Section 4.12 Compensation.--The board of directors shall have the authority to fix the compensation of directors for their services as directors and a director may be a salaried officer of the corporation. ARTICLE V Officers Section 5.1 Officers Generally. (a) The officers of the corporation shall be a president, one or more vice presidents, a secretary, a treasurer, and such other officers as may be elected in accordance with the provisions of Section 5.03. Officers may but need not be directors or shareholders of the corporation. The president and secretary shall be natural persons of full age. The treasurer may be a corporation, but if a natural person shall be of full age. Any number of offices may be held by the same person. (b) Standard of Care.--In lieu of the standards of conduct otherwise provided by law, officers of the corporation shall be subject to the same standards of conduct, including standards of care and loyalty and rights of justifiable reliance, as shall at the time be applicable to directors of the corporation. An officer of the corporation shall not be personally liable, as such, to the corporation or its shareholders for monetary damages (including, without limitation, any judgment, amount paid in settlement, penalty, punitive damages or expense of any nature (including, without limitation, attorneys' fees and disbursements) for any action taken, or any failure to take any action, unless the officer has breached or failed to perform the duties of his or her office under the articles of incorporation, these bylaws, or the applicable provisions of law and the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. The provisions of this subsection shall not apply to the responsibility or liability of an officer pursuant to any criminal statute or for the payment of taxes pursuant to local, state or federal law. Section 5.2 Election, Term of Office and Resignations. (a) Election and Term of Office.--The officers of the corporation, except those elected by delegated authority pursuant to Section 5.03, shall be elected annually by the board of directors, and each such officer shall hold office for a term of one year and until a successor has been selected and qualified or until his or her earlier death, resignation or removal. (b) Resignations.--Any officer may resign at any time upon written notice to the corporation. The resignation shall be effective upon receipt thereof by the corporation or at such subsequent time as may be specified in the notice of resignation. Section 5.3 Subordinate Officers, Committees and Agents.--The board of directors may from time to time elect such other officers and appoint such committees, employees or other agents as the business of the corporation may require, including one or more assistant secretaries, and one or more assistant treasurers, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws, or as the board of directors may from time to time determine. The board of directors may delegate to any officer or committee the power to elect subordinate officers and to retain or appoint employees or other agents, or committees thereof, and to prescribe the authority and duties of such subordinate officers, committees, employees or other agents. Section 5.4 Removal of Officers and Agents.-- Any officer or agent of the corporation may be removed by the board of directors with or without cause. Section 5.5 Vacancies.--A vacancy in any office because of death, resignation, removal, disqualification, or any other cause, may be filled by the board of directors or by the officer or committee to which the power to fill such office has been delegated pursuant to Section 5.3, as the case may be, and if the office is one for which these bylaws prescribe a term, shall be filled for the unexpired portion of the term. Section 5.6 Authority.--All officers of the corporation, as between themselves and the corporation, shall have such authority and perform such duties in the management of the corporation as may be provided by or pursuant to resolutions or orders of the board of directors or, in the absence of controlling provisions in the resolutions or orders of the board of directors, as may be determined by or pursuant to these bylaws. Section 5.7 The President.--The president shall be the chief executive officer of the corporation and shall have general supervision over the business and operations of the corporation, subject, however, to the control of the board of directors. The president shall sign, execute, and acknowledge, in the name of the corporation, deeds, mortgages, bonds, contracts or other instruments, authorized by the board of directors, except in cases where the signing and execution thereof shall be expressly delegated by the board of directors, or by these bylaws, to some other officer or agent of the corporation; and, in general, shall perform all duties incident to the office of president and such other duties as from time to time may be assigned by the board of directors. Section 5.8 The Vice Presidents.--The vice presidents shall perform the duties of the president in the absence of the president and such other duties as may from time to time be assigned to them by the board of directors or the president. Section 5.9 The Secretary.--The secretary or an assistant secretary shall attend all meetings of the shareholders and of the board of directors and all committees thereof and shall record all the votes of the shareholders and of the directors and the minutes of the meetings of the shareholders and of the board of directors and of committees of the board in a book or books to be kept for that purpose; shall see that notices are given and records and reports properly kept and filed by the corporation as required by law; shall be the custodian of the seal of the corporation and see that it is affixed to all documents to be executed on behalf of the corporation under its seal; and, in general, shall perform all duties incident to the office of secretary, and such other duties as may from time to time be assigned by the board of directors or the president. Section 5.10 The Treasurer.--The treasurer or an assistant treasurer shall have or provide for the custody of the funds or other property of the corporation; shall collect and receive or provide for the collection and receipt of moneys earned by or in any manner due to or received by the corporation; shall deposit all funds in his or her custody as treasurer in such banks or other places of deposit as the board of directors may from time to time designate; shall, whenever so required by the board of directors, render an account showing all transactions as treasurer, and the financial condition of the corporation; and, in general, shall discharge such other duties as may from time to time be assigned by the board of directors or the president. Section 5.11 Salaries.--The salaries of the officers elected by the board of directors shall be fixed from time to time by the board of directors or by such officer as may be designated by resolution of the board. The salaries or other compensation of any other officers, employees and other agents shall be fixed from time to time by the officer or committee to which the power to elect such officers or to retain or appoint such employees or other agents has been delegated pursuant to Section 5.03. No officer shall be prevented from receiving such salary or other compensation by reason of the fact that the officer is also a director of the corporation. ARTICLE VI Certificates of Stock, Transfer, Etc. Section 6.1 Share Certificates. (a) Form of Certificates.--Certificates for shares of the corporation shall be in such form as approved by the board of directors. (b) Share Register.--The share register or transfer books and blank share certificates shall be kept by the secretary or by any transfer agent or registrar designated by the board of directors for that purpose. The share register shall be kept at either the registered office of the corporation in the Commonwealth of Pennsylvania or at its principal place of business wherever situated or at the office of its registrar or transfer agent. Section 6.2 Issuance.--The share certificates of the corporation shall be numbered and registered in the share register or transfer books of the corporation as they are issued. They shall be executed in such manner as the board of directors shall determine. Section 6.3 Transfer.--Transfers of shares shall be made on the share register or transfer books of the corporation upon surrender of the certificate therefor, endorsed by the person named in the certificate or by an attorney lawfully constituted in writing. Section 6.4 Record Holder of Shares.--The corporation shall be entitled to treat the person in whose name any share or shares of the corporation stand on the books of the corporation as the absolute owner thereof, and shall not be bound to recognize any equitable or other claim to, or interest in, such share or shares on the part of any other person. Section 6.5 Lost, Destroyed or Mutilated Certificates.--The holder of any shares of the corporation shall immediately notify the corporation of any loss, destruction or mutilation of the certificate therefor, and the board of directors may, in its discretion, cause a new certificate or certificates to be issued to such holder, in case of mutilation of the certificate, upon the surrender of the mutilated certificate or, in case of loss or destruction of the certificate, upon satisfactory proof of such loss or destruction and, if the board of directors shall so determine, the deposit of a bond in such form and in such sum, and with such surety or sureties, as it may direct. ARTICLE VII Indemnification of Directors, Officers and Other Authorized Representatives (The provisions of this Article VII were adopted by the shareholders of the corporation on _______ __, 1996; the predecessor provisions of this Article were first adopted by the board of directors as Article VII of the By-Laws of the corporation on April 21, 1987, subject to shareholder approval, and were approved by the shareholders at the 1987 Annual Meeting of Shareholders.) Section 7.1 Scope of Indemnification. (a) General Rule.--The corporation shall indemnify an indemnified representatives against any liability incurred in connection with any proceeding in which the indemnified representatives may be involved as a party or otherwise by reason of the fact that such person is or was serving in an indemnified capacity, including, without limitation, liabilities resulting from any actual or alleged breach or neglect of duty, error, misstatement or misleading statement, negligence, gross negligence or act giving rise to strict or products liability, except: (1) where such indemnification is expressly prohibited by applicable law; (2) where the conduct of the indemnified representative has been finally determined pursuant to Section 7.06 or otherwise to constitute willful misconduct or recklessness within the meaning of 15 Pa.C.S. SECTION 1746(b) or any superseding provision of law sufficient in the circumstances to bar indemnification against liabilities arising from the conduct; or (3) to the extent such indemnification has been finally determined in a final adjudication pursuant to Section 7.06 to be otherwise unlawful. (b) Partial Payment.--If an indemnified representative is entitled to indemnification in respect of a portion, but not all, of any liabilities to which such person may be subject, the corporation shall indemnify such indemnified representative to the maximum extent for such portion of the liabilities. (c) Presumption.--The termination of a proceeding by judgment, order, settlement or conviction or upon a plea of nolo contendere or its equivalent shall not of itself create a presumption that the indemnified representative is not entitled to indemnification. (d) Definitions.--For purposes of this Article: (1) "indemnified capacity" means any and all past, present and future service by an indemnified representative in one or more capacities as a director, officer, employee or agent of the corporation, or, at the request of the corporation, as a director, officer, employee, agent, fiduciary or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other entity or enterprise; (2) "indemnified representative" means any and all directors and officers of the corporation and any other person designated as an indemnified representative by the board of directors of the corporation (which may, but need not, include any person serving at the request of the corporation, as a director, officer, employee, agent, fiduciary or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other entity or enterprise); (3) "liability" means any damage, judgment, amount paid in settlement, fine, penalty, punitive damages, excise tax assessed with respect to an employee benefit plan, or cost or expense of any nature (including, without limitation, attorneys' fees and disbursements); and (4) "proceeding" means any threatened, pending or completed action, suit, appeal or other proceeding of any nature, whether civil, criminal, administrative or investigative, whether formal or informal, and whether brought by or in the right of the corporation, a class of its security holders or otherwise. Section 7.2 Proceedings Initiated by Indemnified Representatives.--Notwithstanding any other provision of this Article, the corporation shall not indemnify under this Article an indemnified representative for any liability incurred in a proceeding initiated (which shall not be deemed to include counter claims or affirmative defenses) or participated in as an intervenor or amicus curiae by the person seeking indemnification unless such initiation of or participation in the proceeding is authorized, either before or after its commencement, by the affirmative vote of a majority of the directors in office. This section does not apply to reimbursement of expenses incurred in successfully prosecuting or defending an arbitration under Section 7.6 or otherwise successfully prosecuting or defending the rights of an indemnified representative granted by or pursuant to this Article. Section 7.3 Advancing Expenses.--The corporation shall pay the expenses (including attorneys' fees and disbursements) incurred in good faith by an indemnified representative in advance of the final disposition of a proceeding described in Section 7.1 or the initiation of or participation in which is authorized pursuant to Section 7.2 upon receipt of an undertaking by or on behalf of the indemnified representative to repay the amount if it is ultimately determined pursuant to Section 7.6 to such person is not entitled to be indemnified by the corporation pursuant to this Article. The financial ability of an indemnified representative to repay an advance shall not be a prerequisite to the making of such advance. Section 7.4 Securing of Indemnification Obligations.--To further effect, satisfy or secure the indemnification obligations provided herein or otherwise, the corporation may maintain insurance, obtain a letter of credit, act as self-insurer, create a reserve, trust, escrow, cash collateral or other fund or account, enter into indemnification agreements, pledge or grant a security interest in any assets or properties of the corporation, or use any other mechanism or arrangement whatsoever in such amounts, at such costs, and upon such other terms and conditions as the board of directors shall deem appropriate. Absent fraud, the determination of the board of directors with respect to such amounts, costs, terms and conditions shall be conclusive against all security holders, officers and directors and shall not be subject to voidability. Section 7.5 Payment of Indemnification.--An indemnified representative shall be entitled to indemnification within 30 days after a written request for indemnification has been delivered to the secretary of the corporation. Section 7.6 Arbitration. (a) General Rule.--Any dispute related to the right to indemnification, contribution or advancement of expenses as provided under this Article, except with respect to indemnification for liabilities arising under the Securities Act of 1933 that the corporation has undertaken to submit to a court for adjudication, shall be decided only by arbitration in the metropolitan area in which the principal executive offices of the corporation are located at the time, in accordance with the commercial arbitration rules then in effect of the American Arbitration Association, before a panel of three arbitrators, one of whom shall be selected by the corporation, the second of whom shall be selected by the indemnified representative and the third of whom shall be selected by the other two arbitrators. In the absence of the American Arbitration Association, or if for any reason arbitration under the arbitration rules of the American Arbitration Association cannot be initiated, and if one of the parties fails or refuses to select an arbitrator or the arbitrators selected by the corporation and the indemnified representative cannot agree on the selection of the third arbitrator within 30 days after such time as the corporation and the indemnified representative have each been notified of the selection of the other's arbitrator, the necessary arbitrator or arbitrators shall be selected by the presiding judge of the court of general jurisdiction in such metropolitan area. (b) Qualifications of Arbitrators.--Each arbitrator selected as provided herein is required to be or have been a director or executive officer of a corporation whose shares of common stock were listed during at least one year of such service on the New York Stock Exchange or the American Stock Exchange or quoted on the National Association of Securities Dealers Automated Quotations System. (c) Burden of Proof.--The party or parties challenging the right of an indemnified representative to the benefits of this Article shall have the burden of proof. (d) Expenses.--The corporation shall reimburse an indemnified representative for the expenses (including attorneys' fees and disbursements) incurred in successfully prosecuting or defending such arbitration. (e) Effect.--Any award entered by the arbitrators shall be final, binding and nonappealable and judgment may be entered thereon by any party in accordance with applicable law in any court of competent jurisdiction, except that the corporation shall be entitled to interpose as a defense in any such judicial enforcement proceeding any prior final judicial determination adverse to the indemnified representative under Section 7.1(a)(2) in a proceeding not directly involving indemnification under this Article. This arbitration provision shall be specifically enforceable. Section 7.7 Contribution.--If the indemnification provided for in this Article or otherwise is unavailable for any reason in respect of any liability or portion thereof, the corporation shall contribute to the liabilities to which the indemnified representative may be subject in such proportion as is appropriate to reflect the intent of this Article or otherwise. Section 7.8 Contract Rights; Amendment or Repeal.--All rights under this Article shall be deemed a contract between the corporation and the indemnified representative pursuant to which the corporation and each indemnified representative intend to be legally bound. Any repeal, amendment or modification hereof shall be prospective only and shall not affect any rights or obligations then existing. Section 7.9 Scope of Article.--The rights granted by this Article shall not be deemed exclusive of any other rights to which those seeking indemnification, contribution or advancement of expenses may be entitled under any statute, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an indemnified capacity and as to action in any other capacity. The indemnification, contribution and advancement of expenses provided by or granted pursuant to this Article shall continue as to a person who has ceased to be an indemnified representative in respect of matters arising prior to such time, and shall inure to the benefit of the heirs, executors, administrators and personal representatives of such a person. Section 7.10 Reliance on Provisions.--Each person who shall act as an indemnified representative of the corporation shall be deemed to be doing so in reliance upon the rights of indemnification, contribution and advancement of expenses provided by this Article. Section 7.11 Interpretation.--The provisions of this Article are intended to constitute bylaws authorized by 15 Pa.C.S. SECTION 1746. ARTICLE VIII Miscellaneous Section 8.1 Corporate Seal.--The corporation shall have a corporate seal in the form of a circle containing the name of the corporation, the year of incorporation and such other details as may be approved by the board of directors. Section 8.2 Checks.--All checks, notes, bills of exchange or other similar orders in writing shall be signed by such one or more officers or employees of the corporation as the board of directors may from time to time designate. Section 8.3 Contracts.--Except as otherwise provided in the Business Corporation Law in the case of transactions that require action by the shareholders, the board of directors may authorize any officer or agent to enter into any contract or to execute or deliver any instrument on behalf of the corporation, and such authority may be general or confined to specific instances. Section 8.4 Deposits.--All funds of the corporation shall be deposited from time to time to the credit of the corporation in such banks, trust companies or other depositaries as the board of directors may approve or designate, and all such funds shall be withdrawn only upon checks signed by such one or more officers or employees of the corporation as the board of directors shall from time to time designate. Section 8.5 Right of Inspection.--Every shareholder shall, upon written verified demand stating the purpose thereof, have a right to examine, in person or by agent or attorney, during the usual hours for business for any proper purpose, the share register, books and records of account, and records of the proceedings of the incorporators, shareholders and directors and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to the interest of the person as a shareholder. In every instance where an attorney or other agent is the person who seeks the right of inspection, the demand shall be accompanied by a verified power of attorney or other writing that authorizes the attorney or other agent to so act on behalf of the shareholder. The demand shall be directed to the corporation at its registered office in the Commonwealth of Pennsylvania or at its principal place of business wherever situated. Section 8.6 Amendment of Bylaws.--These bylaws may be amended or repealed, or new bylaws may be adopted, either (i) by vote of the shareholders at any duly organized annual or special meeting of shareholders, or (ii) with respect to those matters that are not by statute committed expressly to the shareholders and regardless of whether the shareholders have previously adopted or approved the bylaw being amended or repealed, by vote of a majority of the board of directors of the corporation in office at any regular or special meeting of directors. Any change in these bylaws shall take effect when adopted unless otherwise provided in the resolution effecting the change. EX-99 4 EXHIBIT D-1 EXHIBIT D-1 BEFORE THE PENNSYLVANIA PUBLIC UTILITY COMMISSION In Re: Application of Pennsylvania Power : & Light Company, PFG Gas, Inc. and : North Penn Gas Company for a Certificate : of Public Convenience Evidencing Approval : under Section 1102(a)(3) of the Public : Docket No: Utility Code of the Transfer from Penn Fuel : A---- Gas, Inc. to PP&L Resources, Inc. by : Merger the Title to, or the Possession : or Use of, All Property of Penn Fuel Gas, : Inc.'s Public Utility Subsidiaries, PFG Gas, : Inc. and North Penn Gas Company, Used or : Useful in the Public Service : TO THE PENNSYLVANIA PUBLIC UTILITY COMMISSION: A. INTRODUCTION 1. By this Application, Pennsylvania Power & Light Company ("PP&L"), PFG Gas, Inc ("PFG") and North Penn Gas Company ("North Penn") seek, pursuant to Section 1102 (a)(3) of the Public Utility Code, 66 Pa.C.S. SECTION 1102(a)(3), as interpreted in the Statement of Policy on Utility Stock Transfers, at 52 Pa Code SECTION 69.901, a certificate of public convenience evidencing the Pennsylvania Public Utility Commission's ("Commission") approval of the transfer by merger from Penn Fuel Gas, Inc. ("Penn Fuel") to PP&L Resources, Inc. ("PP&L Resources") the title to, or the possession or use of, all property of Penn Fuel's gas distribution public utility subsidiaries, PFG and North Penn, that is used or useful in the public service. 2. The complete names and address of the Applicants are: Pennsylvania Power & Light Company Two North Ninth Street Allentown, Pennsylvania 18101-1179 PFG Gas, Inc. 55 South Third Street Oxford, Pennsylvania 19363 3. The names, addresses and telephone numbers of the Applicants' attorneys are: David B. MacGregor Morgan, Lewis & Bockius LLP 2000 One Logan Square Philadelphia, PA 19103-6993 Tel: (215) 963-5448 Fax: (215) 963-5299 John H. Isom Morgan, Lewis & Bockius LLP One Commerce Square 417 Walnut Street Harrisburg, PA 17101-1904 Tel: (717) 237-4022 Fax: (717) 237-4004 4. The name, address and telephone numbers of an additional attorney for PP&L are: Paul E. Russell Associate General Counsel Pennsylvania Power & Light Company Two North Ninth Street Allentown, PA 18101-1179 Tel: (610) 774-4254 Fax: (610) 774-6726 B. THE PARTIES TO THE PROPOSED TRANSACTION 5. PP&L Resources, a Pennsylvania corporation, was organized in 1995, as part of a restructuring of the PP&L corporate system. The Commission approved this reorganization in an Order entered on February 10, 1995, at Docket No. A-110500, F.206. As a result of the restructuring, PP&L Resources owns all of the issued and outstanding shares of common capital stock of PP&L. The stock of PP&L Resources is widely held and is traded on the New York Stock Exchange. PP&L is a public utility corporation which provides electric service in Pennsylvania. Because PP&L Resources owns all of the issued and outstanding common capital stock of PP&L, PP&L Resources is a holding company under the Public Utility Holding Company Act of 1935 ("PUHCA"). PP&L Resources, however, qualifies for an exemption under the PUHCA because it and its electric utility subsidiary are predominantly intrastate in character and carry on their businesses in a single state in which they are organized. In addition to PP&L, PP&L Resources owns other subsidiaries, including Power Markets Development Company, which invests in energy projects in the United States and foreign countries, and Spectrum Energy Services Corporation, which markets energy-related services and products. 6. PP&L is a Pennsylvania corporation organized in 1920, which provides electric public utility service in central and eastern Pennsylvania. As shown in Exhibit G, Schedule 1 hereto, as of June 30, 1997, PP&L served approximately 1.2 million customers. PP&L provides service throughout a 10,000 square mile service territory in 29 countries. For the twelve months ended June 30, 1997, PP&L's jurisdictional sales exceeded 32 billion kWh. As shown in Exhibit I, Schedule 1 hereto, for the same period, PP&L's annual operating revenues were approximately $2.9 billion. PP&L's system includes more than 1,100 miles of bulk transmission lines operating at or above 230,000 volts and more than 50,000 miles of other transmission and distribution lines operating at less than 230,000 volts. PP&L currently operates its generation and transmission facilities as part of the Pennsylvania -- New Jersey -- Maryland ("PJM") interconnection. PP&L's PJM operations and other wholesale services are subject to the regulatory jurisdiction of the Federal Energy Regulatory Commission ("FERC"). 7. Penn Fuel is a Pennsylvania corporation organized in 1944, Penn Fuel owns all of the common capital stock of two subsidiaries, PFG and North Penn, which provide gas service subject to the Commission's regulatory jurisdiction. As a result of its ownership of gas public utilities, Penn Fuel is a holding company under the PUHCA. Penn Fuel, however, qualifies for an exemption under the PUHCA because it and its gas utility subsidiaries are predominantly intrastate in character and carry on their businesses predominantly in a single state in which they are organized. In addition to owning public utility subsidiaries, Penn Fuel sells propane to approximately 28,000 customers. 8. PFG provides gas sales and transportation service in portions of 27 Pennsylvania counties and in a small portion of northern Maryland. PFG owns and operates numerous local gas distribution systems that are dispersed throughout the southern and eastern two thirds of Pennsylvania. As shown in Exhibit G, Schedule 2 hereto, as of June 30, 1997, PFG provided gas service to 35,518 customers in Pennsylvania. As shown in Exhibit I, Schedule 2 hereto, annual operating revenues for PFG for the twelve months ended June 30, 1997, were $50,251,383. 9. North Penn is a Pennsylvania corporation organized in 1950. North Penn owns and operates two local distribution systems, one in northwestern Pennsylvania and one in north central Pennsylvania. North Penn provides gas sales, transportation and storage service in ten counties in northern and northwestern Pennsylvania, subject to the regulatory jurisdiction of the Commission. In addition, North Penn provides gas storage service subject to the regulatory jurisdiction of FERC, although by a FERC Order dated June 3, 1992, at Docket No. RP91-111-004, authority over North Penn's storage rates was delegated to the Commission. As shown in Exhibit G, Schedule 3 hereto, as of June 30, 1997, North Penn provided gas service to 34,544 customers in Pennsylvania. As shown in Exhibit I, Schedule 3 hereto, annual operating revenues for North Penn for the twelve months ended June 30, 1997, were $45,189,495. C. DESCRIPTION OF THE PROPOSED ACQUISITION AND MERGER 10. The following is a summary of the principal steps which will be, or have been, taken to effect the proposed acquisition and merger. A complete copy of the Agreement and Plan of Merger, dated as of June 26, 1997, is provided as Exhibit A hereto. a. PP&L Resources has caused a new wholly-owned subsidiary to be organized under the laws of Pennsylvania for the purposes of the proposed acquisition and merger. The name of this corporation is Keystone Merger Corp. ("Keystone"). b. Keystone will be merged into Penn Fuel. Penn Fuel will be the surviving corporation, and Keystone will cease to exist. c. Following the merger, the officers, directors, corporate charter and bylaws of Keystone immediately before the merger will become the officers, directors, corporate charter and bylaws of the surviving corporation, Penn Fuel. d. In the merger, the outstanding shares of common stock of Penn Fuel will be converted into the right to receive shares of common stock of PP&L Resources. In particular, each Penn Fuel common share will be converted into the right to receive between 6.968 and 8.516 shares of PP&L Resources common stock, depending upon the market price of PP&L Resources common stock at the time of the closing of the merger. In this manner, Penn Fuel common shareholders at the time of the merger will become PP&L Resources common shareholders, and PP&L Resources will be the sole holder of all of the outstanding common stock of Penn Fuel. e. Penn Fuel is taking all actions necessary to redeem shares of its outstanding preferred stock in accordance with the terms of the preferred stock. At the option of each preferred stockholder, in lieu of receiving the cash redemption price under the terms of the preferred stock, such Penn Fuel preferred stock, in the merger, may be converted into the right to receive shares of common stock of PP&L Resources. In particular, each Penn Fuel preferred share would be converted into the right to receive between 0.682 and 0.833 shares of PP&L Resources common stock, depending upon the market prices of PP&L Resources common stock at the time of the closing of the merger. In this manner, Penn Fuel preferred shareholders at the time of the merger may become PP&L Resources common shareholders, and there will no longer be any shares of preferred stock outstanding. f. Immediately following the consummation of the transaction proposed in the Agreement and Plan of Merger, Penn Fuel will continue to exist, will retain its present name, and will operate as a wholly-owned subsidiary of PP&L Resources. D. BENEFITS OF THE ACQUISITION AND MERGER 11. Presently, Penn Fuel's issued and outstanding shares of common capital stock are closely held. Almost 95 percent of such stock is beneficially held by members of a single family. After the acquisition by PP&L Resources, Penn Fuel and its subsidiaries will be owned by a large holding company whose common equity capital is publicly traded on the New York Stock Exchange and whose long-term debt is rated A2 by Moody's and A- by Standard and Poor's ("S&P"). PP&L Resources is included in the S&P 500 Composite Index and the S&P Public Utilities. In contrast, Penn Fuel's common stock is not actively traded, and its long-term debt is not rated. Clearly, it will be much easier and more efficient for Penn Fuel's operating subsidiaries to raise capital to meet their ever increasing capital requirements to renew and expand their systems as part of the PP&L Resources corporate system than as part of the Penn Fuel corporate system. 12. Acquisition of Penn Fuel will add to the PP&L Resources corporate system's customer base in additional areas in Pennsylvania because PFG and North Penn provide service in geographic areas not presently served by PP&L, as well as in areas presently served by PP&L. 13. Acquisition by PP&L Resources of Penn Fuel and its operating subsidiaries will provide PP&L with expertise concerning alternative forms of energy, which expertise may be useful in making future decisions concerning energy sources. 14. Acquisition of Penn Fuel will enable the PP&L Resources corporate system to offer a wider range of energy sources to customers. Retail electricity markets in Pennsylvania will be open to competition beginning in 1999. Retail gas markets also are expected to be open to competition in the near future. The merger will permit the PP&L Resources corporate system to compete in both energy markets on a state-wide basis and to provide to customers electricity or gas depending on their needs. 15. Following the merger, the PP&L Resources corporate system's presence in a larger geographic area and the ability to provide both gas and electric energy will enhance the ability to offer "behind the meter" consulting services and present increased opportunities to provide to residential and commercial customers the benefits of energy management systems. 16. There are only limited opportunities for achieving efficiencies in operations as a result of the acquisition of Penn Fuel by PP&L Resources, due to the differences in the nature of the utility services provided, differences in training for and expertise of employees of gas companies and of electric companies and the limited geographical overlap of the service territories of PFG and North Penn with PP&L's service territory. Nevertheless, PP&L, PFG and North Penn will seek to find operational efficiencies in an effort to mitigate future increases in costs of service. 17. Due to the increased size and resources of the combined corporate system, in comparison to the Penn Fuel corporate system on a stand-alone basis, the acquisition will greatly strengthen the foundation supporting services to PFG's and North Penn's customers at a high quality level. 18. Following the acquisition, PFG's and North Penn's customers will have increased stability and other benefits inherent in being part of a much larger organization. E. RATES 19. Presently, PFG and North Penn provide service to Pennsylvania jurisdictional customers under a single tariff and a single set of rates. PFG's and North Penn's rates will not change as a result of the acquisition by PP&L Resources. 20. PP&L's rates for electric service will not change as a result of the acquisition. F. SERVICE 21. Service provided by PP&L, PFG and North Penn will not be affected by the acquisition. G. CORPORATE APPROVALS 22. The merger has been approved by the Board of Directors of Penn Fuel and the Board of Directors of PP&L Resources. 23. The merger is subject to approval by Penn Fuel's shareholders. Such approval is assured, however, because interests representing almost 95 percent of the issued and outstanding shares of common capital stock of Penn Fuel have committed to vote in favor of the acquisition pursuant to a voting agreement dated as of June 26, 1997. The merger is subject also to other closing conditions as set forth in the Agreement and Plan of Merger dated as of June 26, 1997. H. REGULATORY APPROVALS 24. The proposed merger is subject to approval by the United States Securities and Exchange Commission ("SEC") under the PUHCA. 25. The Maryland Public Service Commission ("Maryland PSC") is being duly notified of the proposed transfer by merger. The Maryland PSC will then determine whether any proceedings and its approval will be required. 26. The expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, will be required. 27. A registration statement under the Securities Act of 1933 must be declared effective by the SEC. I. SERVICE TERRITORIES 28. Provided as Exhibit B hereto are copies of the tariff sheets of PFG and North Penn, which identify the areas where they provide service in Pennsylvania. Exhibit C hereto is a map depicting the portions of pennsylvania where PFG and North Penn provide service. 29. Provided as Exhibit D hereto are copies of the tariff sheets of PP&L identifying areas where it provides service. Exhibit E is a map depicting the portions of Pennsylvania where PP&L provides service. 30. The service territories of PP&L, PFG and North Penn would not be changed by the Commission's approval of this Application or by the consummation of the transaction proposed herein. J. CORPORATE HISTORIES OF THE AFFECTED UTILITIES 31. PP&L was founded in 1920 through consolidation of eight electric companies. It was organized initially as a direct subsidiary of Lehigh Power Securities Corporation and an indirect subsidiary of the Electric Bond and Share Company. In 1939, PP&L's corporate parent, Lehigh Power Securities Corporation was dissolved, and PP&L became a direct subsidiary of National Power & Light Company and remained an indirect subsidiary of Electric Bond and Share Company. From 1945 through 1947, as a result of a series of transactions, National Power & Light Co. and Electric Bond and Share Co. divested themselves of PP&L ownership and PP&L stock was sold to the public. As explained above, in 1995, PP&L became a subsidiary of a newly-formed holding company, PP&L Resources. Since its organization, PP&L has expanded its service territory through a series of acquisitions. a. In 1923, Wilkes Barre Electric Company was merged into PP&L. b. In 1925, PP&L acquired United Electric Company. c. In 1929, PP&L acquired Harrisburg Light & Power Company. d. In 1930, PP&L acquired twenty-eight electric companies which served substantially all of Lancaster County, Pennsylvania. e. In 1938, Conestoga Transmission and Lehigh Electric Light & Power Company were merged into PP&L. f. In 1948, PP&L acquired Palmerton Lighting Company. g. In 1955, Pennsylvania Water & Power Company was merged into PP&L. h. In 1956, Scranton Electric Company was merged into PP&L. i. In 1980, Hershey Electric Company was merged into PP&L. 32. Effective December 31, 1994, PFG was created by a merger of seven predecessor public utility corporations. In the merger, Allied Gas Company, Counties Gas Company, Interboro Gas Company, Lewistown Gas Company, South Penn Gas Company, and Union Gas Company were merged with and into Central Penn Gas Company, the surviving corporation, the name of which was simultaneously changed to PFG Gas, Inc. The merger had been approved by the Commission in an Order entered on December 15, 1994, at Docket No. A-120003. 33. As part of an overall plan of simplification and integration of the Pennsylvania Gas & Electric Corporation ("Penn Corp.") corporate system under the PUHCA North Penn Gas Company ("Old North Penn") and its three wholly-owned gas utility subsidiaries Allegany Gas Company, which had been incorporated in 1898, Alum Rock Gas Company which had been incorporated in 1904, and Dempseytown Gas Company, which had been incorporated in 1910, entered into an Agreement of Merger and Consolidation which became effective as of December 31, 1950. Under the terms of the Agreement of Merger and Consolidation, a new corporation, also known as North Penn Gas Company was created and it acquired all of the property, rights, power, privileges, franchises and immunities of its predecessors. The corporation formed by this merger and consolidation, new North Penn, is the corporation which continues to provide public utility service at this time. Pursuant to an Amended Plan for Liquidation and Dissolution of Penn Corp. under Section II of the PUHCA, all of the capital stock of North Penn was distributed to shareholders of Penn Corp. on February 19, 1953. On May 13, 1977, all of North Penn's issued and outstanding common stock was acquired by Penn Fuel System, Inc., pursuant to a Plan under Section II(e) of the PUHCA. Penn Fuel System, Inc. was a public utility holding company that had been formed to acquire the stock of North Penn. As of December 31, 1988, Penn Fuel System, Inc. merged into Penn Fuel, and Penn Fuel System, Inc. ceased to exist. As a result of this merger, North Penn became a direct subsidiary of Penn Fuel. K. SUPPORTING DATA 34. PP&L, PFG and North Penn will employ, in furnishing service plant in service presently used by them to furnish service, together with plant presently under construction and plant which may be added in the future prior to approval of this Application. Schedules 1, 2 and 3 of Exhibit F are Statements for PP&L, PFG and North Penn, respectively, of the original cost, by primary account, of plant in service. Also shown on each schedule of Exhibit F is the reserve for depreciation associated with plant in service. Approval by the Commission of this Application and the consummation of the transaction proposed herein will not alter the original cost of plant in service or the depreciation reserve of each company. 35. Schedules 1, 2 and 3 of Exhibit G hereto indicate, for PP&L, PFG and North Penn, respectively, the number of customers, by class, of each company as of June 30, 1997. Approval by the Commission of this Application and the consummation of the transaction proposed herein will not alter the number of customers served by each company. 36. Schedules 1, 2 and 3 of Exhibit H hereto contain balance sheets for PP&L, PFG and North Penn, respectively, all as of June 30, 1997. Approval by the Commission of this Application and the consummation of the transaction proposed herein will have no material effect upon the companies' balance sheets. 37. Schedules 1, 2 and 3 of Exhibit I hereto are statements of income for PP&L, PFG and North Penn, respectively, each for the twelve months ended June 30, 1997. Approval by the Commission of this Application and the consummation of the transaction proposed herein will not affect the income statements of the companies. L. AFFILIATED INTERESTS CONTRACTS 38. As a result of the acquisition of Penn Fuel and its subsidiaries by PP&L Resources, it is anticipated that it will become necessary for the corporations in the new PP&L Resources corporate system to enter into new affiliated interests contracts under 66 Pa. C.S. SECTIONS 2101--07. Such contracts will be submitted to the Commission in accordance with 66 Pa.C.S. SECTION 2102(b) as the contracts are prepared and become available. M. MISCELLANEOUS 39. All of the annual reports, tariffs and other documents filed by PP&L, PFG and North Penn with the Commission and filings by their predecessors, are made a part hereof by reference. WHEREFORE, for all the foregoing reasons, Pennsylvania Power & Light Company, PFG Gas, Inc. and North Penn Gas Company respectfully request that the Pennsylvania Public Utility Commission approve this Application and issue a certificate of public convenience approving the transfer from Penn Fuel Gas, Inc. to PP&L Resources, Inc. by merger the title to, or the possession or use of, all property of Penn Fuel Gas Inc.'s gas distribution public utility subsidiaries, PFG Gas, Inc. and North Penn Gas Company, that is used or useful in the public service. Respectfully submitted, /s/ John H. Isom ____________________________ Paul E. Russell David B. MacGregor Associate General Counsel Morgan, Lewis & Bockius LLP Pennsylvania Power & Light 2000 One Logan Square Company Philadelphia, PA 19103-6993 Two North Ninth Street Tel: (215) 963-5000 Allentown, PA 18101-1179 Fax: (215) 963-5299 Tel: (610) 774-4254 Fax: (610) 774-6726 John H. Isom Attorney for Pennsylvania Morgan, Lewis & Bockius LLP Power & Light Company One Commerce Square 417 Walnut Street Harrisburg, PA 17101-1904 Tel: (717) 237-4000 Fax: (717) 237-4004 Of Counsel: Attorneys for Pennsylvania MORGAN, LEWIS & BOCKIUS LLP Power & Light Company, PFG Gas, Inc. and North Penn Gas Dated: August 7, 1997 Company (EXHIBIT A, AGREEMENT AND PLAN OF MERGER BY AND AMONG PP&L RESOURCES, INC., KEYSTONE MERGER CORP. AND PENN FUEL GAS, INC. DATED AS OF JUNE 26, 1997 IS OMITTED. EXHIBIT A WAS PREVIOUSLY FILED AS ANNEX I TO THE REGISTRATION STATEMENT OF THE COMPANY ON FORM S-4, FILED ON AUGUST 13, 1997, FILE NO. 333-33565, AND INCORPORATED HEREIN BY REFERENCE.) - ----------------------------------------------------------------------------- Supplement No. 7 to GAS - PA P.U.C. No. 1 First Revised Page No. 35 PFG GAS, INC. Cancelling Original Page No. 35 - ----------------------------------------------------------------------------- DESCRIPTION OF TERRITORY EXHIBIT B PAGE 1 OF 8 ADAMS COUNTY ------------- Townships: - --------- Cumberland Freedom BEDFORD COUNTY -------------- Boroughs: - -------- Bedford Everett Townships: - --------- Bedford Monroe Snake Spring Valley Colerain Napier West Providence BERKS COUNTY ------------ Boroughs: - -------- Hamburg Shoemakersville Townships: - --------- Centre Perry Tilden Windsor BLAIR COUNTY ------------ Boroughs: - -------- Martinsburg Roaring Spring Townships: - --------- Huston North Woodbury Taylor BRADFORD COUNTY --------------- Boroughs: - -------- Alba Canton Sylvania Troy Burlington Townships: - --------- Arsenia Columbia Ridgebury Springfield Burlington Granville Smithfield Troy Canton LeRoy South Creek Wells West Burlington Unincorporated Communities: - -------------------------- Austinville Centerville Fassett Leona Bentley Creek Colubia Crossroads Gillett Mosherville Big Pond East Smithfield Granville Summit Springfield Cedar Ledge East Troy Grover West Burlington - ----------------------------------------------------------------------------- ISSUED: February 27, 1996 EFFECTIVE: October 3, 1996 Supplement No. 7 to GAS - PA P.U.C. No. 1 First Revised Page No. 36 PFG GAS, INC. Cancelling Original Page No. 36 - ----------------------------------------------------------------------------- DESCRIPTION OF TERRITORY EXHIBIT B PAGE 2 OF 8 CARBON COUNTY ------------- Boroughs: - -------- Bowmastown Lehighton Palmerton Weissport Jim Thorpe Townships: - --------- East Penn Lower Towamensing Mahoning (part) Mauch Chunk CENTRE COUNTY ------------- Boroughs: - -------- Phillipsburg South Phillipsburg Townships: - --------- Rush CHESTER COUNTY -------------- Boroughs: - -------- Oxford Townships: - --------- East Nottingham Lower Oxford Upper Oxford West Nottingham Elk CLARION COUNTY -------------- Boroughs: - -------- Callensburg Townships: - --------- Ashland Highland Monroe Salem Beaver Knox Paint Toby Clarion Licking Perry Washington Elk Limestone Piney Farmington Milcreek Richland Unincorporated Communities: - -------------------------- Altman's Corners Elmo Lickingville Perryville Alum Rock Fern Lucinda Scotch Hill (Richmond) Fisher Marble Snydersville Arthurs Fryburg Matildaville Strobleton Blairs Corners Haynie Millerstown Turkey City Clarion Junction Hueffner Miola Tylersburg Crown Kossuth Mt. Joy Wentlings Corners Easton Leeper North Pinegrove Vowinckel - ----------------------------------------------------------------------------- ISSUED: February 27, 1996 EFFECTIVE: October 3, 1996 Supplement No. 7 to GAS - PA P.U.C. No. 1 First Revised Page No. 37 PFG GAS, INC. Cancelling Original Page No. 37 - ----------------------------------------------------------------------------- DESCRIPTION OF TERRITORY EXHIBIT B PAGE 3 OF 8 CLEARFIELD COUNTY ----------------- Boroughs: - -------- Clearfield and Environs Curwensville Wallaceton Chester Hill Townships: - --------- Bradford Decatur Morris Pike Boggs Knox CLINTON COUNTY -------------- Cities: - ------ Lock Haven Boroughs: - -------- Avis Flemington Renovo South Renovo Beech Creek Mill Hall Townships: - --------- Allison Bald Eagle Chapman Noyes Beech Creek Castanes Dunstable Pine Creek (portion) COLUMBIA COUNTY --------------- Boroughs: - -------- Centralia Townships: - --------- Conyngham CUMBERLAND COUNTY ----------------- Boroughs: - -------- Shippensburg Townships: - --------- Shippensburg Southhampton FOREST COUNTY ------------- Boroughs: - -------- Marienville Tionesta Townships: - --------- Barnett Harmony Tionesta Green Jenks - ----------------------------------------------------------------------------- ISSUED: February 27, 1996 EFFECTIVE: October 3, 1996 Supplement No. 24 to GAS - PA P.U.C. No. 1 First Revised Page No. 38 PFG GAS, INC. Cancelling Original Page No. 38 - ----------------------------------------------------------------------------- DESCRIPTION OF TERRITORY EXHIBIT B PAGE 4 OF 8 FRANKLIN COUNTY --------------- Boroughs: - -------- Orrstown Shippensburg Waynesboro Townships: - --------- Greene Guilford Southampton Washington (portion) (portion) FULTON COUNTY (C) ------------- Boroughs: - -------- McConnellsburg Townships: - --------- Ayr (portion) Todd HUNTINGDON COUNTY ----------------- Boroughs: - -------- Huntingdon Mapleton Mill Creek Mount Union Townships: - --------- Brady Juniata Shirley Union Henderson Oneida Smithfield Walker JEFFERSON COUNTY ---------------- Townships: - --------- Barnett JUNIATA COUNTY -------------- Townships: - --------- Tuscarora Lack LANCASTER COUNTY ---------------- Townships: - --------- Colerain Little Britain LEHIGH COUNTY ------------- Boroughs: - -------- Slatington Townships: - --------- Washington (C) Indicates Change - ----------------------------------------------------------------------------- ISSUED: April 18, 1997 EFFECTIVE: April 11, 1997 Supplement No. 7 to GAS - PA P.U.C. No. 1 First Revised Page No. 39 PFG GAS, INC. Cancelling Original Page No. 39 - ----------------------------------------------------------------------------- DESCRIPTION OF TERRITORY EXHIBIT B PAGE 5 OF 8 LUZERNE COUNTY -------------- Cities: - ------ Pittston Boroughs: - -------- Exeter Laflin Pittston Yatesville Hughestown (portion) (portion) Township: - -------- Jenkins Pittston (portion) LYCOMING COUNTY --------------- Boroughs: - -------- Hughesville Jersey Shore Picture Rocks Salladsburg Townships: - --------- Jackson Penn (portion) Porter Wolf (portion) Mifflin (portion) McNett Nippenose Piatt Shrewsbury(portion) MCKEAN COUNTY ------------- Boroughs: - -------- Eldred Port Allegany Townships: - --------- Annin Eldrid Keating Norwich Cares Hamlin Liberty Otto Sergeant Unincorporated Communities: - -------------------------- Betula Colegrove Farmers Valley Prentisvale Bullis Mills Coleville Indian Creek Turtlepoint Burtville Coryville Mix Creek Wrights Cares Crosby Myrtle Wrights Corners East Smethport MIFFLIN COUNTY -------------- Boroughs: - -------- Burnham Juniata Terrace Lewistown McVeytown Townships: - --------- Armagh Brown Granville Union Bratton Derry Mennon - ----------------------------------------------------------------------------- ISSUED: February 27, 1996 EFFECTIVE: October 3, 1996 Supplement No. 7 to GAS - PA P.U.C. No. 1 First Revised Page No. 40 PFG GAS, INC. Cancelling Original Page No. 40 - ----------------------------------------------------------------------------- DESCRIPTION OF TERRITORY EXHIBIT B PAGE 6 OF 8 MONROE COUNTY ------------- Boroughs: - -------- Delaware Water East Stroudsburg Stroudsburg Gap Townships: - --------- Eldred Ross Smithfield Stroud Middle Smithfield MONTOUR COUNTY -------------- Township: - -------- Liberty (portion) NORTHAMPTON COUNTY ------------------ Boroughs: - -------- Bangor Pen Argyl & Vicinity Wind Gap Walnutport East Bangor Roseto Townships: - --------- Bushkill Plainfield Upper Mt. Bethel Washington NORTHUMBERLAND COUNTY --------------------- Cities: - ------ Shamokin Boroughs: - -------- Kulpmont Marion Heights Mount Carmel Snydertown Townships: - --------- Coal Little Mahanoy Ralpho Washington East Cameron Lower Augusta Rockefeller West Cameron Jordon Mount Carmel Shamokin Zerbe East Chillisquaque (portion) - ----------------------------------------------------------------------------- ISSUED: February 27, 1996 EFFECTIVE: October 3, 1996 Supplement No. 7 to GAS - PA P.U.C. No. 1 First Revised Page No. 40(a) PFG GAS, INC. Cancelling Original Page No. 40(a) - ----------------------------------------------------------------------------- DESCRIPTION OF TERRITORY EXHIBIT B PAGE 7 OF 8 POTTER COUNTY ------------- Boroughs: - -------- Austin Galeton Oswayo Coudersport Ulysses Shinglehouse Townships: - --------- Abbott Genesee Oswayo Summit Allegany Harrison Pike Sweden Bingham Hebron Pleasant Valley Sylvania Clara Hector Portage Ulysses East Fork Homer Roulette West Branch Eulalia Keating Sharon Wharton Unincorporated Communities: - -------------------------- Andrews Settlement East Sharon Hebron Pusher Siding Bingham Center Ellisburg Hickox Roulette Brookland Elmer Honeyoye Sharon Center Burtville Genesee Keating Summit Sweden Valley Clara Germania Millport Walton Colesburg Germania Station Mills West Bingham Conneville Gold Newfield West Pike Costello Harrison Valley North Bingham Wharton SCHUYLKILL COUNTY ----------------- Cities: - ------ Pottsville Boroughs: - -------- Ashland Gilberton Middleport Palo Alto Auburn Girardville Minersville Port Clinton Cressona Gordon Mount Carbon Port Carbon Deer Lake Landingville New Philadelphia Ringtown Frackville Mechanicsville Orwigsburg Townships: - --------- Blythe East Norwegian North Manheim South Manheim Branch Hubley (C) Norweigan West Brunswick Butler Mahanoy (portion) Ryan West Mahanoy Union New Castle Upper Mahantango (C) (C) Indicates Change - ----------------------------------------------------------------------------- ISSUED: December 19, 1996 EFFECTIVE: December 6, 1996 Supplement No. 7 to GAS - PA P.U.C. No. 1 PFG GAS, INC. Original Page No. 40(b) - ----------------------------------------------------------------------------- DESCRIPTION OF TERRITORY EXHIBIT B PAGE 8 OF 8 TIOGA COUNTY ------------ Boroughs: - -------- Blossburg Lawrenceville Roseville Westfield Elkland Liberty Tioga Knoxville Mansfield Wellsboro Townships: - --------- Bloss Delmar Lawrence Rutland Brookfield Duncan Liberty Shippen Charleston Elkland Middlebury Sullivan Chatham Farmington Nelson Tioga Clymer Gaines Osceola Union Covington Hamilton Putnam Ward Deerfield Jackson Richmond Westfield Unincorporated Communities: - -------------------------- Academy Corners Hammond Millerton Sebring Arnot Jackson Summit Mitchell Creek Shortsville Austinburg Jobs Corners Morris Run Somers Lane Canoe Camp Kenneyville Nelson Stokesdale Covington Lambs Creek Ogdensburg Tioga Junction Cowanesque Little Marsh Osceola Tomkins Crooked Creek Mainsburg Phillips Station Trowbridge Daggett Manhattan Potter Brook Watrous Gaines Marshlands Round Top Wellsboro Junction Gleason Middlebury Center Sabinsville UNION COUNTY ------------ Boroughs: - -------- Lewisburg Townships: - --------- Buffalo East Buffalo Kelly Union (portion) (portion) (portion) (portion) VENANGO COUNTY -------------- Cities & Boroughs: - ----------------- Oil City Rouseville Townships: - --------- Clinton Cranberry President Rockland Cornplanter Pinegrove Richland Sugar Creek Unincorporated Communities: - -------------------------- Ahrensville McClintockville Pinegrove Tippery Fertigs Nickleville Sugar Creek - ----------------------------------------------------------------------------- ISSUED: February 27, 1996 EFFECTIVE: October 3, 1996 [Map of PFG's and North Penn's service territory is omitted] EXHIBIT C Supplement No. 56 Electric PA. P.U.C. No. 200 PENNSYLVANIA POWER & LIGHT COMPANY Second Revised Page No. 4 Canceling Original and First Revised Page No. 4 - --------------------------------------------------------------------------- TERRITORY COVERED BY THIS TARIFF EXHIBIT D PAGE 1 OF 4 BERKS COUNTY (C) Boroughs of New Morgan, Robesonia, Shillington, Sinking Spring, Wernersville, West Lawn, Womelsdorf, Wyomissing, and Wyomissing Hills. Townships of Caernarvon, Cumru, Heidelberg, Lower Heidelberg, South Heidelberg, and Spring. BUCKS COUNTY Boroughs of Richlandtown, Sellersville, Silverdale, Telford, and Turmbauersville. Townships of East Rockhill, Haycock, Hilltown, Milford, Richland, Springfield, and West Rockhill. CARBON COUNTY Boroughs of Beaver Meadows, Bowmanstown, East Side, Jim Thorpe, Lansford, Nesquehoning, Palmerton, Parryville, Summit Hill, and Weissport. Townships of Banks, East Penn, Franklin, Kidder, Lausanne, Lehigh, Lower Towamensing, Mahoning, Packer, Penn Forest, and Towamensing. CHESTER COUNTY Boroughs of Atglen, Elverson, and Honey Brook. Townships of Honey Brook, West Nantmeal, and West Sadsbury. CLINTON COUNTY City of Lock Haven. Boroughs of Avis, Flemington, Loganton, Mill Hall, Renovo, and South Renovo. Townships of Allison, Bald Eagle, Castanea, Chapman, Colebrook, Crawford, Dunnstable, Gallagher, Greene, Grugan, Logan, Noyes, Pine Creek, Wayne, and Woodward. COLUMBIA COUNTY Town of Bloomsburg. Boroughs of Ashland, Benton, Berwick, Briar Creek, Centralia, Millville, Orangeville, and Stillwater. Townships of Beaver, Benton, Briar Creek, Catawissa, Cleveland, Conyngham, Fishing Creek, Franklin, Greenwood, Hemlock, Jackson, Locust, Madison, Main, Mifflin, Montour, Mount Pleasant, North Centre, Orange, Pine, Roaring Creek, Scott, South Centre, and Sugarloaf. CUMBERLAND COUNTY Boroughs of Camp Hill, Carlisle, Lemoyne, Mechanicsburg, New Cumberland, Newville, Shiremanstown, West Fairview, and Wormleysburg. Townships of Dickinson, East Pennsboro, Hampden, Lower Allen, Middlesex, Monroe, North Middleton, North Newtow, Penn, Silver Spring, South Middleton, South Newton, Upper Allen, and West Pennsboro. DAUPHIN COUNTY City of Harrisburg. Boroughs of Berrysburg, Dauphin, Elizabethville, Gratz, Halifax, Highspire, Hummelstown, Lykens, Millersburg, Paxtang, Penbrook, Pillow, Steelton, and Williamstown. Townships of Derry, East Hanover, Halifax, Jackson, Jefferson, Lower Paxton, Lower Swatara, Lykens, Middle Paxton, Mifflin, Reed, Rush, South Hanover, Susquehanna, Swatara, Upper Paxton, Washington, Wayne, West Hanover, Wiconisco, and Williams. (C) Indicates Change - --------------------------------------------------------------------------- Issued October 5, 1995 Effective September 28 Supplement No. 56 Electric PA. P.U.C. No. 200 PENNSYLVANIA POWER & LIGHT COMPANY Second Revised Page No. 4A Canceling Original and First Revised Page No. 4A - --------------------------------------------------------------------------- TERRITORY COVERED BY THIS TARIFF EXHIBIT D PAGE 2 OF 4 JUNIATA COUNTY Boroughs of Mifflin, Mifflintown, Port Royal, and Thompsontown Townships of Delaware, Fayette, Fermanagh, Greenwood, Milford, Monroe, Susquehanna, Turbett, and Walker. LACKAWANNA COUNTY Cities of Carbondale and Scranton. Boroughs of Archbald, Blakely (part), Clarks Greer, Clarks Summit, Dalton, Dickson City, Dunmore, Jermyn, Jessup, Mayfield, Moosic, Moscow, Old Forge, Olyphant (part), Taylor, Throop, and Vandling. Townships of Abington, Benton, Carbondale, Clifton, Covington, Elmhurst, Fell, Glenburn, Greenfield, Jefferson, La Plume, Lehigh, Madison, Newton, North Abington, Ransom, Roaring Brook, Scott, South Abington, Spring Brook, and West Abington. LANCASTER COUNTY City of Lancaster. Boroughs of Adamstown, (part), Akron, Christiana, Columbia, Denver, East Petersburg, Elizabethtown, Ephrata (part), Lititz, Manheim, Marietta, Millersville, Mount Joy, Mountville, New Holland, Quarryville, Strasburg, and Terre Hill. Townships of Bart, Brecknock, Caernarvon, Clay, Colerain, Conestoga, Conoy, Drumore, Earl, East Cocalico, East Donegal, East Drumore, East Earl, East Hempfield, East Lampeter, Eden, Elizabeth, Ephrata, Fulton, Lancaster, Leacock, Little Britain, Manheim, Manor, Martick, Mount Joy, Paradise, Penn, Pequea, Providence, Rapno, Sadsbury, Salisbury, Strasburg, Upper Leacock, Warwick, West Cocalico, West Donegal, West Earl, West Hempfield, and West Lampeter. LEBANON COUNTY Borough of Richland. Townships of Heidelberg and Millcreek. LEHIGH COUNTY Cities of Allentown and Bethlehem. Boroughs of Alburtis, Catasauqua, Coopersburg, Coplay, Emmaus, Fountain Hill, Macungie, and Slatington. Townships of Hanover, Heidelberg, Lower Macungie, Lower Milford, Lohill, North Whitehall, Salisbury, South Whitehall, Upper Macungie, Upper Milford, Upper Saucon, Washington, and Whitehall. LUZERNE COUNTY Cities of Hazelton, Pittstown, and Wilkes-Barre. Boroughs of Ashley, Avoca, Bear Creek Village, Conyngham, Dupont, Duryea, Exerter, Freeland, Hughestown, Jeddo, Laflin, Laurel Run, Nescopeck, Nuangola, Penn Lake Park, West Hazleton, West Pittston, White Haven, and Yatesville. Townships of Bear Creek, Black Creek, Buck, Butler, Dennison, Dorrance, Exeter, Fairview, Foster, Hanover, Hazle, Hollenbach, Jenkins, Nescopeck, Pittston, Plains, Rice, Salem, Slocum, Sugarloaf, Wilkes-Barre, and Wright. LYCOMING COUNTY City of Williamsport. Boroughs of Duboistown, Hughesville, Jersey Shore, Montgomery, Montoursville, Muncy, Picture Rocks, Salladasburg, and South Williamsport. Townships of Anthony, Armstrong, Bastress, Brady, Clinton, Eldred, Fairfield, Franklin, Hepburn, Jordan, Limestone, Loyalsock, Lycoming, Mifflin, Mill Creek, Moreland, Muncy, Muncy Creek, Nippenose, Old Lycoming, (C) Indicates Change - --------------------------------------------------------------------------- Issued October 5, 1995 Effective September 28 Supplement No. 56 Electric PA. P.U.C. No. 200 PENNSYLVANIA POWER & LIGHT COMPANY Second Revised Page No. 4A Canceling Original and First Revised Page No. 4A - --------------------------------------------------------------------------- TERRITORY COVERED BY THIS TARIFF EXHIBIT D PAGE 3 OF 4 LYCOMING COUNTY (continued), Penn, Piatt, Porter, Shrewbury, Susquehanna, Upper Fairfield, Washington, Watson, Wolf, and Woodward. MONROE COUNTY Boroughs of East Stroudsburg (part), Mount Pocono, and Stroudsburg (part). Townships of Barrett, Chestnuthill, Coolbaugh, Eldred, Jackson, Paradise, Pocono, Polk, Price, Smithfield, Stroud, Tobyhanna, and Tunkhannock. MONTGOMERY COUNTY Boroughs of East Greenville, Pennsburg, Red Hill, Souderton, and Telford. Townships of Franconia, Hatfied, and Upper Hanover. MONTOUR COUNTY Boroughs of Danville and Washingtonville. Townships of Anthony, Cooper, Derry, Liberty, Limestone, Mahoning, Mayberry, Valley and West Hemlock. NORTHAMPTON COUNTY City of Bethlehem. Boroughs of Freemansburg, Hellertown, Nazareth (part), North Catasauqua, Northampton, Pen Argyl (part), Stockerton, Tatany, and Walnutport. Townships of Allen, Bethlehem, Bushkill, East Allen, Forks, Hanover, Lehigh, Lower Mount Bethel, Lower Nazareth, Lower Saucon, Moore, Palmer, Plainfield, Upper Nazareth, Washington, and Williams. NORTHUMBERLAND COUNTY Cities of Shamokin and Sunbury. Boroughs of Herndon, Kulpmont, Marion Heights, McEwensville, Milton, Mount Carmel, Northumberland, Riverside, Snydertown, and Turbotville. Townships of Coal, Delaware, East Cameron, East Chillisquaque, Jackson, Jordon, Lewis, Little Mahanoy, Lower Augusta, Upper Mahanoy, Washington, West Cameron, West Chillisquaque, and Zeroe. PERRY COUNTY Boroughs of New Bloomfield, Landisburg, Liverpool, Marysville, Millerstown, New Buffalo, and Newport. Townships of Buffalo, Carroll, Centre, Greenwood, Howe, Juniata, Liverpool, Miller, Northeast Madison, Oliver, Penn, Rye, Saville, Southwest Madison, Spring, Tuscarora, Tyrone, Watts, and Wheatfield. PIKE COUNTY Townships of Blooming Grove, Greene, Lackawaxen, Palmyra, Porter, and Shohola. SCHUYLKILL COUNTY City of Pottsville. Borroughs of Ashland, Auburn, Coaldale, Cressona, Deer Lake, Frackville, Gilberton, Girardyville, Jordon, Landingville, Mahanoy City, McAooo, Mechanicsville, Middleport, Minnersville, Mount Cameron, New Philadelphia, New Ringgold, Orwigsburg, Pine Grove, Port Carbon, Port Clinton, Ringtown, Shenandoah, Tamaqua, Tower City, and Tremont. Townships of Barry, Blythe, Branch, Butler, Cass, Delano, East Brunswick, East Norwegian, East Union, Eldred, Foster, Frailey, Hegins, Hupley, Kline, Mahanoy, New Castle, North Manheim, North Union, Norwegian, Pine Grove, Porter, Reilly, Rush, Ryan, Schuylkill, South Manheim, Tremont, Union, Mahantongo, Walker, Washington, Wayne, West Brunswick, West Mahanoy, and West Penn. (C) Indicates Change - --------------------------------------------------------------------------- Issued October 5, 1995 Effective September 28 Supplement No. 56 Electric PA. P.U.C. No. 200 PENNSYLVANIA POWER & LIGHT COMPANY Original Page No. 4B - --------------------------------------------------------------------------- TERRITORY COVERED BY THIS TARIFF EXHIBIT D PAGE 4 OF 4 SNYDER COUNTY Boroughs of Beavertown, Freeburg, McClure, Middleburg, Selinsgrove, and Shamokin Dam. Townships of Adams, Beaver, Centre, Chapman, Franklin, Jackson, Middlecreek, Monroe, Penn, Perry, Union, Washington, West Beaver, and West Perry. SUSQUEHANNA COUNTY Boroughs of Forest City and Union Dale. Townships of Clifford and Herrick. UNION COUNTY Boroughs of Hartleton and New Berlin. Townships of Gregg, Hartley, Kelly, Lewis, Limestone, Union, West Buffalo and White Deer. WAYNE COUNTY Boroughs of Bethany, Hawley, Honesdale, Prompton and Waymart. Townships of Berlin, Canaan, Cherry Ridge, Clinton, Damascus, Dreher, Dyberry, Lake, Lebanon, Lehigh, Mount Pleasant, Oregon, Palmyra, Paupack, Salem, South Canaan, Sterling and Texas. WYOMING COUNTY Borough of Factoryville. Townships of Clinton, Nicholson, Overfield and Tunkhannock. YORK COUNTY Boroughs of East Prospect and Wrightsville. Townships of Fairview, Hellam and Lower Windsor. (C) Indicates Change - --------------------------------------------------------------------------- Issued October 5, 1995 Effective September 28 [Map of PP&L's service territory omitted] EXHIBIT E EXHIBIT F SCHEDULE 1 Pennsylvania Power and Light Company Original Cost Plant in Service and Accumulated Reserve for Depreciation As of June 30, 1997 ------------------- Original Cost Depreciation Reserve Account Plant Balance Balance - ------- ------------- ------- Intangible 301 $ 476,251.80 - 302 147,083.87 - 303 30,875,967.95 143,677.00 ------------------ ------------------ Total $ 31,499,303.62 $ 143,677.00 Steam Production 310 $ 13,234,308.30 $ 580,853.72 311 245,477,838.55 143,841,464.22 312 1,223,936,918.03 532,398,654.82 314 494,620,959.72 215,783,041.97 315 136,218,622.31 75,374,861.68 316 13,110,113.59 8,124,891.28 ------------------ ------------------ Total $ 2,126,598,760.50 $ 976,103,767.69 Nuclear Production 320 $ 14,242,367.48 $ 1,941,545.86 321 914,670,166.02 280,677,270.27 322 1,869,295,947.26 480,229,649.24 323 550,628,104.09 132,754,573.07 324 553,516,745.48 164,845,003.58 325 112,764,585.36 13,295,580.55 ------------------ ------------------ Total $ 4,015,117,915.69 $ 1,073,743,622.57 Hydro Production 330 $ 4,787,001.13 $ 65,821.00 331 7,518,997.49 4,252,573.31 332 46,633,615.58 11,880,249.37 333 37,948,453.50 7,517,187.67 334 24,385,591.87 2,409,452.56 335 1,667,815.74 548,861.34 336 260,007.75 136,811.99 ------------------ ------------------ Total $ 123,201,483.06 $ 26,810,957.24 Other Production 340 $ 67,694.63 Non-depreciable 341 799,185.26 703,721.65 342 2,371,511.21 1,578,374.06 343 18,550,444.91 16,294,669.36 344 7,809,016.13 5,927,757.49 345 3,896,731.43 3,505,751.79 346 87,917.69 52,659.40 ------------------ ------------------ Total $ 33,582,501.26 $ 28,062,933.75 Transmission 350 $ 23,089,416.27 $ 6,501,431.28 352 7,986,117.93 1,748,426.60 353 158,306,357.91 25,611,944.93 354 114,239,047.40 55,888,539.91 355 2,200,272.74 824,449.97 356 78,854,355.87 34,394,809.30 359 5,617,865.82 1,535,804.65 ------------------ ------------------ Total $ 390,293,433.94 $ 126,505,406.64 Distribution 360 $ 106,442,476.72 $ 33,120,652.79 361 41,984,026.71 16,705,182.28 362 396,993,089.27 127,448,492.26 364 696,688,777.24 230,087,517.94 365 516,394,201.60 195,436,596.26 366 91,305,700.24 15,314,184.97 367 203,352,357.72 49,268,418.68 368 303,144,580.65 119,234,601.82 369 334,731,489.31 160,960,547.61 370 83,233,715.23 23,882,757.28 371 4,344,615.64 2,110,244.80 373 55,380,050.91 23,575,237.68 ------------------ ------------------ Total $ 2,833,995,081.24 $ 997,144,434.37 General 389 $ 9,494,843.66 $ 127.00 390 191,883,871.57 55,899,086.06 391 64,473,524.62 44,735,269.07 392 104,339.71 74,543.91 393 3,602,408.29 1,774,310.53 394 39,441,931.21 12,167,564.64 395 11,544,546.22 5,128,423.14 397 8,818,669.63 3,975,037.39 398 6,291,836.17 2,599,987.02 ------------------ ------------------ Total $ 335,655,971.08 $ 126,354,348.76 Grand Total $ 9,889,944,450.39 $ 3,354,869,148.02 EXHIBIT F SCHEDULE 2 PFG GAS, INC. Statement of Original Cost of Plant In Service Account Number Amount ------- ------ INTANGIBLE PLANT ORGANIZATION EXPENSE 101301-0000 $ 73,222 FRANCHISES AND CONSENTS 101302-0000 131,210 MISCELLANEOUS INTANGIBLE PLANT 101303-0000 56,399 ------------ TOTAL INTANGIBLE PLANT $ 260,831 ------------ PRODUCTION PLANT LAND AND LAND RIGHTS 101304-0000 $ 9,112 STRUCTURES AND IMPROVEMENTS 101305-0000 48,843 BOILER PLANT EQUIPMENT 101306-0000 62 ------------ TOTAL PRODUCTION PLANT $ 58,017 ------------ LOCAL STORAGE PLANT STRUCTURES AND IMPROVEMENTS 101361-0000 $ 1,779 ------------ TOTAL LOCAL STORAGE PLANT $ 1,779 ------------ TRANSMISSION PLANT LAND AND LAND RIGHTS 101365-1000 $ 385,719 RIGHTS OF WAY 101365-2000 115 STRUCTURES AND IMPROVEMENTS 101366-0000 11,307 MAINS 101367-0000 9,041,363 NEASURING & REGULATING STATION EQUIPMENT 101369-0000 1,550,354 ------------ TOTAL TRANSMISSION PLANT $ 10,988,858 ------------ DISTRIBUTION PLANT LAND AND LAND RIGHTS 101374-0000 $ 268,373 RIGHTS OF WAY 101374-2000 53,021 STRUCTURES AND IMPROVEMENTS 101375-0000 88,182 MAINS 101376-0000 38,460,218 MEASURING & REGULATING STATION EQUIPMENT - GENERAL 101378-0000 1,339,737 MEASURING & REGULATING STATION EQUIPMENT - CITY GATE 101379-0000 48,692 SERVICES 101380-0000 24,110,161 METERS 101381-0000 3,268,039 METER INSTALLATIONS 101382-0000 1,644,860 HOUSE REGULATORS 101383-0000 $ 534,639 HOUSE REGULATOR INSTALLATIONS 101384-0000 167,221 MEASURING & REGULATING STATION EQUIPMENT - INDUSTRIAL 101385-0000 2,897,584 OTHER EQUIPMENT 101387-0000 95,223 ------------ TOTAL DISTRIBUTION PLANT $ 72,975,949 ------------ GENERAL PLANT LAND AND LAND RIGHTS 101389-0000 $ 132,908 STRUCTURES AND IMPROVEMENTS 101390-0000 1,175,121 OFFICE FURNITURE & EQUIPMENT 101391-0000 245,525 OFFICE FURNITURE & EQUIPMENT - PERSONAL COMPUTERS 101391-4000 99,775 TRANSPORTATION EQUIPMENT 101392-0000 50,385 STORES EQUIPMENT 101393-0000 255 TOOLS, SHOP & GARAGE EQUIPMENT 101394-0000 565,493 LABORATORY EQUIPMENT 101395-0000 106,524 POWER OPERATED EQUIPMENT 101396-0000 272,027 COMMUNICATION EQUIPMENT 101397-0000 176,643 MISCELLANEOUS EQUIPMENT 101398-0000 52,391 OTHER TANGIBLE PROPERTY 101399-0000 113 ------------ TOTAL GENERAL PLANT $ 2,877,160 ------------ GAS PLANT IN THE PROCESS OF RECLASSIFICATION 103000-0000 $ 40,540 GAS PLANT HELD FOR FUTURE USE 105000-0000 $ 88,286 NONUTILITY PROPERTY 121000-0000 $ 417,698 ------------ TOTAL PLANT IN SERVICE $ 87,709,119 ============ ACCUMULATED RESERVE FOR DEPRECIATION $ 12,347,948 ============ EXHIBIT F SCHEDULE 3 NORTH PENN GAS COMPANY Statement of Original Cost of Plant In Service Account Number Amount ------- ------ INTANGIBLE PLANT Organization Expense 101301-0000 $ 7,017 Franchises and Consents 101302-0000 10,179 ------------ TOTAL INTANGIBLE PLANT $ 17,196 ------------ PRODUCTION PLANT Producing Lands 101325-1000 $ 13,029 Producing Leaseholds 101325-2000 158,728 Gas Rights 101325-3000 913,667 Rights-of-Way 101325-4000 29,546 Other Land 101325-5000 1,134 Field Measuring and Regulating Station Structures 101328-0000 1,263 Other Structures 101329-0000 44,785 Producing Gas Wells - Well Construction 101330-0000 68,627 Producing Gas Wells - Well Equipment 101331-0000 49,353 Field Lines 101332-0000 704,916 Field Measuring and Regulating Station Equipment 101334-0000 70,730 Drilling and Cleaning Equipment 101335-0000 49,604 Other Equipment 101337-0000 11,062 ------------ TOTAL PRODUCTION PLANT $ 2,116,445 ------------ STORAGE PLANT Land 101350-1000 $ 26,687 Rights-of-Way 101350-2000 1,566 Compression Station Structures 101351-2000 29,025 Measuring and Regulating Station Structures 101351-3000 12,595 Other Structures 101351-4000 82,342 Well Construction 101352-1000 1,629,586 Well Equipment 101352-2000 873,061 Storage Leaseholds 101352-1100 73,196 Storage Rights 101352-1200 176,810 Storage Lines 101353-0000 1,079,611 Compressor Station Equipment 101354-0000 6,222 Measuring & Reg. Station Equipment 101355-0000 805,446 Purification Equipment 101356-0000 144,514 Other Equipment 101357-0000 66,855 ------------ TOTAL STORAGE PLANT 5,007,516 ------------ TRANSMISSION PLANT Land and Land Rights 101365-1000 $ 27,411 Rights of Way 101365-2000 509,121 Measuring & Regulating Station Structures 101366-2000 117,130 Other Structures 101366-3000 37,818 Mains 101367-0000 18,959,919 Measuring & Regulating Station Equipment 101369-0000 1,882,525 Communication Equipment 101370-0000 321,779 Other Equipment 101371-0000 167,358 Testing Equipment 101371-1000 84,653 ------------ TOTAL TRANSMISSION PLANT $ 22,107,714 ------------ DISTRIBUTION PLANT Land and Land Rights 101374-1000 $ 37,259 Rights of Way 101374-2000 1,379,897 Structures and Improvements - Large Structures 101375-1000 541,363 Structures and Improvements - Small Structures 101375-2000 26,623 Mains 101376-0000 23,717,316 Measuring & Regulating Station Equipment - General 101378-0000 1,020,852 Services 101380-0000 11,447,828 Meters 101381-0000 1,805,738 Meter Installations 101382-0000 646,892 House Regulators 101383-0000 378,857 House Regulator Installations 101384-0000 385,651 Measuring & Regulating Station Equipment - Industrial 101385-0000 573,734 Other Equipment 101387-0000 1,035,442 ------------ TOTAL DISTRIBUTION PLANT $ 42,997,449 ------------ GENERAL PLANT Land and Land Rights 101389-0000 $ 113,576 Structures and Improvements 101390-0000 1,928,320 Office Furniture & Equipment 101391-0000 9,808 Office Furniture & Equipment - Furniture 101391-1000 111,067 Office Furniture & Equipment - Equipment 101391-2000 109,592 Office Furniture & Equipment - Personal Computers 101391-4000 331,647 Transportation Equipment 101392-0000 69,428 Stores Equipment 101393-0000 785 Tools, Ship & Garage Equipment 101394-0000 15,705 Power Operated Equipment 101396-0000 325,390 Communication Equipment 101397-0000 67,249 Miscellaneous Equipment 101398-0000 2,495 ------------ TOTAL GENERAL PLANT $ 3,085,064 TOTAL PLANT IN SERVICE $ 75,331,384 ============ ACCUMULATED RESERVE FOR DEPRECIATION $ 24,847,868 ============ EXHIBIT G SCHEDULE 1 EXHIBIT G SCHEDULE 1 PAGE 1 OF 1 PENNSYLVANIA POWER & LIGHT COMPANY Number of Customers By Rate Schedule As of June 30, 1997 RATE SCHEDULE NUMBER OF CUSTOMERS RS 1,070,866 RTD 296 RTS 14,590 GS-1 123,315 IS-1 4 ISM 1 GS-3 20,132 LP-4 824 IS-P 34 LP-5 97 IS-T 33 LPEP 1 LP-6 5 GH-1 1,231 GH-2 2,832 BL 16 SL/AL 1,086 EXHIBIT G SCHEDULE 2 PFG GAS, INC. EXHIBIT G Customers Served SCHEDULE 2 As Of June 30, 1997 PAGE 1 OF 1 Customer Count 6/30/97 Residential 29,500 General 5,887 Resale 1 Large Volume Service 130 ------ Total 35,518 EXHIBIT G SCHEDULE 3 NORTH PENN GAS COMPANY EXHIBIT G Customers Served SCHEDULE 3 As Of June 30, 1997 PAGE 1 OF 1 Customer Served 6/30/97 Residential 31,341 General 3,126 Resale 2 Gas Lights 21 Large Volume Service 54 ------ Total 34,544 EXHIBIT H SCHEDULE 1 PENNSYLVANIA POWER & LIGHT COMPANY BALANCE SHEET ACCOUNTS ASSETS AND OTHER DEBITS ACCT. NO. TITLE OF ACCOUNT June 30, 1997 - ----- ---------------- ------------- UTILITY PLANT 101 UTILITY PLANT IN SERVICE $ 9,899,154,193.53 101.1 PROPERTY UNDER CAPITAL LEASES 659,860.15 105 UTILITY PLANT HELD FOR FUTURE USE 32,195,632.04 107 CONSTRUCTION WORK IN PROGRESS 153,750,278.35 ------------------ GROSS UTILITY PLANT 10,085,759,964.07 108/111 ACCUMULATED PROVISION FOR DEPRECIATION AND AMORTIZATION OF UTILITY PLANT IN SERVICE (3,348,112,427.82) ------------------ NET UTILITY PLANT, LESS NUCLEAR FUEL 6,737,647,536.25 120.1 NUCLEAR FUEL IN PROCESS 86,588.50 120.5 NUCLEAR FUEL PROVISION FOR AMORTIZATION OF ASSEMBLY (4,476,620.70) 120.6 NUCLEAR FUEL UNDER CAPITAL LEASES 168,176,467.98 ------------------ NET UTILITY PLANT 6,901,433,972.03 ------------------ OTHER PROPERTY AND INVESTMENTS 121 NONUTILITY PROPERTY 5,870,203.64 122 ACCUMULATED PROVISION FOR DEPRECIATION OF NONUTILITY PROPERTY (387,690.41) ------------------ NET NONUTILITY PROPERTY 5,482,513.23 123 INVESTMENT IN SUBSIDIARY COMPANIES 425,095,910.13 124 OTHER INVESTMENTS 8,892,223.89 128 OTHER SPECIAL FUNDS 169,802,581.75 ------------------ TOTAL OTHER PROPERTY AND INVESTMENTS 609,273,229.00 ------------------ CURRENT AND ACCRRUED ASSETS 131 CASH 372,745.89 132 INTEREST SPECIAL DEPOSITS 1,850.70 134 OTHER SPECIAL DEPOSITS 575.00 135 WORKING FUNDS 2,582,869.10 136 TEMPORARY CASH INVESTMENTS 133,616.00 NOTES AND ACCOUNTS RECEIVABLE 141 NOTES RECEIVABLE 10,119.67 142 CUSTOMER ACCOUNTS RECEIVABLE 216,108,325.51 143 OTHER ACCOUNTS RECEIVABLE 16,431,124.68 144 ACCUMULATED PROVISION FOR UNCOLLECTIBLE ACCOUNTS-CREDIT (20,951,309.27) ------------------ TOTAL NOTES AND ACCOUNTS RECEIVABLE 211,598,260.59 ------------------ RECEIVABLES FROM ASSOCIATED COMPANIES 145 NOTES RECEIVABLE FROM ASSOCIATED COMPANIES 26,921,000.00 146 ACCOUNTS RECEIVABLE FROM ASSOCIATED COMPANIES 10,189,600.53 ------------------ TOTAL RECEIVABLES FROM ASSOCIATED COMPANIES 37,110,600.53 ------------------ MATERIALS AND SUPPLIES 151 FUEL STOCK 99,724,157.86 152 FUEL STOCK EXPENSES UNDISTRIBUTED 212,462.82 154 PLANT MATERIALS AND OPERATING SUPPLIES 107,327,186.12 158 EMISSION ALLOWANCE INVENTORY 5,166,843.25 163 STORES EXPENSE UNDISTRIBUTED 641,1010.59 ------------------ TOTAL MATERIALS AND SUPPLIES $ 213,017,751.64 ------------------ CURRENT AND ACCRUED ASSETS (CONTINUED 165 PREPAYMENTS) $ 68,820,203.63 OTHER CURRENT AND ACCRUED ASSETS 171 INTEREST AND DIVIDENDS RECEIVABLE (32,545.56) 172 RENTS RECEIVABLE 2,555,320.88 173 ACCRUED UTILITY REVENUES 74,512,929.00 174 MISCELLANEOUS CURRENT AND ACCRUED ASSETS 28,311,181.49 190 ACCUMULATED DEFERRED INCOME TAXES (CURRENT) 27,847,760.00 ------------------ TOTAL OTHER CURRENT AND ACCRUED ASSETS 133,194,645.81 ------------------ TOTAL CURRENT AND ACCRUED ASSETS 666,887,118.89 ------------------ DEFERRED DEBITS 181 UNAMORTIZED DEBT EXPENSE 5,271,080.17 182.3 OTHER REGULATORY ASSETS 1,400,420,937.45 183 PRELIMINARY SURVEY AND INVESTIGATION CHARGES 1,293,548.51 184 CLEARING ACCOUNTS (1,899,844.96) 185 TEMPORARY FACILITIES (66,332.73) 186 MISCELLANEOUS DEFERRED DEBITS 13,833,634.80 189 UNAMORTIZED LOSS ON REACQUIRED DEBT 107,178,056.00 190 ACCUMULATED DEFERRED INCOME TAXES 322,233,038.00 LESS CURRENT ACCUMULATED DEFERRED INCOME TAXES 27,847,760.00 ------------------ TOTAL ACCUMULATED DEFERRED INCOME TAXES (NONCURRENT) 294,385,278.00 ------------------ TOTAL DEFERRED DEBITS 1,820,416,357.24 ------------------ TOTAL ASSETS AND OTHER DEBITS $ 9,998,010.677.16 ================== PROPRIETARY CAPITAL 201 COMMON STOCK ISSUED 1,476,048,306.77 204 PREFERRED STOCK ISSUED 466,374,500.00 207 PREMIUM ON CAPITAL STOCK 87,000.00 211 NET UNREALIZED SECURITIES GAINS (LOSSES) 55,609,909.96 214 CAPITAL STOCK EXPENSE (18,868,634.73) 216 EARNINGS REINVESTED 1,047,261,064.27 215.1 APPROPRIATED RETAINED EARNINGS- AMORTIZATION RESERVE-FEDERAL 3,062,823.32 216.1 UNAPPROPRIATED UNDISTRIBUTED SUBSIDIARY EARNINGS 45,294,089.00 ------------------ TOTAL PROPRIETARY CAPITAL 3,074,869,058.59 ------------------ LONG-TERM DEBT 221 BONDS 2,786,232,000.00 222 REACQUIRED BONDS 0.00 224 OTHER LONG-TERM DEBT 125,475,000.00 226 UNAMORTIZED DISCOUNT ON LONG-TERM DEBT-DEBIT (21,806,787.47) ------------------ 2,889,900,212.53 ------------------ LESS AMOUNTS DUE WITHIN ONE YEAR 221 BONDS 150,000,000.00 ------------------ TOTAL LONG-TERM DEBT 2,739,900,212.53 ------------------ OTHER NONCURRENT LIABILITIES 227 OBLIGATIONS UNDER CAPITAL LEASES- NONCURRENT 108,543,467.98 ------------------ TOTAL OTHER NONCURRENT LIABILITIES 108,543,467.98 ------------------ CURRENT AND ACCRUED LIABILITIES LONG-TERM DEBT DUE WITHIN ONE YEAR 221 BONDS 150,000,000.00 231 NOTES PAYABLE 191,700,000.00 232 ACCOUNTS PAYABLE 116,465,156.95 234 ACOUNTS PAYABLE TO ASSOCIATED COMPANIES 9,447,076.98 235 CUSTOMER DEPOSITS 1,582,299.58 236 TAXES ACCRUED (888,603.53) 237 INTEREST ACCRUED 53,367,778.12 238 DIVIDENDS DECLARED 75,562,448.75 240 MATURED INTEREST 1,850.70 241 TAX COLLECTIONS PAYABLE 4,130,782.51 242 MISCELLANEOUS CURRENT AND ACCRUED LIABILITIES 92,075,313.02 243 OBLIGATIONS UNDER CAPITAL LEASES-CURRENT 60,292,860.15 283 ACCUMULATED DEFERRED INCOME TAXES-OTHER (CURRENT) (60,066.00) ------------------ TOTAL CURRENT AND ACCRUED LIABILITIES $ 753,676,897.23 ------------------ DEFERRED CREDITS 228.3 ACCUMULATED PROVISION FOR PENSIONS AND BENEFITS $ 48,010,764.00 228.4 ACCRUED MISCELLANEOUS OPERATING PROVISION-D&D FUND 24,968,570.92 228.41 ACCRUED MISCELLANEOUS OPERATING PROVISION-NUG BUYOUTS 48,510,000.00 252 CUSTOMER ADVANCES FOR CONSTRUCTION 195,049.67 253 OTHER DEFERRED CREDITS 460,026,412.12 254 OTHER REGULATORY LIABILITIES 187,526,353.82 255 ACCUMULATED DEFERRED INVESTMENT TAX CREDITS 202,266,782.30 257 UNAMORTIZED GAIN ON REACQUIRED DEBT 3,940.00 281 ACCUMULATED DEFERRED INCOME TAXES ACCELERATED AMORTIZATION PROPERTY 11,731,160.00 282 ACCUMULATED DEFERRED INCOME TAXES- OTHER PROPERTY 1,805,440,768.00 283 ACCUMULATED DEFERRED INCOME TAXES- OTHER 532,281,174.00 LESS ACCUMULATED DEFERRED INCOME TAXES-OTHER (CURRENT) (60,066.00) ------------------ TOTAL ACCUMULATED DEFERRED INCOME TAXES-OTHER (NONCURRENT) 532,341,240.00 ------------------ TOTAL DEFERRED CREDITS 3,321,021,040.83 TOTAL LIABILITIES AND OTHER CREDITS $ 9,998,010,677.16 ================== EXHIBIT H SCHEDULE 2 PFG GAS, INC. BALANCE SHEET JUNE ---- ASSETS AND OTHER DEBTS 1997 ---------------------- ---- Utility Plant $ 87,709,119 Construction Work in Process 3,715,969 Depreciation (12,347,948) Acquisition Adjustment 38,862 ------------- Total 79,116,002 ------------- Investment 1,900 ------------- Current and Accrued Assets Cash 8,643,374 Special Deposit 2,155 Working Funds 7,588 Customer Accounts Receivable 4,645,037 Unbilled Revenue 441,826 (Reserve for Uncollectibles) (495,247) Jobbing 21,335 Other Accounts Receivable 534,962 Plant, Materials & Operating Supplies 3,192,040 Natural Gas Inventories 3,094,862 Prepayments 384,671 Deferred Income Tax 637,113 ------------- Total Current & Accrued Assets 21,109,715 ------------- Deferred Debits: Miscellaneous Deferred Debits 450,196 Regulatory Assets 29,268 ------------- Total Deferred Debits 479,464 ------------- Total Assets and Other Debits $ 100,707,081 ============= LIABILITIES AND OTHER CREDITS ----------------------------- Proprietary Capital: Common Stock Issued 264,433 Earned Surplus 43,967,755 Capital Surplus 1,651,341 ------------- Total Proprietary Capital 45,883,529 ------------- Long Term Debt: Advances of Associates 648,905 Accounts Payable-Parent 37,914,460 ------------- Total Long Term Debt 38,563,365 ------------- Current and Accrued Liabilities: Accounts Payable 2,288,637 Customer Deposits 191,861 Payroll Deductions 68,861 Taxes 2,178,487 Interest - Notes 13,820 Deferred Income Tax 635,228 ------------- Total Current & Accrued Liabilities 5,376,895 ------------- Deferred Credits: Customer Advances 148,626 Other 1,166,012 ------------- Total Deferred Credits 1,314,638 ------------- Reserves Miscellaneous 269,745 ACRS 6,303,777 Deferred Inc Tax - Payable 2,995,132 ------------- Total Reserves 9,568,654 ------------- Total Liabilities and Other Equity $ 100,707,081 ============= EXHIBIT H SCHEDULE 3 NORTH PENN GAS COMPANY BALANCE SHEET JUNE ---- ASSETS AND OTHER DEBTS 1997 ---------------------- ---- Utility Plant at Original Cost: Gas Plant in Service $ 75,331,384 Gas Plant Held For Future Use 208,225 Construction Work in Progress 1,436,681 ------------- Total Utility Plant 76,976,289 ------------- Less Accumulated Provision for Depreciation and Amortization 24,847,868 ------------- Net utility Plant 52,128,421 ------------- Gas Stored Underground 5,340,750 ------------- Other Property and Investments: Non-Utility Property 39,150 Less Accumulated Provision for Depreciation (1,042) Other Special Funds 259,308 ------------- Total Other Property and Investments 299,500 ------------- Current and Accrued Assets Cash 198,166 Working Funds 6,970 Temporary Cash Investments 372,232 Customer Accounts Receivable 4,821,327 Merchandise 37,820 Other Accounts Receivable 279,315 Accum. Prov. for Uncollected Accounts-CR (309,383) Unbilled Revenue 358,344 Plant, Materials & Operating Supplies 1,745,789 Gas Storage Underground - Current (423,946) Prepayments 1,607,351 Misc. Current & Accrued Assets 139 ------------- Total Current & Accrued Assets 8,694,125 ------------- Deferred Debits: Unamortized Debt Discount and Expense 223,488 Prelim. Survey & Investigation 45,905 Regulatory Assets 7,118,746 Clearing Accounts 424,334 Miscellaneous Deferred Debits 488,104 Accumulated Deferred Income Taxes 1,570,070 ------------- Total Deferred Debits 9,870,647 ------------- Total Assets and Other Debits $ 76,333,444 ============= LIABILITIES AND OTHER CREDITS ----------------------------- Proprietary Capital: Common Stock Issued $ 2,250,000 Earned Surplus 30,816,711 ------------- Total Proprietary Capital 33,066,711 ------------- Long Term Debt: Notes 21,625,000 ------------- Current and Accrued Liabilities: Accounts Payable 488,843 Payroll 142,004 Accounts Payable to Associated Co. 1,011,935 Customer Deposits 68,532 Tax Accrued - Federal Income 597,903 Tax Accrued-Other (27,721) Interest Accrued - Long-term Debt 442,533 Interest Accrued-Other Debt 12,222 Dividends Declared 620,000 Long-term Debt Due Within One Year 1,125,000 Misc. Current & Accrued Liabilities 3,106,643 ------------- Total Current & Accrued Liabilities 7,587,895 ------------- Deferred Credits: Other Deferred Credits 4,358,131 Other Regulatory Liabilities 849,001 Unrecovered Purchased Gas Costs 226,547 Accumulated Deferred Investment Tax Credits 8,271,985 ------------- Total Deferred Credits 13,705,664 ------------- Operating Reserves 348,174 ------------- Total Liabilities and Other Credits $ 76,333,444 ------------- EXHIBIT I SCHEDULE 1 PENNSYLVANIA POWER & LIGHT COMPANY STATEMENT OF INCOME TWELVE MONTHS ENDED JUNE 30, 1997 ACCT. NO - ----- UTILITY OPERATING INCOME 400 OPERATING REVENUES $2,922,716,805.95 ----------------- OPERATING EXPENSES 401 OPERATION EXPENSES 1,410,305,217.85 402 MAINTENANCE EXPENSES 194,242,652.10 403/406 DEPRECIATION EXPENSES AND AMORTIZATION OF ELECTRIC PLANT ACQUISITION ADJUSTMENTS 367,995,793.95 407.3 REGULATORY DEBITS 23,322,608.00 407.4 REGULATORY CREDITS (69,486,751.92) 408.1 TAXES OTHER THAN INCOME TAXES STATE GROSS RECEIPTS 104,036,738.00 STATE CAPITAL STOCK 33,862,580.00 STATE UTILITY REAL ESTATE 44,760,980.00 OTHER 20,748,675.16 409.1 INCOME TAXES FEDERAL 160,344,399.00 STATE 55,461,918.00 410.1 PROVISION FOR DEFERRED INCOME TAXES FEDERAL 132,797,548.00 STATE 34,973,617.00 411.1 PROVISION FOR DEFERRED INCOME TAXES-CREDIT FEDERAL (107,840,209.00) STATE (19,783,553.00) 411.4 INVESTMENT TAX CREDIT ADJUSTMENT (9,919,032.00) 411.8 GAINS FROM DISPOSITION OF EMISSION ALLOWANCES (800,528.98) ------------ TOTAL UTILITY OPERATING EXPENSES 2,375,022,652.16 ---------------- NET UTILITY OPERATING INCOME 547,694,153.79 -------------- OTHER INCOME AND DEDUCTIONS OTHER INCOME 415/416 MERCHANDISING, JOBBING AND CONTRACT WORK 418 NONOPERATING RENTAL INCOME (1,335,286.72) 418.1 EQUITY IN EARNINGS OF SUBSIDIARY COMPANIES 9,221,890.33 419 INTEREST AND DIVIDEND INCOME 7,080,789.16 419.1 ALLOWANCE FOR EQUITY FUNDS USED DURING CONSTRUCTION 4,762,107.06 421 MISCELLANEOUS NONOPERATING INCOME 3,970,668.99 421.1 GAIN ON DISPOSITION OF PROPERTY 74,514.15 --------- TOTAL OTHER INCOME 23,774,682.97 ------------- OTHER INCOME DEDUCTIONS 421.2 LOSS ON DISPOSITION OF PROPERTY 3,442.40 426.1-426.5 MISCELLANEOUS INCOME DEDUCTIONS 8,227,265.52 ------------ TOTAL OTHER INCOME DEDUCTIONS $8,230,707.92 ------------- OTHER INCOME AND DEDUCTIONS (CONTINUED) TAXES APPLICABLE TO OTHER INCOME AND DEDUCTIONS 408.2 TAXES OTHER THAN INCOME TAXES $77,092.00 409.2 INCOME TAXES FEDERAL (2,102,174.00) STATE (660,942.00) D.C. TAX 32,924.00 410.2/411.2 PROVISION FOR DEFERRED INCOME TAXES-NET FEDERAL 239,390.00 STATE 79,725.00 --------- TOTAL TAXES APPLICABLE TO OTHER INCOME AND DEDUCTION (2,333,985.00) -------------- NET OTHER INCOME AND DEDUCTIONS 17,877,960.05 ------------- INCOME BEFORE INTEREST CHARGES 565,572,113.84 -------------- INTEREST CHARGES 427 INTEREST ON LONG-TERM DEBT 204,529,660.13 428 AMORTIZATION OF DEBT DISCOUNT AND EXPENSE 2,404,737.01 428.1 AMORTIZATION OF LOSS ON REACQUIRED DEBT 7,228,189.00 429 AMORTIZATION OF PREMIUM ON DEBT-CREDIT (10,967.37) 429.1 AMORITIZATION OF GAIN ON REACQUIRED DEBT-CREDIT (2,367.25) 431 OTHER INTEREST CHARGES 5,674,936.68 ------------ 432 ALLOW. FOR BORROWED FUNDS USED DURING CONSTRUCTION-CREDIT (5,201,949.02) -------------- NET INTEREST CHARGES 214,622,239.18 -------------- NET INCOME $350,949,874.66 =============== EXHIBIT I SCHEDULE 2 PFG GAS, INC. STATEMENT OF INCOME FOR THE TWELVE MONTH PERIOD ENDED JUNE 30, 1997 1997 ---- Total Operating Revenue $ 58,251,383 ---------------- Operating Expenses Cost of Gas $ 28,210,642 Operation 11,582,379 Maintenance 2,711,233 Depreciation 3,402,110 Taxes Other Than Income Taxes 3,547,772 Income Taxes Federal 2,189,660 State (117,380) Investment Tax Credit (39,902) ---------------- Total $ 51,486,516 ---------------- Operating Income $ 6,764,867 ---------------- Other Income Interest Income $ 39,111 Miscellaneous Non-Operating Income 87,877 ---------------- Total Other Income $ 126,988 ---------------- Gross Income $ 6,891,855 ---------------- Income Deductions Miscellaneous $ 3,996 Other Interest 2,038,315 Allowance for Borrowed Funds Used During Construction - Credit (31,641) ----------------- Total Interest Charges $ 2,010,669 ---------------- NET INCOME $ 4,881,186 ================ EXHIBIT I SCHEDULE 3 NORTH PENN GAS COMPANY STATEMENT OF INCOME FOR THE TWELVE MONTH PERIOD ENDED JUNE 30, 1997 1997 ---- Total Operating Revenue $ 45,189,495 ---------------- Operating Expenses Cost of Gas $ 17,856,286 Administrative 7,097,007 Operation 7,335,892 Maintenance 739,631 Depreciation 2,457,572 Taxes - General 2,686,834 Income Taxes Federal 1,294,626 State 255,242 Investment Tax Credit (36,463) ---------------- Total $ 39,686,627 ---------------- Operating Income $ 5,502,868 ---------------- Other Income Interest Income $ 248,160 Miscellaneous Non-Operating Income 140,289 ---------------- Total Other Income $ 388,449 ---------------- Gross Income $ 5,891,317 ---------------- Income Deductions Miscellaneous $ 12,525 Interest on Long - term Debt 2,132,125 Amortization of Debt Expense 14,245 Other Interest 154,959 Allowance for Borrowed Funds Used During Construction - Credit (18,761) Total Interest Charges $ 2,295,093 ---------------- NET INCOME $ 3,596,224 ================ AFFIDAVITS AFFIDAVIT COMMONWEALTH OF PENNSYLVANIA : : SS. COUNTY OF LEHIGH : FRANK A. LONG, being duly sworn according to law, deposes and states that he is Executive Vice President and Chief Operating Officer of Pennsylvania Power & Light Company; that he is authorized to and does make this affidavit for it; and that the facts set forth above related to Pennsylvania Power & Light Company and its affiliates are correct to the best of his knowledge, information and belief and that he expects Pennsylvania Power & Light Company to be able to prove the same at any hearing hereof. /s/ Frank A. Long ------------------------------ Frank A. Long Executive Vice President and Chief Operating Officer Sworn to and subscribed before me this 5th day of August, 1997 /s/ Francine A. Greenzweig - --------------------------- Notary Public AFFIDAVIT COMMONWEALTH OF PENNSYLVANIA : : SS. COUNTY OF CHESTER : Terry H. Hunt, being duly sworn according to law, deposes and states that he is President and Chief Executive Officer of PFG Gas, Inc., and North Penn Gas Company; that he is authorized to and does make this affidavit for them; and that the facts set forth above as to PFG Gas, Inc., North Penn Gas Company and their affiliates are correct to the best of his knowledge, information and belief and that he expects PFG Gas, Inc. and North Penn Gas Company to be able to prove the same at any hearing hereof. /s/ Terry H. Hunt ------------------------------ Terry H. Hunt President and Chief Operating Officer SWORN TO AND SUBSCRIBED before me this 4th day of August, 1997 /s/ Eleanor R. Ross - ---------------------------- Notary Public EX-99 5 EXHIBIT D-2 Exhibit D-2 Application of Pennsylvania Power & Light Company PFG Gas, Inc. and North Penn Gas Company Docket Nos. A-120650F0006, A-122050F0003 Statements and Exhibits Statement STJ-1........................................Scott T. Jones Exhibit STJ-I....................................Scott T. Jones Exhibit STJ-2....................................Scott T. Jones Exhibit STJ-3....................................Scott T. Jones Statement PTC-1.....................................Paul T. Champagne Statement JJH-1..................................John J. Hilyard, Jr. Submitted: December 22, 1997 Statement STJ-1 DIRECT TESTIMONY OF DR. SCOTT T. JONES Application of Pennsylvania Power and Light Company, PFG Gas, Inc., North Penn Gas Company Docket Nos. A-122050F0003, A-120650F0006 December 22, 1997 I. QUALIFICATIONS AND EXPERIENCE Q: Please state your name and business address. A: My name is Scott T. Jones. My business address is One Mifflin Place, Cambridge, Massachusetts, 02138. Q: What position do you hold? A: I am CEO, The Economics Resource Group, Inc. My firm specializes in economic and regulatory policy consulting services to private and, to a lesser extent, public organizations in traditionally regulated industries. Q: What is your professional and educational background? A: I have been involved in issues related to the regulation of utilities and regulatory policy for 12 years. My experience with regulated utilities and regulatory policy includes research and testimony on behalf of clients as well as working with regulators at the state and federal level as a senior executive in the energy industry. My previous work experience and testimony includes the determination of market-clearing energy and capacity prices under conditions of retail and wholesale competition, rate design, the role of regulation in project economics and project finance, the determination of workably competitive markets including a market power evaluation of Pennsylvania-New Jersey-Maryland power pool ("PJM"), facilities siting, resource cost analysis, and financial economics pertaining to tariff structure, mergers and debt refinancing. I have acted as a consultant to and as a member of the energy industry in matters pertaining to electric utilities, oil pipelines, natural gas transmission and distribution companies, and gas liquids transportation systems. In addition to my more recent work discussed above, I have submitted testimony on several occasions before the Federal Energy Regulatory Commission examining market power issues associated with oil and gas companies. This testimony addressed not only the analytical determination of whether a market is competitive, but also what types of tests should be applied to determine the conditions under which a market may be declared workably competitive.(1) The specific analyses focused on a variety of gas and oil company products sold in various geographic markets, including the relevant geographic market pertinent to this matter. - ----------- 1 See, for example, FERC Comments in Response to Notice of Inquiry on Market-based Ratemaking for Oil Pipelines, Docket No. RM94-1-000, Statement of Scott T. Jones, January 24, 1994. My experience in the energy industry, including two occasions where worked in the oil and gas industry, spans 22 years. I hold a Ph.D. in Economics from Virginia Tech. My resume is attached as Exhibit STJ 1, listing my background and experience in further detail. II. INTRODUCTION AND FINDINGS Q: What is the purpose of your testimony in this proceeding? A: PP&L Resources, Inc. ("Resources" or the "Company") has asked me to examine its proposed merger with Penn Fuel Gas, Inc. ("Penn Fuel")(2), and determine whether the merger is consistent with the public interest. In that regard, I will provide testimony that analyzes three factors: the effect on rates(3), the effect on competition, and the effect on regulation. - ------------ 2 Penn Fuel Gas, Inc., is an intrastate holding company exempt under Sections 9(a)(2) and 10 of the Public Utility Holding Company Act of 1935 ("PUHCA"). 3 As part of the examination of the effect of the merger on rates, I have also been asked, as an economist, to develop an opinion about whether the merger creates benefits for the utilities' customers, directly or indirectly through increased economic efficiencies that accrue to society as a whole. Q: What regulatory policy statements have you reviewed to determine what factors to examine in order to prepare your testimony in this matter? A: In conducting my analysis, I reviewed and applied the Federal Energy Regulatory Commission's (the "FERC") Merger Policy Statement(4), relevant portions of the Pennsylvania Electric Competition Act(5), and the Pennsylvania Public Utility Commission's (the "PPUC") Order adopting a policy statement regarding the treatment of gas marketers.(6) - ---------------- 4 FERC, Inquiry Concerning the Commission's Merger Policy Under the Federal Power Act; Policy Statement, 61 FR 68595 (1996). The FERC follows a standard that has been adopted by other federal agencies like the Department of Justice, which focuses on the change in market power as a result of the merger. Since the Pennsylvania Public Utility Commission's (PPUC) does not have a similar standard for measuring the effect of proposed mergers on competition, I have adopted the guidelines in the FERC's Merger Policy Statement. 5 Electric Generation Customer Choice and Competition Act, PN4282, December 3, 1996. 6 Pennsylvania Public Utility Commission, Order Regarding Affiliated Interests of Natural Gas Marketers, Docket No. M-00960838, June 9, 1997. II.A SUMMARY OF THE MERGER Q: Could you please summarize the proposed merger between Resources and Penn Fuel? A: Yes. The owner of a large, eastern Pennsylvania-based, vertically-integrated, investor-owned electric utility (Resources) is proposing to merge with the owner of a small, closely-held, natural gas utility (Penn Fuel). Penn Fuel provides gas storage, sales, transportation and distribution services in addition to propane storage, transportation and delivery services for retail and wholesale customers scattered over two thirds of Pennsylvania. Resources is the parent holding company of PP&L, Inc. ("PP&L") which provides regulated retail electric service in central eastern Pennsylvania. Penn Fuel is the parent holding company of PFG Gas, Inc. ("PFG Gas"), which provides regulated natural gas service in southern and eastern Pennsylvania and in a small portion of northern Maryland, and of North Penn Gas Company ("North Penn"), which provides regulated natural gas service in northwestern and north central Pennsylvania. II.B SUMMARY OF THE FINDINGS Q: What are your conclusions based on the analysis of the proposed merger? A: I have examined the pre- and post-merger market for possible changes due to the merger. As a result of my analysis, find that the merger will bestow benefits to the ratepayers, have no effect on the current state of competition, and have no impact on the required regulation of the firms. I have reached these conclusions for the following reasons: 1. I have identified many areas where the merged firms are likely to improve the efficiency of existing operations and services. In this way, both customers and society as a whole are made better off as a result of the merger. 2. There is no evidence that the proposed merger will reduce competition in the market for energy supply, transportation, or transmission services. Post-merger, the rising tide of competition for electric energy and natural gas service in Pennsylvania, along with the continued regulation of transportation and transmission services, will insure that the relatively small number of customers common to both Resources and Penn Fuel will continue to benefit from the pressure that market forces will bring to bear on the combined firm. For those 30,000 or so Penn Fuel customers that become customers of Resources, emerging competition will insure that if Resources does not meet the demands of these customers, some other energy supplier will. 3. There is no evidence that the proposed merger will affect the way that various aspects of the utilities' operations are currently regulated. Intervenors and protesters express concerns about post-merger horizontal and vertical market power issues.(7) Based on my analysis of the proposed merger, the concerns are without merit and should be dismissed. The evidence regarding this proposed merger suggests that the merger is in the public interest and should be approved. - ------------- 7 Petition to Intervene of UGI Utilities, Inc., Docket No. A-122050F0003, A-120650F0006, September 29, 1997, p. 1; Protest of New England Hub Partners, L.P., Docket No. A122050F0003, A-120650F0006, September 29, 1997, pp. 6-7; Reply of New England Hub Partners, L.P., to the answer of PP&L, PFG Gas, Inc., and North Penn Gas Co., October 17, 1997, p. 9. II.C TESTIMONY STRUCTURE Q: How is your testimony structured for the purposes of this proceeding? A: I first present an examination of the merger's effect on rates. I then discuss the effect of the merger on competition. Finally, I comment on the effect of the proposed merger on regulation. III. THE EFFECT OF THE MERGER ON RATES Q: The FERC's Merger Policy Statement explains that its primary focus is the effect of the merger on ratepayer protection. Why would the proposed merger benefit the ratepayer and how will ratepayers realize these benefits? A: As noted in the section titled "Efficiencies" in Revisions to the Horizontal Merger Guidelines dated April 8, 1997, "Competition usually spurs firms to achieve efficiencies internally. Nevertheless, mergers have the potential to generate significant efficiencies by permitting a better utilization of existing assets, enabling the combined firm to achieve lower costs in producing a given quantity and quality than either firm could have achieved without the proposed transaction. Indeed, the primary benefit of mergers to the economy is their potential to generate such efficiencies."(8) - ------------ 8 Revisions to the Horizontal Merger Guidelines, issued by the U.S. Department of Justice and the Federal Trade commission, April 8, 1997. The Agency also correctly notes that only those efficiencies likely to be accomplished with the proposed merger and unlikely to be accomplished in the absence of either the proposed merger or another means have comparable anticompetitive effects. These are called merger-specific efficiencies. Q: Have you identified some of the savings and societal benefits that will accrue as a result of the merger? A: Yes. First of all, find the reasons listed for the merger listed in Form U-1, Application or Declaration Under the Public Utility Holding Company Act of 1935 (at 9) both compelling and well within the scope of this merger. That document discusses the following benefits and efficiency gains: 1. The customer base of the combined utilities will be larger. Customers will benefit directly from enhanced electricity competition enabling them to tailor their energy needs to either gas or electricity services. For example, Penn Fuel's current industrial and commercial customers who could gain from an array of services will gain ready access to the ability of a much larger utility to provide sophisticated energy/fuel management services, risk management services, enhanced financial services, and so forth. 2. Similarly, Penn Fuel's customers will benefit from company personnel's access to advanced information systems, professional training and research routinely provided to employees of Resources, a much larger organization. 3. Resources' wholesale (and after 1999, retail) customers will benefit from the Company's affiliation with Penn Fuel's experienced natural gas marketing personnel(9). Added natural gas marketing skills will allow Resources to offer its customers a wider array of energy options as well as possibly to acquire fuel supplies at a lower cost for its gas-fired generation facilities. - ------------- 9 Natural gas has been and is expected to be the fuel used by most new capacity constructed in the territory served by the Pennsylvania-New Jersey-Maryland interconnection association ("PJM"). 4. The combined firms should be able to reduce their overall cost of operation to a level below that which would have prevailed but for the merger. Cost reductions are likely to be achieved in common corporate departments such as accounting, finance, information systems, regulatory affairs, legal consulting and procurement. Secondly, I would expect the combined firms to achieve direct cost reductions, economic efficiencies, or added customer benefits such as the following. 5. The applicants customers can be served out of common service centers. Most service skills needed to meet customer requirements are the same for both companies. While the technical skills needed for some customer service requirements are not common to existing employees today, further training and consolidation of equipment and materials could make headway on the operational side. Training and other skill-enhancing efforts should lead to an ongoing customer benefit that works to lower cost and enhance offerings at service centers. 6. North Penn, PFG Gas and PP&L customers can be served by a common customer relations department, including activities like billing, new services, low income customer activities, etc. 7. The combination of Penn Fuel with Resources should lead to a reduction in the cost of capital financing Penn Fuel. Further, a merger with the larger Resources, will add an expanded array of finance options for capital projects, which Penn Fuel's management cannot currently access on its own. Reduced capital costs should lead to lower customer costs for a number of utility services. 8. Existing utility rights of way and real estate holdings used for regulated assets such as transmission wires or gas pipelines and compressor stations, can be used to reduce future capital costs. Additional gas might be run under existing wires, reducing the per mile cost of developing infrastructure. I would also note that the expected benefits from the merger of Penn Fuel and Resources are found in the testimony of John J. Hilyard, Jr., and Paul T. Champagne, filed on behalf of the applicants. Q: How will the merger benefits be passed on to consumers? A: So long as the proposed merger results in at least some economic efficiencies that are ultimately passed through to the market, customers will benefit from the merger. For regulated utility service, these efficiency gains are reflected in a reduction (all else equal) in the rate of change in the rate base, which translates into a slower rise in prices. For those products and services marketed in a competitive market, the crucible of competition will likely force merger savings to be passed on to consumers. Q: Do the various benefits described above have to be quantified as alleged by the intervenors to be judged valuable from an economist's perspective? A: No. Economic theory does not require that the magnitude of a change in the structure of the market be quantified to declare that the market as a whole is improved and customers are made better off by the merger. Quantifications of various costs and benefits due to mergers is difficult. In fact the FERC in its latest policy statement on merger policy explicitly recognizes the problem with quantifying benefits to mergers: Our investigations have frequently required trial-type hearings. Although we have considered the applicants' burden of proof to be met by a generalized showing of likely costs and benefits, these hearings have often been time-consuming, and there has been considerable controversy over whether the estimates of future costs and benefits are truly meaningful. Moreover, there has been controversy over the position we have taken that benefits are to be "counted" even if they could reasonably be obtained by means other than the merger.(10) - ----------- 10 Inquiry Concerning the Commission's Merger Policy Under the Federal Power Act; Policy Statement, op. cit., at 18. Surely, economists sometimes engage in measuring the economic benefits or costs given a change in the marketplace. However, all that is actually required to declare a change beneficial to the economic well-being of the market, or individual market participants, is to know (all else equal) that costs are reduced, or the array products are expanded. In this particular case, it is clear that there are numerous potential synergies and savings to be achieved and that the merger is clearly in the public interest. IV. THE EFFECT OF THE MERGER ON COMPETITION IV.A SUMMARY OF FINDINGS REGARDING THE IMPACT OF THE MERGER ON COMPETITION Q: What are the potential concerns regarding the impact of the merger on competition? A: Potential concerns of the merger's effect on competition is whether it causes an increase in horizontal and vertical market power. The horizontal market power concern in this case consists of whether Penn Fuel and Resources combined would have a sufficiently large share of the natural gas transportation or the electricity generation market to exercise market power by restricting supply or otherwise erecting barriers to entry in an effort to raise prices. In the absence of evidence suggesting that the merger would significantly increase market power, a market is workably competitive and the proposed merger unlikely to have adverse competitive effects.(11) Potential vertical market power concerns Penn Fuel's ability to adversely affect competition by erecting barriers to entry or otherwise raising prices to the merged firm's competitors.(12) This could occur only if Penn Fuel's gas transportation facilities serve existing or future gas-fired generators which compete in the same geographic market as PP&L. In either instance, the ultimate concern is whether the effect of the merger may substantially lessen competition or tend to create a monopoly.(13) - ------------- 11 Inquiry Concerning the Commission's Merger Policy Under the Federal Power Act, Policy Statement, op. cit., at 30. 12 FERC Order Approving Merger, Duke Power Company and PanEnergy Corporation, Docket EC97-13-000, May 28, 1997, p. 21. 13 The Clayton Act (1914), Section 7, as amended in 1950. Q: Summarize your findings regarding the impact the merger will have on competition. A: PP&L is a generator of electric energy that serves wholesale customers at market-based rates in competitive markets. Transmission and distribution services are provided by PP&L under largely regulated, non-discriminatory open-access provisions established by state and federal regulatory agencies. Other services, like energy brokering, are unregulated. Penn Fuel does not own energy resources. To the extent that these companies provide energy services, the applicant is both a very small part of a much larger natural gas market and subject, for the most part, to Commission regulation. Finally, neither applicant shares, as a matter of their current business operations, customers or competitors except in the broadest sense that both Resources and Penn Fuel are energy companies. Without any significant overlap, and without any evidence that either company possesses market power in its business not subject to regulation, market power cannot be increased by the merger. Hence, I find that there is no evidence that the oposed merger causes harm to competition in the relevant markets. IV.B NATURAL GAS AND ELECTRIC POWER INDUSTRY RESTRUCTURING AND DEREGULATION Q: Is it important to distinguish between a utility's wholesale and retail businesses? A: Yes. Because of the nature of the services demanded and the way the utility provides those services, a utility's customer base is fundamentally different, for wholesale versus retail customers (see Table 1). Most natural gas in the U.S. is sold to end users by local distribution companies ("LDCs") like those operated by North Penn and PFG Gas. The companies are obligated to meet all of the natural gas needs of their customers and are responsible for securing adequate supplies of natural gas and maintaining the means to deliver that gas to customers. Most natural gas used by distribution companies is produced in areas outside of their service territories and must be transported by interstate pipeline to the "city-gate" of the distribution company. Table 1 Penn Fuel and PP&L Product Offerings Product PP&L Penn Fuel ------- ---- --------- Wholesale Gas Storage N Y Gas Transmission N Y Electricity Y N Electricity Transmission Y N Propane N Y Retail Electricity Y N Gas N Y Until 1985, virtually all natural gas supplies were purchased at the city-gate by regulated distribution companies from FERC-regulated interstate pipelines. The price and conditions of natural gas transportation was regulated, although the price of gas was set by the competitive market. After 1985, the FERC began requiring interstate pipelines to sell natural gas transportation separately from the sale of the commodity gas and permitted the distribution companies to convert their contract demand for natural gas delivered to their city-gate into firm transportation, thereby opening direct purchase of gas to the distribution companies. The interstate pipelines could continue to transport gas for resale to distribution companies (the "sale for resale" or wholesale business), but they now also had to offer the distribution companies the choice of transportation-only (including interruptible transportation) for gas they bought from the producers. In 1992, as a result of FERC Order No. 636, a secondary market for interstate pipeline capacity formed from the released firm capacity of the distribution companies opening direct purchase of gas from producers over interstate pipelines to the city-gates by marketers and industrial customers of the distribution companies. As a result of these changes in the way gas transportation and sales are regulated, the provision of interstate natural gas service at wholesale to LDCs at their city-gates has been separated or unbundled into three relevant products: natural gas, access to an interstate pipelines, and with capacity-release, natural gas transportation capacity. Similarly, for the electric industry, FERC Order No. 888/889 changed the relationship between the way a utility supplied customers with generation service. Prior to the Order, wholesale electric customers, usually municipal electric companies that resold the electricity generated by investor-owned utilities, purchased bundled generation with regulated transmission and distribution services to the meter. Now, wholesale customers can shop for generation from any supplier and receive delivery over wires at non-discriminatory, regulated rates. This same purchase option is to be extended to retail customers in Pennsylvania beginning in 1999 as a result of the Electric Generation Customer Choice and Competition Act.(14) - ------------ 14 Enacted as House Bill No. 1505, Sections 3-4, 66 Pa. C.S. P. 2801-2812 Q: What is the status of wholesale and retail sales of the applicants? A: Today, the wholesale generation and energy marketing business of PP&L is subject to market-based rates approved by the FERC(15), while other retail businesses of PP&L remain regulated.(16) The energy supply business of Penn Fuel does not exist, since Penn Fuel does not own a company that produces and sells natural gas.(17) With the exception of Penn Fuel's propane operations, the transportation and distribution businesses (including gas sales, transportation, storage and distribution services), whether to large industrial customers or residential users, are regulated by the PPUC. However, the fact that unregulated gas production and unregulated interstate customer base eligible to choose alternate suppliers. gas transportation services are available to Penn Fuel's industrial customers does impact on the traditional gas merchant (bundled sales) function of the utility. Hence, competitive pressure bears on Penn Fuel's gas sales to customers because unbundled alternatives exist upstream of the city-gate. - ------------ 15 Federal Energy Regulatory Commission, Order Conditionally Accepting for Filing Proposed Market Based Rates, Issued July 17, 1997, Docket No. ER97-3055-000. 16 The deregulation of the electricity industry in Pennsylvania started this year with 5% of the customer base eligible to choose alternate suppliers. 17 PP&L/Penn Fuel witness John J. Hilyard (at 2) points out that Penn Fuel does collect for sale a small amount of local production. IV.C RELEVANT GEOGRAPHIC AND PRODUCT MARKETS Q: Dr. Jones, what is an appropriate framework for examining competition? A: In order to analyze the extent of competition, it is necessary to properly establish the relevant geographic and product markets. Equally important in analyzing this merger proposal is clarification of the distinction between the companies' retail and wholesale businesses. Having defined the market, an economist will then investigate the potential for a market participant to exercise horizontal and vertical market power. IV.C.1 GEOGRAPHIC MARKET Q: What is the relevant geographic market for the purposes of evaluating the proposed merger between Resources and Penn Fuel? A: The FERC has determined, based upon an analysis I conducted, that PP&L's relevant geographic market is at least as large as PJM.(18) I recognize, however, that compared to the size of PJM, natural gas transportation, distribution and storage markets tend to cover a much larger geographic market, sometimes encompassing many states in more than one region of the U.S.(19) To simplify matters here, I have restricted the analysis of natural gas transportation and storage to a geographic market just slightly larger than PJM, including the seven states of Pennsylvania, Ohio, West Virginia, Maryland, Delaware, New Jersey and New York. - -------------- 18 Affidavit, Dr. Scott T. Jones, in support of PP&L's Application for Authority to Sell Energy and Capacity at Market-Based Rates, FERC, Docket No. ER97-3055-000. 19 For example, interstate pipelines like Transco, a PFG Gas storage customer, "stages" natural gas supplies into storage outside of Tioga County, Pennsylvania, on the basis of storage costs, gas costs, transportation requirements, and other competitive reasons. If PFG Gas, post-merger, were to attempt to sustain a non-competitive rate increase affecting gas storage costs, Transco would have an incentive to use less costly storage capacity in Pennsylvania or as far west Indiana or Illinois and as far south as Texas or Louisiana. Q: Why not expand the analysis completed for PP&L to include the larger, seven state geographic market used for natural gas? A: The FERC has already approved PP&L's market-based rates on the basis of exactly the same tests for market power that I would use if the market were larger than just PJM. A larger geographic area would only increase the number of competitors to be counted in the relevant market, but not increase PP&L's generation resources. Hence, the outcome of the analysis is known without performing the study. IV.C.2 PRODUCT MARKET Q: What are the relevant product markets affected by the merger of Penn Fuel with Resources and why? A: The relevant product markets for purposes of a pre- and post-merger examination of the change in market power are the retail and wholesale businesses that each applicant pursues that are somehow common to the strategic interests of the combined companies. North Penn and PFG Gas engage in regulated natural gas transportation, natural gas storage (both on- and off-system), and natural gas procurement/sales (the "merchant function") to on-system Customers. In addition, Penn Fuel owns a small unregulated "bottled gas" business for propane storage sales and transportation. On the other hand, PP&L is in the business of generating electric energy in the wholesale market, then transmitting electricity to its customers. PP&L does not directly participate in any of the business activities engaged in by Penn Fuel, i.e., it does not own or operate natural gas transportation, distribution, or gas storage facilities in competition with Penn Fuel.(20) Therefore, although the service territories of Penn Fuel and PP& L overlap to some extent as shown in Exhibit STJ 2, the applicants do not serve the same customers with the same services. - ------------ 20 PP&L does operate a pipeline from the Philadelphia area for transportation service dedicated to its generation plant at Martins Creek, as well as a Public Service Electric and Gas facility in New Jersey. This pipeline is switched from gas to fuel oil service, depending on the utility's requirements during the year. As a result, various segments of this pipeline are underutilized much of the time. Q: But in a broader sense, isn't there some overlap between electricity and gas, in that electricity competes with natural gas, say for example as a fuel for heating or cooking? A: Yes, along with other energy sources like fuel oil, propane, wood, geothermal energy, etc. In fact, based on the move toward deregulation of electric generation and the proposed deregulation of intra-state natural gas markets, and given the fact that all customers can choose the type of energy they use for certain applications, trade press articles suggest that the relevant product market could be expanded to "energy," measured in BTUs regardless of source.(21) If the product market were to be defined this broadly, there would be numerous participants and competitors for BTU services, all but eliminating the need to analyze the merger for market power. For purposes of my market power analysis, I have chosen to narrow the relevant product market as noted above. - ------------- 21 "Duke Energy Sees BTU as 'Common Currency' in Converged Marketplace", Inside FERC, November 24, 1997, p. 1. IV.D MARKET POWER IV.D.1 HORIZONTAL MARKET POWER Q: What are the indicators that horizontal market power exists as a result of the merger and what are the remedies if the concern is realized? A: Regulators generally use traditional economic tools for assessing the potential for the exercise of horizontal market power.(22) These tools are used as benchmarks, designed to measure market concentration where the market consists of a very small number of firms that when combined control most of the capacity to serve customers in the relevant geographic market. The concern here is that it is easier for one or two competitors to coordinate their activities in an effort to erect barriers to market entry or otherwise sustain a non-competitive increase in price. When these concerns are evidenced by analysis, regulators look to the applicants to voluntarily mitigate market power. - ------------- 22 The most common tool is the Herfindahl-Hirschman Index (HHI). The HHI is a market-share based indicator of market concentration. Q: What are the steps necessary to determine if the merger results in an increase in horizontal market power? A: The steps for assessing the impact of a merger on competition is set out in the FERC's Merger Policy Statement. The Guidelines call for a multi-step process that begins with the definition of the relevant geographic and product market for the combined firms. This is followed by developing measures of market concentration. Next, the analysis evaluates whether the extent of concentration in the pre-merger versus the post-merger market, along with other factors that characterize the market, raises concerns about potential anti- competitive effects. Q: If the applicants' markets are only loosely connected, and the apparent change in market power as a result of the merger is nil, why have you supplied evidence regarding the structure of the markets as part of your testimony? A: I provide evidence about the level of competition facing customers of Penn Fuel and, separately, PP&L, in order to lay to rest any concern on the part of the PPUC that either PP&L or the operating companies of Penn Fuel have the ability to exercise horizontal market power in a post-merger setting. Table 2 contains a listing of the markets where horizontal market power is feasibly of concern. Table 2 Potential Horizontal Market Power Concerns Product PP&L Penn Fuel Horizontal Market Power Concern? ----------------------------------------------------------------------- Wholesale Gas Storage N Y Regulated and many competitors Gas Transmission N Y Regulated and many competitors Electricity Y N No market power--commission- approved market-based rates Electricity Transmission Y N Regulated, under the control of an independent system operator for PJM Propane N Y Competitive market Retail Electricity Y N Regulated, but soon to be deregulated witn many competitors Gas N Y Regulated, expected to be deregulated with many competitors Q: What about the other relevant product markets that you identified earlier? A: As shown in Table 2, Penn Fuel markets are either subject to PPUC regulatory jurisdiction and/or are not shared at all by Resources PP&L. For example, PP&L does not sell, transport or store propane. PP&L does not own, use, or operate natural gas storage and, in fact, even Penn Fuel's gas storage is of little consequence in the relevant geographic market. Q: What do you mean by their gas storage business is of little consequence in the relevant market? A: On the basis of ownership of storage capacity, Penn Fuel's Tioga County, Pennsylvania fields (see Exhibit STJ 3) constitute less than one third of one percent of the deliverability capacity in the relevant geographic market (see Table 3). However, the percentage of capacity actually operated by Penn Fuel is even less than that. CNG, the interstate pipeline and storage company, operates all Penn Fuel gas storage except the Meeker field and even Meeker's capacity is dependent on the CNG compressors to get gas out of storage and onto the pipeline system. Table 3 Gas Storage Market Share Analysis Deliverablity Market Storage Operator (MMcfd) Share -------------------------------------------- Cabot 63 0.4% CNG 8,902 59.4% Columbia 4,150 27.7% Duke 30 2.0% Equitrans 41 2.8% Hampshire 48 0.3% Honeoye 40 0.3% National Gas Oil 40 0.3% NFG 79 5.3% Nyseg 14 1.0% Penn Fuel 41 0.3% Phillips 31 0.2% ------------------------------------------- Total 14,979 100% Source: AGA, 1997 Q: What weight should be placed on the presence of unbundled interstate pipeline services when considering a merger between a gas distribution company and an electric utility? A: The fact that unbundled gas transportation, sales and storage services are readily available at the city-gate of the distribution company means considerable competitive pressure has already been brought to bear on the distribution company, particularly the services offered to industrial customers. Given that interstate pipelines offer unbundled services to shippers, anindustrial customer holding capacity on North Penn's system could contract for the purchase of gas from an oil company or gas marketer, then arrange for interstate transportation on a pipeline all the way through the city gate of the North Penn or PFG Gas distribution systems at prices that reflect upstream supply and demand conditions for fuel and transportation. In this way, the rates North Penn is able to charge for competing gas sales must reflect the external conditions just outside its city-gate. As an indication of the relative magnitude of competitive pressure brought by interstate pipelines into Pennsylvania, Table 4 lists the pipelines along with the capacities of each of those systems. The combined capacity of these interstate systems is more than 100 times greater than that of Penn Fuel. Table 4 Interstate Pipeline Capacity in the Market Pipeline Capacity Share of Total Pipeline Operator (MMcfd) Capacity ------------------------------------------------------ ANR 3,359 19% CNG 21 0.1% Columbia 3,367 19% Crossroads 250 1.4% Duke 4,051 23% North Country 56 0.3% Penn Fuel 167 0.9% St Lawrence 62 0.3% Tennessee 3,301 19% Union 45 0.3% Williams 3,107 17% ------------------------------------------------------ Total 17,786 100% Note: Penn Fuel represents peak capacity on the combined PFG Gas and North Penn Systems. Source: EIA, 1996, Penn Fuel. IV.D.2 VERTICAL MARKET POWER Q: What is vertical market power? A: Vertical market power accrues to merger applicants that have, as a result of a merger, the ability to restrict the supply of energy or services to competitors, or otherwise engage in discriminatory behavior as a result of the firm's vertical structure. Q: What are some remedies to prevent potential vertical market power concerns? A: Regulators and statutes impose non-discriminatory transportation and transmission service requirements on monopoly providers. Regulated companies are required to unbundle their services and charge regulated rates for transmission and transportation services provided to energy suppliers. Penn Fuel is required to provide open access and non-discriminatory transportation services under FERC Order 636 and state law. PP&L is required to provide open access and non-discriminatory transmission services under FERC Orders 888 and 888-A and under the Pennsylvania Electric Competition Act. Q: Dr. Jones, have you considered the potential for the applicants to possess and exercise vertical market power? A: Yes. As a result of the merger, Resources and Penn Fuel might survey their common customer base looking for an opportunity to practice "affiliate self dealing," where the applicants help one another in a deliberate effort to harm the competitors to one or both of the applicant firms. Secondly, I have examined the proposed merger's effect on competition for evidence of rebundling of energy and transmission or transportation services. Vertical market power could allow rebundling, causing customers to both take and pay for the combined services. However, an examination of the market containing the customers common to both utilities reveals that neither of these vertical market power factors is present, since, as I noted earlier, the applicants do not share customers for the same services, or face common competitors for those services. Therefore, there is no basis for concluding that the merger will create any significant vertical market power. IV.D.3 MITIGATION OF MARKET POWER: COMPETITIVE ALTERNATIVES Q: Besides the specific examples you discuss regarding horizontal and vertical market power, are there other factors that might mitigate merger-related market power? A: Yes. Markets tend to evolve with or without mergers, due to the presence of a variety of competitive alternatives, not just other gas and electric utilities. Under the FERC's Merger Policy Statement, certain conditions require that these factors be identified and accounted for in a market power finding. Q: Can you briefly illustrate and discuss the competitive alternatives the applicants' customers face, particularly the source and extent of alternate fuels? A: There are several elements in the natural gas and electricity markets that bring competitive pressure to bear on the applicants. First, many of Penn Fuel's largest customers are "dual-fuel," capable of switching in a short period of time to the alternate fuel. Dual-fuel capability is also a factor in the electric market where the generation of electric energy at many sites might originate with gas-fired, oil-fired or coal-fired boilers. As an example of the ready availability of alternate fuel, Exhibit STJ 4 illustrates the density and range (shown as colored circles) of trucking radii for fuel oil out of terminals and refineries. Q: In place of fuel-switching, are there ways Penn Fuel's customers might gain access to another source of delivered natural gas? A: Large customers might avoid an increase in delivered natural gas prices by arranging to construct a pipeline from a nearby interstate pipeline and by-pass the gas distribution company (see Exhibit STJ 3). This can also be used by customers as an extremely effective threat, since by-pass means the permanent loss of pipeline market share. By-pass is an option for any customer near an alternative pipeline. Q: Besides by-pass, what can customers do to bring competitive pressure to bear on natural gas distribution companies? A: First, Penn Fuel's largest customers could acquire added interruptible capacity on the distribution company's system, then link that capacity to aggressive negotiations with gas marketers, interstate pipelines, gas storage operators, and gas producers, creating a gas "package" to their burner tip. This delivered price becomes the alternative against which Penn Fuel must structure any offer to sell gas to that customer. Second, gas by wire or "tolling" of gas supplies into electricity is an option for some industrial customers. Suppose an electric generation company has a plant that takes gas from Penn Fuel. Generation companies have learned how to arrange for gas to be delivered to another generator to be tolled into electricity. This lowers the capacity factor at the generation facility on the Penn Fuel system and increases the capacity factor at the plant tolling gas into electricity. V. EFFECT OF THE MERGER ON REGULATION Q: Have you reviewed the apparent effect of the merger on regulation? A: Yes. Q: On the basis of that review, are you able to make a public interest determination of the effect of the proposed merger on regulation? A: Yes. I have determined that there is nothing about the proposed merger that suggests the applicants are preparing to engage in regulatory evasion, such as jurisdiction shopping or market restructuring in an effort to reduce or otherwise fundamentally alter the way regulators currently oversee applicant markets. The proposed merger between Penn Fuel and Resources will not change the fact that the PPUC will regulate Penn Fuel's existing and post- merger business activities. Similarly, the merger will still leave PP&L's retail business subject to the jurisdiction of the PPUC and its transmission business subject to FERC oversight. All other relevant government agencies, such as the Nuclear Regulatory Commission, will retain their pre-merger oversight in a post-merger environment. VI. CONCLUSIONS Q: Can you summarize your overall findings regarding the ability of the applicants to exercise market power as a result of the proposed merger? A: The objective of my analysis was to apply the regulatory standard which seeks to identify a significant increase in market power as a result of the proposed merger. My analysis revealed that: 1. The merger bestows benefits on the applicants, customers, and society as a whole through a variety of efficiency-enhancing changes to the way the companies currently operate. 2. There is no change in the level of horizontal or vertical market concentration as a result of the merger. Hence, allowing the firms to merge means that the post-merger impact on the relevant markets is nil. 3. The effect of the merger on regulation does not cause a change in the way the firms are regulated, nor does the merger provide an opportunity for the combined firms to engage in regulatory evasion. Q: Does this conclude your direct testimony? A: Yes, it does. Exhibit STJ 1 SCOTT T. JONES The Economics Resource Group, Inc. One Mifflin Place Cambridge, MA 02138 (617) 491-4900 (617) 520-0215 (direct) PROFESSIONAL EXPERIENCE The Economics Resource Group, Inc., Cambridge, MA CEO, 1993 - present Responsible for the strategic focus and development of the management consulting and litigation support services firm in new areas of business. Directly responsible for many oil and gas, utility and other industry clients. Coho Resources, Inc., Dallas, TX Senior Vice President, 1992 - 1993, Board of Directors, 1990 - 1993 Responsible for marketing, business development, and all regulatory matters within this oil and gas exploration and production company. Oversaw oil and gas sales. Negotiated pipeline/transportation agreements. Implemented risk management programs and directed acquisitions/divestitures. AUS Consultants, Industry Analysis Group, suburban Philadelphia, PA President, 1988 - 1992 Co-founder of the Group. Responsible for the operation of the consulting firm which had over 200 industry clients. Directly responsible for oil and refined products clients, oil pipeline clients and gas utilities. Coordinated the energy risk management and fuel supply management practices. Chase Econometrics/WEFA, Bala Cynwyd, PA Senior Vice President, 1986 - 1988 Responsible for the development, enhancement and execution of all consulting services in each of the following areas of this Chase Manhattan Bank subsidiary: oil, gas, coal, electric utilities, non-ferrous metals, steel, plastics and packaging materials. Atlantic Richfield Company, Los Angeles, CA Director; Energy Studies, and Director; Market Research, 1980 - 1985 Responsible for the design and implementation of market-related plans/projects for senior management in the U.S. and foreign oil markets, natural gas markets, refining/marketing and metals markets. General Motors Corporation, Detroit, Ml Senior Staff Associate, 1976 - 1980 Responsible for energy, regulatory and long-range marketing strategies for senior management. Worked with every division, plus the technical staffs. University of Texas, San Antonio, TX, and Virginia Tech, Blacksburg, VA Assistant Professor, School of Business and Consultant to Industry, 1974 - 1976 Responsible for classes in economics, marketing, finance and statistics. U.S. Army Commissioned Officer, 1967 - 1970 EDUCATION Virginia Tech, Blacksburg, VA Ph.D. in Economics, 1976 Dissertation: "A Variable Risk Hypothesis for Foreign Exchange Rate Behavior" University of Texas, Arlington, TX M.A. in Economics and Marketing, 1973 B.A. in Business, 1972 TESTIMONY Pennsylvania Power & Light Company Prepared Direct Testimony before the Pennsylvania Public Utility Commission, Docket No. R00973975, Statement No. 1. Economic theory and regulatory policy principles supporting stranded cost recovery for PP&L, Inc., from UGI Utilities, Inc., customers subject to an ongoing power supply agreement. Also, market-clearing prices for energy and capacity for UGI's two facilities in PJM under conditions of retail and wholesale competition, 1999-2001. Re: PAPUC v. UGI Utilities, Inc. - Application of UGI Utilities, Inc., for Approval of its Restructuring Plan under ss.2806 of the Public Utility Code. November 21, 1997. Pennsylvania Power & Light Company Prepared Rebuttal Testimony before the Pennsylvania Public Utility Commission, Docket No. R-00973954, Statement No. 7-R. Market-clearing prices for energy and capacity, plus unit revenue estimates for PP&L and PJM facilities to support the company's stranded cost recovery and corporate restructuring filing in accordance with the State of Pennsylvania, Electricity Generation Customer Choice and Competition Act of 1996. Harrisburg, PA, August 4, 1997. Pennsylvania Power & Light Company Affidavit in Support of PP&L's Petition before the Federal Energy Regulatory Agency, Docket No. ER97-3055-000. Application for Authority to Sell Energy and Capacity at Market-Based Rates. Market power analysis of the Pennsylvania-New Jersey-Maryland Interconnection ("PJM pool") in support of the application to sell electricity at market-based rates. Washington, DC, May 23,1997. Pennsylvania Power & Light Company Prepared Rebuttal Testimony before the Federal Energy Regulatory Commission, Docket No. SC97-1-000. Market price of electric energy and capacity in a competitive environment. The formation of market prices support PP&L's claim for stranded cost relief before the Commission in response to comments by the staff and plaintiffs in this matter. Washington, DC, April 22, 1997. Pennsylvania Power & Light Company Prepared Direct Testimony before the Pennsylvania Public Utility Commission, Docket No. R-00973954, Statement No. 7. Market price and revenue estimates for PP&L and PJM to support the company's stranded cost recovery and corporate restructuring filing in accordance with the State of Pennsylvania, Electricity Generation Customer Choice and Competition Act of 1996. Harrisburg, PA, April 1, 1997. BP America, Inc. Affidavit in Support of BP's Petition before the United States Internal Revenue Service. Tax dispute involving the transfer of North West Shelf net profits royalty interest (NPRI) owned by BP Property Developments Australia (BPPDA) to Standard Oil Company, a subsidiary of BP America. Testimony as to the fair market value of the property. Cambridge, MA, February 28, 1997. BP Exploration (Alaska), Inc. Deposition testimony before the Superior Court for the State of Alaska, Third Judicial District, Anchorage, AK, In the Matter of Prudhoe Bay Unit Litigation, Case No. 3AN-95-8960CI, damages proceeding involving the quantity, quality, and fair market value of the crude oil and the facilities used to produce/transport hydrocarbons from the Prudhoe Bay Unit. Boston, MA, November 19, 1996. Koch Industries, Inc. Deposition testimony before the United States District Court, Eastern District of Oklahoma, In the Matter of Petro Source Partners, Ltd. (plaintiff) vs. Koch Industries, Inc., Koch Gathering Systems, Inc., and Koch Oil Company (defendants), Case No. 95-356-B, antitrust proceeding involving the market for crude oil and gas liquid sales, transportation and trading in Oklahoma, Kansas, and Texas. Oklahoma City, OK, August 28, 1996. Koch Industries, Inc. Affidavit in Support of the Brief of Defendant's Motion for Summary Judgment (with exhibits). Submitted to the United States District Court, Eastern District of Oklahoma, In the Matter of Petro Source Partners, Ltd. (plaintiff) vs. Koch Industries, Inc., Koch Gathering Systems, Inc., and Koch Oil Company (defendants), Case No. 95-356-B. Muskogee, OK, August 23, 1996. BP Exploration (Alaska), Inc. Prepared direct testimony before the State of Alaska, Department of Natural Resources and Department of Revenue, Joint Hearing In the Matter of the Appropriate Reservoir Management for Optimization of Natural Gas Liquids Blending and Utilization; and Economic and Physical Recovery within the Prudhoe Bay Unit. This case involved the valuation and use of hydrocarbon producing properties as well as the valuation of facilities used on the North Slope for transportation and treatment. Anchorage, AK, August 22, 1995. BP Exploration (Alaska), Inc. Prepared direct and rebuttal testimony before the State of Alaska, Alaska Oil and Gas Conservation Commission In the Matter of a Hearing to Review the Plan of Development and Operation and Other Agreements as They Affect Natural Gas Liquid Throughput, Miscible Injectant Utilization and Ultimate Recovery from Prudhoe Bay. Anchorage, AK, May 12, 1995, and June 12, 1995. Northern Natural Gas Company Prepared direct testimony before the Federal Energy Regulatory Commission, Docket No. RP95-185-000, natural gas pipeline rate case, market-based storage. Washington, DC, March 13, 1995. Florida Gas Transmission Company Prepared direct testimony before the Federal Energy Regulatory Commission, Docket No. RP95-103-000, natural gas pipeline rate case, incentive rate-making and market-based rates. Washington, DC, January 10, 1995. Exxon Corporation and Exxon Company USA Deposition testimony before the Superior Court of the State of California for the County of Los Angeles, In the Matter of The People of the State of California and the City of Long Beach vs. Chevron Corporation; Unocal Corporation; Mobil Oil Corporation; Shell California Production; Texaco Inc.; Exxon Corporation; Exxon Company, USA, No. C 587 912. Oil pricing/contract dispute. December 7, 1994. El Paso Natural Gas Company Deposition testimony before the U.S. District Court for the Northern District of California In the Matter of Jonathan C. S. Cox vs. El Paso Natural Gas Company. South Texas producing property, natural gas price/contract dispute matter. November 29, 1994. Mariposa Pipeline Company Testimony before the Superior Court of the State of California for the County of Santa Barbara In the Matter of Mariposa Pipeline Company vs. Gaviota Terminal Company, Case No. 194428. Condemnation proceeding and rate case. Testimony focused on the market value of pipeline and terminal facilities (both marine and on-shore) for heavy crude oil, gas liquids, and emissions recovery plant/equipment in a limited-life producing property. April 18, 1994. Association of Oil Pipelines Testimony before the Federal Energy Regulatory Commission In the Matter of Market-Based Ratemaking for Oil Pipelines, Notice of Inquiry, Docket No. RM94-1-000. Washington, DC, January 25, 1994. ARCO Pipe Line Company and Four Comers Pipe Line Company Testimony before the Federal Energy Regulatory Commission In the Matter of Market-Based Ratemaking for Oil Pipelines, Notice of Inquiry, Docket No. RM94-1-000. Washington, DC, January 24, 1994. Santa Fe Pacific Pipe Line Company Testimony before the Federal Energy Regulatory Commission, Docket No. IS92-39-000. Testimony about the market facing shippers on a southwest U.S. petroleum products pipeline. Washington, DC, May 24, 1993. Buckeye Pipe Line Company, L.P. Testimony before the Federal Energy Regulatory Commission Technical Conference In the Matter of the Interstate Oil Pipe Line Industry, Docket No. OR92-6-000. Washington, DC, April 30, 1992. Williams Pipe Line Company Testimony before the Federal Energy Regulatory Commission In the Matter of Williams Pipe Line Company, Docket No. IS90-21-000, Bifurcated rate case, oil pipeline market power showing, Phase l. Washington, DC, July 1991. ARCO Pipe Line Company Prepared direct testimony before the Federal Energy Regulatory Commission, Docket No. IS90-34-000, Bifurcated rate case, oil pipeline market power showing, Phase I, Washington, DC, February 1991. Amoco Pipe Line Company Prepared direct testimony before the Federal Energy Regulatory Commission, Docket No. IS90-30-000, Bifurcated rate case, Rocky Mountain crude oil pipeline market power showing, Phase I. Washington, DC, August 1990. Hawaiian Electric Company, Inc. Testimony before the Public Utilities Commission of the State of Hawaii on behalf of Hawaiian Electric Company for approval of AES Power Purchase Contract, Docket No. 6177. Honolulu, HI, November 1989. Buckeye Pipe Line Company, L.P. Testimony before the Federal Energy Regulatory Commission, Docket IS87-14-000, Bifurcated rate case, oil pipeline market power showing, Phase I. Washington, DC, October 1988. Sacramento Municipal Utility District Testimony before the Sacramento Municipal Utility District Board In the Matter of the Rancho Seco Nuclear Facility. Sacramento, CA, May 1988. U.S. Senate Testimony before the U.S. Senate Committee on Energy and Natural Resources, Senator Bennett A. Johnson, Chairman, Oversight Hearing on the World Oil Outlook. Washington, DC, March 11, 1987. SELECTED INDUSTRY PROJECTS/PUBLICATIONS Lead economic and industry valuation expert in the hostile takeover attempt by Union Pacific Resources, Inc., of Pennzoil Company. Prepared Valuation of Pennzoil Company for the Chancery Court in Delaware based on proprietary documents provided by Pennzoil through discovery. The report required that all of Pennzoil's operations and plans be modeled and integrated into a valuation by business segment (upstream and downstream) and collectively as enterprise value. November 1997. Senior market strategist on electric industry restructuring for a major investor-owned utility in the northeast. Responsible for directing a team charged with rate design, market analysis, corporate restructuring and strategy. 1994-1996. Senior market strategist to Columbia Gulf Transmission regarding their Gulf Coast corporate, marketing, and regulatory strategy. The proprietary projects included asset acquisition and divestiture, developing alternative marketing opportunities for jurisdictional and non-jurisdictional businesses, rate design, and planned expert testimony. July 1996-July 1997. Senior energy economist to the Single Participating Area (SPA) team for BP Exploration, Inc., formed as a result of Order 360, Alaska Oil and Gas Conservation Commission, September 1995. Team member (on-site) from November 1995 to August 1996. The issues were: the value of the hydrocarbons produced 1995-2030 from the Prudhoe Bay Unit; the market value of the facilities used to treat and transport those hydrocarbons; the probable value of alternative uses for natural gas from the North Slope in the global market; the use of various valuation techniques as applied to the hydrocarbon resources from the PBU; and the impact of oil and gas production on the workforce/economy of Alaska. All work was proprietary and considered highly confidential. Senior energy economist as part of a team advising a major southwestern U.S. investor-owned electric utility regarding strategy and testimony needed to support a petition against the merger of competing firms. The work considered competitive conditions throughout Texas, Oklahoma, New Mexico, and Louisiana as well as interconnects with Mexico. 1994-1995. "The Relationship Between Fuel Oil and Natural Gas Prices in the 1990's," proprietary client report that examined the statistical relationships that are embedded in the way oil and gas prices move together. The objective was to provide a risk management tool to the client to use when hedging exposure to oil price changes linked to gas procurement contracts. 1993. "An Assessment of Competition: Amoco Pipe Line Company's Rocky Mountain Crude Oil System," prepared by AUS Consultants. March 1992. "Optimizing Capital Expenditures and Trucking Penalties Among Terminals in the Combined Sun/Atlantic System," proprietary study prepared for Sun Oil Company in cooperation with Sun/Atlantic Pipe Line Companies. July 1990. "Competition in the Atlantic Pipe Line Company Market: Theory and Evidence of the Battle for Transportation Services," proprietary study prepared for Sun/Atlantic Pipe Line Company. April 1990. "Competition in the Williams Pipe Line Company Market: Theory and Evidence of the Battle for Transportation Services" (2 volumes), proprietary study prepared for Williams Pipe Line Company. February 1990. "The Competitive Environment Faced by Sun Pipe Line Company's FERC-Regulated Crude Oil System," (2 volumes), proprietary study prepared for Senior Management of the Sun Pipe Line Company. November 1989. "Sun Pipe Line Company Market Analysis of the Eastern Products System, 1985-1988," proprietary study prepared for Sun Pipe Line Company. July 1989. "An Analysis of Refined Product Use in Buckeye Pipe Line Company, L.P. Market Areas: 1989-1994," proprietary study prepared for the Senior Management of Buckeye. June 1989. "Market Analysis of Ohio and Indiana for Refined Petroleum Product Pipelines", proprietary study prepared for Buckeye Pipe Line Company, L.P. June 1989. "Standing on the Brink: The North American Natural Gas Market," published by Chase Econometrics. Detailed analysis of the prospects of gas producers, distributors, IPP's/co-gen and transmission companies in the rapidly unfolding environment of deregulated markets. 1988. "Power Wheeling in North America," published by Chase Econometrics. The first market analyst of its kind, showing the detailed quantitative effects of open access in North America. The work covered all NERC regions including Canada. 1988. "Natural Gas Procurement: Supply Options and Solutions" (with Matt Dutzman), produced for several pipelines and utilities. Complete analysis of the natural gas industry's evolving market. The study included the role of brokers, IPP's, co-gen plus several scenarios regarding the evolving relationship between gas buyers and sellers. 1988. "The Impact of a Gasoline Tax," proprietary study prepared for Mobil Oil Corporation. This widely quoted study demonstrated the impact of either a 25 or 50 cent per gallon gas tax on the auto, gasoline and labor markets. 1987. "China's Energy Supply/Demand Balance," proprietary study prepared for the Atlantic Richfield Company. Demonstrated that China could remain an important exporter of energy if it instituted certain measures to conserve domestic demand during the 1990s. 1987. "U.S. Oil and Gas Drillings: Beyond the Current Crisis," published by WEFA, demonstrated why drilling activity could sink toward 1,000 active rigs before recovering in the 1990s. January 1987. "The Next Oil Shock," published by Chase Econometrics (2 volumes). Complete global analysis of the prospects for much higher oil and gas prices by 1992 once energy consuming-countries become increasingly dependent on oil from countries in politically unstable regions or those nations hostile to the United States. 1986. "Oil and Natural Gas Supply/Demand Balances" (Oil and Gas Market Trends Team Member), National Petroleum Council, Washington, DC. 1986. PUBLICATIONS AND RESEARCH "Regulatory Reform and the Economics of Contract Confidentiality: The Example of Natural Gas Pipelines" (with J. Kalt, A. Jaffe, and F. Felder), Regulation, No. 1, 1996. "Natural Gas Pipelines: Roadmap to Reform" (with F. Felder), Public Utilities Fortnightly, April 1, 1995. "Focusing In On Futures and Options" (with F. Felder), Electric Perspectives, Edison Electric Institute, January/February 1995. "Using Derivatives in Real Decision Making" (with F. Felder), Public Utilities Fortnightly, October 15, 1994. "OCTG Markets are Hammered by Natural Gas," Center Lines, Cleveland, OH, January 1992. "Least-Cost Planning for Investor-Owned Natural Gas Distribution Companies: What's Needed and What's Not" (with G. Schink), City Gate Magazine, Pennsylvania Gas Association, Harrisburg, PA, June 1989. "Oil and Natural Gas Markets: Change is on the Way," Chemical Marketing & Management, Vol. 2, No. 4, summer 1987. "Energy Resources and the Global Marketplace," The Canadian Mining and Metallurgical Bulletin, spring 1987. "OPEC May Stumble, But It Won't Fall," The New York Times, February 8, 1987. "Forecasting Oil Prices to 1995," Hydrocarbon Processing, Vol. 66, No. 8, August 1987. "Negotiating China's Energy Future," East Asian Executive Reports, Vol. 8, No. 4, April 1986. "Multiple Scenario Planning in an Uncertain Oil and Gas Market," Journal of Business Forecasting, Vol. 4, No. 3, 1986. "Exchange Rate Movements and Oil Demand," in M. Wionczek, ed., Strategic Planning in the Oil and Gas Industry, Westview Press, 1985. "Political Instability and Foreign Direct Investments: The Motor Vehicle Industry, 1948-65" (with K. Bollen), Social Forces, Vol. 60, No. 4, June 1982. "A Perspective on the Cost of Energy Technologies," SAE Transactions, Spring 1982. "Political Instability's Impact on Output: Motor Vehicles Production in Argentina, Brazil, and Mexico" (with K. Bollen), Studies in Comparative International Development, Vol. 17, No. 4, 1982. "Aluminum Markets and Supply Elasticity," Light Metals Age, May 1981. PUBLICATIONS IN PROCEEDINGS "Twenty Years Is a Long Time: Tomorrow's Oil & Gas Market with Lessons from the Past," in 20th Annual Petrochemical Review, DeWitt & Company, Houston, TX, pp. A-1 to A-18, March 22, 1995. "Fuel-Switching Between Distillates and Natural Gas: The Search for a New Rule of Thumb," in The World Oil & Gas Industries in the 21st Century, Proceedings from the 16th Annual North American Conference, International Association of Energy Economists, Dallas, TX, November 9, 1994. "The Energy Market Outlook: Costs Going Down and Reliability Improving," in Forecast '94, Steel Service Center Institute, Chicago, IL, September 27, 1993. "Good News for the Petrochemicals: Will the Energy Market Play Along?" in 1993 Petrochemical Review, DeWitt & Company, Houston, TX, pp. 1-16, March, 1993. "New Age Energy Markets," in 1992 Petrochemical Review, DeWitt & Company, Houston, TX, pp. 1-21, March 1992. "Oil & Gas Market Outlook: Opportunities for New Mexico Producers, 1990-95," in Proceedings: Oil and Gas '91, Robert O. Anderson School of Business, University of New Mexico, February 13, 1991. "Clearing Away the Fog: A Look at Oil and Gas in the 1990s," in 1990 Petrochemical Review, DeWitt & Company, Houston, TX, pp. 1-16, March 1990. "Time to Get on With the Job at Hand," in Forward to the Nineties, The Alliance, Anchorage, AK, pp. 1-15, January 1990. "Energy Markets: Have Petrochemical Producers Found a Safe Haven or Just the Eye of the Storm?" in 1989 Petrochemical Review, DeWitt & Company, pp. 1-16, March 1989. "Alaska-On the Threshold of a Dream," in Proceedings from Meet Alaska, 1989, The Alliance, pp. 1-9, January 1989. "Crude Oil Outlook," in 1988 Petrochemical Review, DeWitt & Company, Houston, TX, pp. 1-20, March 1988. "Oil and Natural Gas Markets: Change is on the Way," in Review and Forecast: Prospects for Profitability, The Chemical Marketing Research Association, pp. 174-179, May 1987. "Petroleum Product Market in Transition," in Proceedings, National Petroleum Refiners Association, San Antonio, TX, pp. 15-25, April 1987. "Low World Crude Oil Price - How Long Do We Have?", in 1987 Petrochemical Review, DeWitt & Company, Houston, TX, pp. 1-15, April 1987. OTHER PROFESSIONAL ACTIVITIES Invited Speaker (Partial Listing) American Association of Energy Economics, American Gas Association, American Petroleum Institute, Association of Oil Pipelines, Canadian Energy Research Institute, Canadian Petroleum Association, Central Electricity Generating Board of the U.K., DeWitt Petrochemical, Gas Daily and Gas Buyer's Guide, Georgia Mining Association, Independent Petroleum Association of Canada, International Association of Energy Economists, Institute of Gas Technology, National Association of Business Economists, National Petroleum Council Oil Daily, Society of Gas Operators, Society of Rate of Return Analysis, State of North Dakota, State of Texas, Steel Service Center Institute, Transportation Research Board, U.S. Association of Energy Economists, University of New Mexico, University of Southern California University of Texas (Arlington) Directorships and Advisory Committees COHO Resources, Inc., Dallas, TX. Director, 1990-93 (an oil and gas exploration and production company) Remuda Corporation, Denver, CO. Advisory Committee, 1991 - present (a natural gas exploration, production and marketing company) Professional Associations and Certifications Petroleum Economics & Management Program, Northwestern University International Association of Energy Economists National Association of Business Economists American Economic Association [Exhibit STJ-2 - Map of Penn Fuel and PP&L Service Territories Omitted] [Exhibit STJ-3 - Map of Gas Storage and Selected Interstate Pipeline Alternatives Omitted] [Exhibit STJ-4 - Map of Selected Alternatives to Penn Fuel's Gas Sales Omitted] STATEMENT PTC-1 DIRECT TESTIMONY OF PAUL T. CHAMPAGNE Application of Pennsylvania Power & Light Company, PFG Gas, Inc. and North Penn Gas Company; Docket Nos.: A-120650F00006, A-122050F00003 DECEMBER 22, 1997 Q. Please state your full name and business address. A. My name is Paul T. Champagne, and my business address is Suite 400,11350 Random Hills Road, Fairfax, Virginia 22020. Q. By whom are you employed and in what capacity? A. I am Vice President for Business Development of PP&L Global, Inc. a which is a wholly-owned subsidiary of PP&L Resources, Inc. ("PP&L Resources"). Q. Please summarize your educational background and experience related to your testimony in this proceeding. A. In 1981, I was awarded a Bachelor's Degree in Chemical Engineering from the University of Illinois. From 1981 to 1983, I took graduate courses in Mechanical Engineering at the University of Illinois. From 1983 through 1988, I served as a research engineer for the Research Triangle Institute at Research Triangle Park, North Carolina. From 1989 through 1994, I served as Business Developer and Regional Manager for Business Development for the Edison Mission Energy Company, which is a wholly-owned subsidiary of Edison International. Edison Mission Energy Company specializes in the development and acquisition of domestic and international power projects. In 1995, I joined PP&L Global, Inc. as Vice President for Business Development. Q. Explain your responsibilities with regard to the proposed acquisition by PP&L Resources, Inc. of Penn Fuel Gas, Inc. ("Penn Fuel"). A. I participated in the review of Penn Fuel on behalf of PP&L Resources that led to its decision to offer to purchase the stock of Penn Fuel. Q. Are you familiar with the testimony of John J. Hilyard, Jr. in this proceeding? A. Yes, I am. He has summarized many of the efficiencies and service enhancements that Penn Fuel's utility subsidiaries, PFG Gas, Inc. ("PFG") and North Penn Gas Company ("North Penn") will experience as a result of the acquisition by PP&L. Q. Will these efficiencies benefit PFG and North Penn customers? A. Yes. As a result of efficiencies arising from the acquisition, PFG's and North Penn's future rates will undoubtedly be lower than they would have been if Penn Fuel and its subsidiaries continued to exist independently of PP&L Resources. Q. Do you anticipate immediate rate reductions as a result of the merger? A. We cannot predict immediate rate reductions for PFG and North Penn customers. The efficiencies discussed in Mr. Hilyard's testimony will be implemented over a period of years. Whether other increases in costs will offset these efficiencies during the transition period cannot be predicted with certainty. Further, it is generally anticipated that gas supply will be unbundled from the transportation service provided by local distribution companies in the near future. When similar legislation was enacted concerning electric generation in the Electricity Generation Customer Choice and Competition Act, a price cap was imposed on the electric distribution companies, such as PP&L. It remains uncertain whether such a price cap will be enacted as part of gas supply deregulation. Because we are not certain what form of rate regulation will be in effect for gas distribution companies in the near future, we cannot make any definitive statements concerning rate reductions. Q. Under ownership by PP&L Resources will PFG and North Penn continue to be able to provide safe and reliable service? A. Absolutely. PP&L Resources will not take any action that will limit PFG's or North Penn's ability to provide safe and reliable service. PFG's and Penn Fuel's technical expertise to design, construct and maintain its gas distribution systems will not be altered in any manner that reduces its ability to offer safe and reliable service. Q. Will PP&L itself receive any benefits from the acquisition? A. Yes, it will. As PFG's and North Penn's systems are integrated into PP&L, the fixed costs of certain of PP&L's systems, such as the billing system and the information system, will be spread over a larger customer base, thereby reducing the cost per unit of these systems. In addition, there are potential marketing opportunities which may produce benefits in the future, depending upon the manner in which competitive markets for electric generation and natural gas supplies develop. PP&L will be able to offer customers a range of energy options backed up by extensive experience in both electric and gas industries. The presence of the PP&L corporate system in new territory may provide opportunities for PP&L to market electric generation beyond its resent service territory. Further, PP&L may be able to assist PFG and North Penn to market gas service within their present service territories or within the service territory of PP&L. Q. Are any other opportunities presented by the acquisition? A. Yes. As a provider of both electric and natural gas services, the PP&L corporate system will have an increased opportunity to provide "behind the meter" consulting services to customers, particularly those who use substantial amounts of energy, to obtain the benefits of energy management systems. Q. Will PP&L be able to reduce its rates as a result of the acquisition? A. No. As I explained previously, most of the efficiencies arising from the acquisition will arise from the integration of Penn Fuel systems into PP&L systems. Therefore, most of the efficiencies will inure most directly to PFG and North Penn. Further, in terms of total number of customers, the acquisition of Penn Fuel by PP&L Resources, Inc. does not represent a major expansion. The PP&L corporate system will be expanding its number of utility customers by only about 6%, including gas service customers of Penn Fuel that are already electric service customers of PP&L. One cannot expect substantial economies of scale from such a small increase in the total number of customers. Another consideration that must be noted is that PP&L is already subject to a rate cap under the Electricity Generation Customer Choice and Competition Act. The opportunities and the economies rising from the acquisition of Penn Fuel by PP&L Resources may make the existing rate cap for PP&L somewhat more manageable. Q. Do you have anything further at this time? A. No, I do not. STATEMENT JJH-1 DIRECT TESTIMONY OF JOHN J. HILYARD, JR. Application of Pennsylvania Power & Light Company, PFG Gas, Inc. and North Penn Gas Company; Docket Nos.: A-120650F00006, A-122050F00003 DECEMBER 22, 1997 Q. Please state your name and business address. A. My name is John J. Hilyard, Jr. My business address is 55 South Third Street, Oxford, Pennsylvania 19363. Q. By whom are you employed and in what capacity? A. I am the Manager of Rates and of Major Customer Services for Penn Fuel Gas, Inc. ("Penn Fuel") and its utility subsidiaries including PFG Gas, Inc. ("PFG") and North Penn Gas Company ("North Penn"). Q. Please describe your educational background and business experience. A. I have a Bachelor's Degree in Accounting from the University of Pennsylvania. While attending the University of Pennsylvania, I interned with Main Lafrentz & Co., Certified Public Accountants, and served as a member of its audit staff. After graduating, I joined Penn Fuel as an Accountant/Rate Analyst. My duties and responsibilities have included preparation of statistical and financial data required for the utility subsidiaries of Penn Fuel. In 1993, I was appointed to the position of Manager of Rates, and earlier in 1997, I was appointed to the additional position of Manager of Major Customer Services. Q. Have you testified previously before any regulatory agencies? A. Yes, I have testified previously in behalf of utility subsidiaries and associated companies of Penn Fuel before the Delaware Public Service Commission, Maryland Public Service Commission and the Pennsylvania Public Utility Commission ("Commission"). Q. Are you familiar with PP&L/Penn Fuel Exhibit No. 1, the application for certificates of public convenience evidencing the Commission's approval of the acquisition, which was filed on August 7, 1997? A. Yes, I am. Q. Are the portions of the application providing information concerning Penn Fuel, PFG Gas, Inc. and North Penn Gas Company true and correct to the best of your knowledge, information and belief? A. Yes, they are. Q. Please describe generally the operations of Penn Fuel Gas, Inc. and its subsidiaries. A. Penn Fuel is a holding company under the Public Utility Holding Company Act. Penn Fuel's corporate headquarters, which also serve as the corporate headquarters of its two utility subsidiaries, are located in Oxford, Chester County, Pennsylvania. In addition to owning public utility subsidiaries, Penn Fuel sells propane to approximately 28,000 customers. PFG provides gas sales and transportation service in portions of 27 counties in Pennsylvania and in a small portion of northern Maryland. PFG owns and operates numerous local gas distribution systems that are dispersed throughout southern, central and eastern Pennsylvania. Each local distribution system is interconnected with one of the following interstate pipeline companies: Texas Eastern Transmission Corporation, Transcontinental Gas Pipeline Company or Columbia Gas Transmission Corporation. With the exception of a small volume of locally-produced gas, all gas sold to or transported by PFG to its customers is delivered to PFG by one of these three interstate pipeline companies. The local gas distribution systems now owned and operated by PFG were acquired directly or indirectly by Penn Fuel from 1945 through 1970. At the time of acquisition, each local distribution system was owned by a separate corporation. Initially, Penn Fuel preserved the corporate separateness of the owners of the local distribution systems. As a result of the acquisitions, Penn Fuel owned 25 different gas distribution subsidiaries, each maintaining its own set of rates. In the 1970's, Penn Fuel undertook an initial simplification of its corporate structure by a series of mergers. As a result of these mergers, the 25 operating companies were merged into seven public utility corporations.(1) These seven public utility corporations were merged on December 31, 1994, to form PFG. As of June 30, 1997, PFG provided gas service to 35,518 customers in Pennsylvania. - ------------- 1 Allied Gas Company, Central Penn Gas Company, Counties Gas Company, Interboro Gas Company, Lewistown Gas Company, South Penn Gas Company, and Union Gas Company. Q. Summarize the operations of North Penn. A. North Penn owns and operates two gas distribution systems, the larger one is in north central Pennsylvania, and the smaller one is in northwestern Pennsylvania. North Penn provides gas sales, transportation and storage service in 10 counties in northern and northwestern Pennsylvania. North Penn produces a small portion of its gas supplies and purchases a small volume of locally-produced gas. Most gas supplies sold by North Penn or transported by North Penn to its customers are received from Tennessee Gas Pipeline Company or from CNG Transmission Corporation, both interstate pipeline companies. As of June 30, 1997, North Penn provided gas service to 34,544 customers in Pennsylvania. In addition to sales and transportation service, North Penn provides storage service to on-system and off-system customers, and North Penn provides sales for resale service to a small local distribution company, Clarion River Gas Co., and to an isolated portion of the system of New York State Electric & Gas Company. Q. Will the acquisition of Penn Fuel by PP&L provide any benefits to customers of PFG and North Penn? A. Yes. There will be benefits to PFG's and North Penn's customers. Q. Can you provide some examples of benefits of the acquisition? A. Yes, I can. One example is that, in the future, Penn Fuel will be able to raise new capital as part of the PP&L corporate system. PP&L Resources' stock is publicly traded on the New York Stock Exchange and its long-term debt is rated A2 by Moody's and A- by Standard & Poor's ("S&P"). PP&L Resources is included in the S&P 500 composite index and the S&P public utilities. PP&L Resources is well-known in financial markets. Penn Fuel, in contrast, since its inception has been a family-owned business. Therefore, Penn Fuel has never made a public stock offering. Penn Fuel's ability to raise equity capital has been limited to retention of earnings. Similarly, Penn Fuel and its subsidiaries have not issued debt to the public. Instead, in the past, Penn Fuel has raised debt capital through private placements, generally with insurance companies. Penn Fuel and North Penn have a "2" designation from the National Association of Insurance Commissioners. This designation corresponds generally to a BBB bond rating, which is the lowest investment grade bond rating. In the future, as part of the PP&L corporate system, Penn Fuel and its subsidiaries should be able to raise capital at a lower cost rate and under more favorable terms and conditions than they could on their own. Q. Can you provide any other examples of benefits to Penn Fuel and its customers of the acquisition? A. Yes. Retail electricity markets in Pennsylvania are now in the process of being opened to competition. PP&L's restructuring proceeding under the Electricity Generation Customer Choice and Competition Act, 66 Pa.C.S. Ch. 28, is pending at this time. PP&L's pilot program is under way, and it is expected that PP&L, and the other Pennsylvania electric distribution companies, will open substantial portions of their retail electricity markets to competition commencing in 1999. PP&L is and has been a leader in the move toward the opening of electric energy markets to competition. It is anticipated that gas markets will be opened fully to competition in the near future. Bills are pending in the Pennsylvania House of Representatives and in the Senate that would require complete opening of the natural gas supply market to competition, much as the Electricity Generation Customer Choice and Competition Act, 66 Pa.C.S. Ch. 28, opened electric generation to competition. As a result of the acquisition, Penn Fuel will have available to it the benefit of PP&L's experience in dealing with the issues arising from the opening of residential energy markets to competition. This experience should facilitate a smooth transition to a competitive gas supply market for the benefit of customers. Q. Does the acquisition present opportunities for Penn Fuel to improve its gas acquisition procedures? A. Yes, it does. The combined acquisition of gas for PP&L and Penn Fuel may enable the combined entity to buy natural gas on terms more favorable than either could obtain alone, thereby benefitting customers of PP&L as well as customers of PFG and North Penn. Further, Penn Fuel has not made substantial utilization of financial instruments to stabilize gas costs. It is my understanding that PP&L, in contrast, has substantial experience in energy-related financial instruments, such as collars, which are designed to reduce volatility of prices paid for energy. Such financial instruments are available for both natural gas and electricity and are generally similar in nature. Following the acquisition, Penn Fuel will have the benefit of PP&L's expertise with these financial instruments, which may provide opportunities to reduce the volatility of amounts paid by Penn Fuel for natural gas, which in turn may reduce the volatility of prices paid by its customers for natural gas. Q. Would any improvements in service or efficiencies result from the acquisition? A. Yes. Penn Fuel's operations, commencing in the portion of its service territories that overlap PP&L's service territory, would be consolidated over time into PP&L's operations. Such consolidation would have many benefits. Penn Fuel's after-hour answering services would be eliminated, and those operations would be consolidated into PP&L's 24-hour call center which has modern and sophisticated communication systems and computerized identification of the most efficient approach to dispatching crews to a site where assistance is needed. Further, if there were a wide-spread problem in Penn Fuel's system, Penn Fuel would have access to additional personnel from PP&L to address the situation as needed. Penn Fuel's present after-hours system, in contrast, is simply an answering service that has a list of numbers of employees to be called out in response to incoming reports of problems. The consolidation of Penn Fuel's answering services into PP&L's modern, centralized 24-hour call center will improve service and create efficiencies. Q. Will Penn Fuel be able to achieve any other efficiencies as a result of the acquisition? A. Yes, it will. Penn Fuel's own facilities for billing customers will be eliminated, and bills for service furnished by Penn Fuel and its subsidiaries will be prepared by PP&L. Further, to the extent that Penn Fuel and PP&L have overlapping service territories, meter reading will be consolidated. Thereafter, only one premises visit to a customer receiving both gas and electric service will be required to obtain data for preparing bills for both services. Another example of an area in which efficiencies will be achievable is construction. When gas lines and electric lines are being extended into the same area, it will be much easier to coordinate supervision and inspection of such gas and electric projects by a single employee. It is anticipated also that certain operation centers will be consolidated, particularly in the geographic areas where Penn Fuel's operations overlap those of PP&L. Reducing the number of operation center buildings will reduce the expenses associated with maintenance of such buildings. Another example of areas in which efficiencies can be achieved is that, following the acquisition, Penn Fuel will no longer maintain an independent board of directors. Costs of maintaining a separate, independent board of directors for Penn Fuel will be eliminated. Another area in which there are potential savings from consolidation include information and communication systems. Penn Fuel's separate computer and information systems will be eliminated, and such services will be provided on a consolidated basis by PP&L. Q. Do you have anything further at this time? A. No, I do not. EX-99 6 EXHIBIT G-3 Exhibit G-3 _________________ The Path Ahead... _________________ Choices Penn Fuel Gas, Inc. 1996 Annual Report [Map of Propane District Office and Gas Utility Service Area Omitted] Penn Fuel Gas, Inc. Penn Fuel Gas, Inc. is an Oxford, Pennsylvania based holding company which through its natural gas utility subsidiaries provides services to approximately 70,900 customers located in over half the counties of Pennsylvania. Additionally, the Company engages a natural gas storage, transportation and merchandise services. Penn Fuel Gas also provides propane gas service to approximately 28,000 customers in Pennsylvania and Maryland. Highlights Letter to Shareholders Management's Discussion and Analysis Independent Auditors' Report Financial Statements Summary of Financial Data Operating Statistics Board of Directors 1996 Highlights % Change 1996 1995 1996 v. 1995 ------------------------------------------------------------------- Operating Revenues thousands $113,507 $105,647 7.4 Net Income thousands $ 7,394 $ 6,077 21.7 Net Income Applicable to $ 6,389 $ 5,072 26.0 Common Stock thousands Earnings per Common Share $ 8.90 $ 7.07 $ 26.0 Dividends per Preferred Share $ 1.40 $ 1.40 -- Dividends per Common Share $ 2.40 $ 2.00 20.0 Total Assets thousands $196,465 $184,277 6.6 Stockholders' Equity per $ 93.01 $ 86.51 7.5 Common Share Gas Throughput -- Dekatherms 27,616 27,518 0.2 thousands Number of Customers 98,907 98,256 0.7 ---------------------------------------------------------------- 1993 1994 1995 1996 -------------------------------------------------------- Net Income 5,305 5,705 6,077 7,394 ($ in thousands) Earnings Per 5.99 6.55 7.07 8.90 Common Share ($) Stockholders' Equity 74.89 81.44 86.51 93.01 Per Common Share ($) -------------------------------------------------------- Graph from original converted to table format. [Photograph of Terry H. Hunt and Paul W. Ware omitted] To Our Shareholders Penn Fuel Gas enjoyed a successful year in 1996 with significant improvements in earnings and return on shareholders' equity, operating efficiencies, and utility rates. The Company also assumed a leadership role in the management of its environmental responsibilities. A number of these accomplishments are highlighted below and throughout this report. HIGHLIGHTS (X) Penn Fuel's 1996 net income available to common shareholders was $6,389 million or $8.90 per share, a 26% increase from the $5,072 million or $7.07 reported in 1995. (X) In early 1996 Penn Fuel increased its common stock dividend by 20% to $2.40 per share on an annual basis. In February 1997, the Board of Directors approved an additional 20% common dividend increase to $2.88 per share on an annual basis. (X) Common shareholders' equity per share increased to $93.01 in 1996, a 7.5% increase from 1995. This increased equity, together with the improved net income, are indicative of increased value and financial strength of Penn Fuel. (X) In October 1996 the Pennsylvania Public Utility Commission approved an increase in Penn Fuel's utility subsidiary rates of $6.725 million. The full year impact of these higher rates will be reflected in 1997. (X) In March 1996 Penn Fuel and the Pennsylvania Department of Environmental Protection executed a Consent Agreement under which Penn Fuel will investigate and clean up, as necessary, twenty former manufactured gas plant sites. This agreement is the first of its kind among Pennsylvania gas companies and will permit the Company to responsibly manage our environmental obligations in our customers' interests. THE PATH AHEAD We are proud of your Company's achievements and continue to be appreciative of the confidence you maintain in Penn Fuel's development. The energy industry landscape is dramatically changing, however, and we must build on the foundation of past achievements as the Company embarks on the path ahead that best serves its shareholders and customers. This path will be marked for the first time with Choice. Gas and electric utility customers will have the choices of energy supplier, service, and pricing. Choices will also be required as Penn Fuel steers through the challenges and opportunities of an increasingly deregulated energy environment. The Commonwealth of Pennsylvania took a national leadership role in the deregulation of the electric utility industry with the passage of unbundling legislation in 1996. Over the next several years, industrial, commercial, and residential customers alike will have the opportunity to choose their electricity supplier under terms and pricing that suits their individual needs. The responsibility for delivery of the electric power to consumers will continue to rest with electric utilities under regulated terms. Similar unbundling and customer choice initiatives are progressing in the natural gas business. Large volume customers have had the right, for some time, to choose their natural gas supplier. Legislation was recently introduced in Pennsylvania, however, that would fully unbundle all natural gas services, deregulate the sale of the natural gas commodity, and mandate choice of natural gas supplier for all residential and small commercial customers by the end of this decade. We welcome the prospect of customer choice and the competitive opportunity it brings. Penn Fuel is a viable and aggressive participant in the unbundled energy environment. We expect that the electric and natural gas industries will evolve from fully regulated to largely competitive in a transition parallel to the deregulation of banking and telecommunications. Utilities are responding to competition like participants in those industries: 1) With a greater focus on cost cutting and efficiency measures to lower the cost of providing energy delivery and customer services; 2) Through alliances and combinations to generate economics of scale; and, 3) Through the creation of menus of total energy services and products. -------------------------- 1993 1994 1995 1996 --------------------------------------------- Earnings Per Common Share($) 5.99 6.55 7.07 8.90 --------------------------------------------- Graph from original converted to table format. PENN FUEL INITIATIVES As we explore business opportunities available in a deregulated energy environment, Penn Fuel must retain its focus on the critical success factors in our primary businesses -- customer relations; efficient and cost effective operations; and appropriate recovery of costs through rates. Penn Fuel has earned a solid reputation for providing reliable service that is community and customer oriented. Your Company works hard to maintain those good relations -- regardless of customer size -- and expects that these close connections will be an asset in an expanded energy service market. In an increasingly competitive environment, Penn Fuel continues to manage business costs, looking for efficiencies without jeopardizing the service reliability our customers expect. Expanded training programs are enhancing the skills of our operating and service personnel and providing more flexibility for operations support. We are also seeking further improvements in the Company's award winning safety program and accident prevention records. We expect to continue growing Penn Fuel's earnings through a combination of rates improvements, operating efficiencies, and expansion. While price competition is new to the utility industry, Penn Fuel is already experienced because of its unregulated propane business. We look forward to the new competitive arena of customer choice with the confidence that we have the people and capabilities to be an effective market participant. Marketing of additional natural gas and propane applications to existing Penn Fuel customers and an aggressive program of customer expansion are integral parts of a marketing strategy for the Company. We are also dramatically expanding our trade ally relationships with local contractors and other energy companies to build a network of service and sales capabilities and to foster customer growth. The transition to a full customer choice environment will introduce a new set of challenges for Penn Fuel to develop enhanced customer services and billing systems, and to optimize the Company's gas supply and pipeline capacities needed for the new utility business environment. Penn Fuel has an outstanding team of gas supply professionals to facilitate this transition and to develop opportunities for adding value from the Company's gas storage capabilities. Finally, as we evaluate choices for business expansion, we will be assessing opportunities for alliances or other relationships that can expand energy service offerings for our customers and provide additional growth. We fully understand that Penn Fuel, itself, has finite capabilities for developing a full service energy presence. Our challenge will be to focus on areas where we can bring key success ingredients from our own expertise and select partners who bring complimentary abilities. We look forward to the new competitive arena of customer choice with the confidence that we have the people and capabilities to be an effective market participant. The directors, management, and employees of Penn Fuel appreciate your continued support of your Company's successful growth. Paul W. Ware Terry H. Hunt Chairman President and Chief Executive Officer Management's Discussion and Analysis RESULTS OF OPERATIONS Net income and earnings per common share were $6,389,000 and $8.90, respectively, for 1996 compared to $5,072,000 and $7.07 for 1995. Net income for 1995 includes $378,000, equivalent to $.53 per common share from the cumulative effect, net of tax, on prior years of a change in accounting principle. The increase in net income is the result of several factors. Gross utility margin, defined as operating revenues less cost of gas increased $4,406,000 (8.8%) in 1996. The full benefit of a rate increase approved by the Pennsylvania Public Utility Commission (PUC) in 1995 is included in 1996 revenues as is part of the benefit of a rate increase approved in October 1996. Utility throughput in 1996 was almost the same as in 1995 as deliveries to sales customers increased 492,000 Dth (3.6%), and throughput to transportation customers decreased 405,000 Dth (3.1%). Sales to Liquefied Petroleum (LP) customers were almost the same at 841,000 Dth in 1996 compared to 830,000 Dth in 1995. The gross margin on LP sales increased $240,000 (3.6%) in 1996. Degree days in 1996 were 2.7% above normal while degree days in 1995 were 2.3% below normal. Also included in 1996 net income is $868,000 ($1.21 per share) representing the current tax benefits of a change in tax accounting method approved by the Internal Revenue Service during the year and $115,000 ($.16 per share) from the sale of real estate no longer used in operations. 1995 net income included $567,000 ($.79 per share) from the sale of assets by a subsidiary that accounted for all the Company's LP and merchandise sales in Delaware. Operating revenues increased $7,860,000 to $113,507,000 in 1996. Utility operations accounted for $6,706,000 of the increase. Several factors, including the impact of rate case proceedings settled in 1996 and 1995, higher sales volumes and the recovery of purchased gas costs that were higher in 1996 than 1995 contributed to the increase in revenues. 1996 utility operating revenues include the increase in rates approved in September 1995 by the PUC. The rates were designed to provide $2,247,000 of additional annual revenues. Also included in 1996 utility operating revenues is a partial year's benefit of a rate increase approved by the PUC in October 1996. The new rates were designed to provide $6,725,000 of increased annual revenues. Utility throughput in 1996 was virtually the same as in 1995: 26,775,000 Dth versus 26,688,000 Dth. However, there was a change in the mix of sales and transportation volumes which has an effect on operating revenues. Rates charged to sales customers include a component to recover the cost of gas purchased by the Company for resale to its customers. Rates charged for transportation service do not include an amount to recover the cost of gas delivered because the transportation customer has purchased the commodity from a supplier other than the Company. The gross margin the Company earns on sales and transportation service is generally the same for the same type of customer, but the operating revenue generated by the two services will differ even if the volume is the same because the recovery of gas costs is included in rates charged to sales customers. LP operating revenues increased $1,285,000 in 1996 while sales on a Dth basis remained essentially unchanged: 841,000 Dth in 1996 and 830,000 Dth in 1995. In 1996 the Company was able to recover higher product costs through increased selling prices and improve its gross margin by $240,000 (3.6%). Other operating, administrative and general and maintenance expenses increased $1,146,000 (3.5%)in 1996. During the year the Company began a program to inspect the condition of a major transmission line that is part of its pipeline system. The program will continue into 1997. To date, no significant anomalies have been identified through the program. The cost of the program and resulting repairs have been charged to expense in 1996. Legal expense was higher in 1996 primarily because of the costs incurred to oppose an application by another Company with the Federal Energy Regulatory Commission to develop salt dome storage in the same area as the Company's existing underground storage facilities. Other factors contributing to the increase in expense are higher payroll costs and uncollectible accounts expense. Expense reductions in 1996 included a $343,000 pension expense credit. The credit resulted from discontinuing an investment contract with an insurance company, funding outstanding guaranteed annuities under the contract and placing the balance of the assets from the contract with an investment manager. Also in 1996 the Company implemented a new purchasing and inventory control system. As part of the implementation of the new system, the Company expanded its definition of inventoriable items, redesigned its part numbers and took a physical inventory. The cost of items included in the physical inventory net of reserves for loss contingencies resulted in a $141,000 reduction in 1996 expense. Depreciation and amortization expense increased $705,000 (12.7%) in 1996. Higher amortization of capitalized environmental costs accounted for $283,000 of the increase. Depreciation of investment in property, plant and equipment increased $422,000 in 1996. Current and deferred income tax expense in 1996 include the impact of a change in tax accounting method for cost of removal. In 1996 the Company received approval from the Internal Revenue Service (IRS) to deduct cost of removal from taxable income beginning with the 1994 tax year. The approval applied to the deduction of applicable costs incurred in 1994 and subsequent years and to costs incurred by the Company prior to 1994 (accumulated costs). The accumulated costs are deductible pro rate over a six year period also beginning with the 1994 tax year. Approval to begin deducting costs of removal created timing differences or current tax benefits depending on the vintage of the assets the costs related to, and the principles followed for recognizing differences between book and tax at the time. The combination of deferred taxes and current tax benefits recognized in 1996 as a result of the approval to deduct cost of removal reduced the year's tax expense $868,000. Interest expense for 1996 was $369,000 (7.8%) lower compared to 1995 expense. Lower interest costs resulting from reductions in long-term debt through required and optional prepayments more than offset interest incurred through higher levels of borrowings under the Company's lines of credit. In addition, interest costs related to the over collection of purchased gas and transition costs were lower in 1996 because these amounts were refunded to customers during the year. A decrease in interest income from temporary cash investments was approximately offset by the amount of interest received from the settlement of prior years income tax issues. Other expense (income) in 1996 includes $193,000 of pre-tax gain on the sale of real estate. In 1995 certain assets of an LP subsidiary located in Delaware were sold and a pre-tax gain of $945,000 was recognized as other income. The real estate sold in 1996 was previously used in the Delaware LP business. LIQUIDITY AND CAPITAL RESOURCES The Company's natural gas and LP business are both seasonal in nature and weather sensitive. The heating season of November through March is the Company's highest period of cash flow. However, cash requirements for capital expenditures and the acquisition of gas for storage are highest during the spring and fall of the year. Bank lines of credit are used to meet the Company's seasonal working capital requirements and as a source of under for its capital investment program. Periodically the Company refinances capital investments funded through its lines of credit by issuing long-term debt. At December 31, 1996 and December 31, 1995 the Company had outstanding line of credit borrowings of $7,500,000 and $500,000 respectively. The Company expects to negotiate bank lines of credit in 1997 at levels appropriate to meet its requirements. In 1996 the Company and its subsidiaries have unsecured committed and uncommitted bank lines of credit that in aggregate total $12,000,000 and $24,000,000 respectively. In the first quarter of 1995, the Company reinstated a common dividend to its stockholders at the annual rate of $2.00 per share. The annual rate of the common dividend was increased to $2.40 on February 27, 1996 and to $2.88 on March 7, 1997. The Company's 1997 capital improvement and environmental budgets total $13,343,000. In 1996 capital and environmental expenditures amounted to $14,109,000. In 1995 the Company acquired undeveloped acreage with the intent of constructing a new office building for the Company's management and administrative functions. The new office building project has not been included in the Company's 1997 capital budget pending finalization of plans and permitting. Gas inventory is primarily natural gas (storage gas) but also includes smaller amounts of LP. Natural gas in storage is generally purchased during the warmer months of the year and held either in facilities owned by the Company or by interstate pipelines for withdrawal during the heating season. At December 31, 1996 the Company had 3,305,000 Dth of natural gas in inventory and 60,000 Dth of LP. At December 31, 1995 natural gas inventory totaled 2,614,000 Dth and LP totaled 52,000 Dth. The Company's projections show an increase in storage at December 31, 1997 of up to 500,000 Dth. The increase in storage is part of a study to determine the level of additional storage space that may be developed in one of the Company's storage fields. REGULATORY MATTERS Order 636 issued by the Federal Energy Regulatory Commission (FERC) in 1992 substantially changed the regulations governing the operations and services provided by interstate pipeline companies. The Order requires the interstate pipelines to separately charge for services such as storage and transportation, which were historically bundled as part of the traditional merchant gas sales service they offered. The regulated services available from interstate pipelines no longer include the aggregation of gas supplies from producers. Instead, the Company is responsible for securing its gas supply requirements through negotiated, unregulated transactions. The interstate pipelines interconnected with the Company's system implemented Order 636 in 1993. All of the Company's pipeline suppliers have implemented plans approved by the FERC to recover from their customers, including the Company, 100% of transition costs prudently incurred in complying with Order 636. The amount and duration of transition costs is different for each supplier. The Company has received authorization from the PUC to recover all transition costs billed by the pipelines. A $5,712,000 refund to its customers was included in the Company's annual purchased gas cost filing submitted to the PUC on August 31, 1995. Included in the refund was approximately $2,600,000 deferred in 1994 plus interest. The PUC granted the Company authorization to refund the amount as a lump-sum bill credit during December 1995. The balance of $2,969,000 was included as a refund in rates charged to customers during the period November 1, 1995 through November 30, 1996. Revised rates for the recovery of the Company's purchased gas costs were approved by the PUC effective December 1, 1996. The Company and the parties who participated in purchased gas cost proceedings agreed that $895,000 of cost for pipeline capacity that the Company would not need to meet its firm sales requirements during the next three winters (stranded costs) could be claimed through rates established under a different docket. The Company's filing in support of the recovery of these stranded costs has been suspended by the PUC until July 1, 1997 in order to consider the formal complaints filed by various parties. The Company is recording the pipeline capacity costs as liability and an offsetting regulatory asset representing the expected recovery of these costs from its customers. On January 27, 1995, the Company filed a rate increase request with the PUC seeking an increase in annual revenues of $5,022,000. The filing covered approximately half of the Company's utility customers. On September 27, 1995, the PUC adopted an order authorizing an increase in annual operating revenues of $2,247,000 effective on one day's notice for service rendered after September 27, 1995. The annual increase includes an allowance for the recovery of the cost of postretirement benefits other than pensions (PBOPs) calculated in accordance with FAS 106, including recovery and amortization over five years of such costs deferred from January 1, 1995 to September 27, 1995. The Pennsylvania Office of Consumer Advocate appealed the PUC's decision allowing recovery of the deferred costs. The amount at issue is $435,000. On February 7, 1997, the Commonwealth Court ordered the appeal to be reargued before the entire court. In the opinion of management the decision of the court will not have a material adverse effect on the Company. On February 27, 1996, the Company's two wholly owned public utility subsidiaries filed a request with the PUC for an increase in annual revenues of $10,955,000 and authorization to consolidate the tariffs of the two subsidiaries into one tariff and one set of rates. In October 1996, final approval of a settlement resolving the issues was received from the PUC. Under the settlement, the Companies were permitted to consolidate their tariffs and increase their rates to produce additional annual operating revenues of $6,725,000. Gas supply cost, including contracts with pipelines for delivery service (capacity cost), storage service and the cost of natural gas purchased for sale and delivery to customers is the Company's largest cost. The Company's tariffs provide for the recovery of these costs subject to regulatory review and approval. Rates to recover gas supply costs are based on projections of the volume of gas the Company will purchase; the cost of these purchases and the amount of gas its sales customers will use. Deviations between such projections and actual experience cause over or under recovery of the costs from customers which are adjusted in the Company's filings with the PUC and either refunded or collected. At December 31, 1996 the Company's rates for the recovery of gas costs plus its rates authorized to recover pipeline transition costs resulted in undercollection from customers of $370,000. At December 31, 1995 the Company overcollected gas and transition costs in the amount of $3,080,000 which as been paid back to the customers with interest. COMMITMENTS AND CONTINGENCIES The Company has accrued environmental costs at December 31, 1996 amounting to $15,728,000 and recorded a regulatory asset of $15,115,000. At December 31, 1996, $613,000 of the amount accrued has been charged to expense to provide for the minimum range of environmental costs related to non-utility sites. The Company has also accrued $4,038,000 at December 31, 1996 to recognize the estimated cost of plugging 366 producing and non- producing gas wells. The Company and its subsidiaries are present or past owners of approximately twenty-six (26) properties on which manufactured gas plants (MGP) were located. In October 1993, the Company and the Pennsylvania Department of Environmental Protection (PADEP) signed a Consent Order and Agreement (COA) for the environmental assessment of twenty (20) of the Company's twenty-one (21) MGP sites located in Pennsylvania, which at the time were under the Company's control. (The one such Pennsylvania MGP site not covered by the COA was the Brodhead Creek Superfund Site which is the subject of separate agreements with the United States Environmental Protection Agency (USEPA). On March 27, 1996, the Company, North Penn Gas Company (North Penn), a wholly owned subsidiary of the Company, and PADEP signed a new COA (1996 COA). The agreement, except for certain provisions which have been incorporated by reference, supersedes the 1993 COA. The 1996 COA provides that from 1996 through the year 2011 the Company will perform a minimum amount of work per year to investigate, and where necessary, clean-up twenty (20) MGP sites and that North Penn will plug all of its non-producing wells. The 1996 COA has a term of fifteen (15) years, but may be terminated by either party after five (5) years. Progress on the investigation, clean-up and well plugging activities covered by the 1996 COA will be measured through a point system, which is based on addressing the highest risks earlier in the process. In any year in which the Company's and North Penn's environmental costs defined by the 1996 COA exceed $1,750,000 (Environmental Cost Cap), the Company will not be required to achieve the minimum required points except that North Penn must meet the well plugging schedule set forth in the agreement regardless of whether the minimum required points or the Environmental Cost Cap are reached. The point system gives the Company and North Penn some flexibility in determining the activities to be undertaken in a given year; however, the 1996 COA does not relieve or limit the Company's or North Penn's obligation to comply with applicable statutes or regulations. The Company and North Penn satisfied the 1996 COA's minimum point requirement during 1996 and PADEP has approved the Company's 1997 annual plan. North Penn's estimate of the cost to plug the wells covered by the 1996 COA is $4,038,000. After recognizing North Penn's estimated well plugging cost, the Company allocated the balance of the Environmental Cost Cap to MGP site activities for the purposes of estimating the related total commitment under the 1996 COA. The estimated present value of the portion of the Environmental Cost Cap allocated to MGP site activities plus oversight cost reimbursements owed to PADEP during the term of the agreement is $15,728,000 at December 31, 1996 and $16,333,000 at December 31, 1995. The estimated present value was determined based upon interest rates for United States Treasury obligations with maturities that coincide with the term of the 1996 COA. The Company has adopted the present value of its estimated total Environmental Cost Cap under the 1996 COA as the low end of the range of costs that may be incurred in connection with MGP site activities. A liability of $15,728,000 and an associated regulatory asset of $15,115,000 have been recorded at December 31, 1996. A liability of $16,333,000 and an associated regulatory asset of $15,891,000 were recorded at December 31, 1995. The Company's actual costs will depend on a number of factors including actual site conditions determined through the site assessment process, changing technology, government statutes and regulations, success in pursuing claims against and finalizing cost sharing arrangements with other potentially responsible parties and recoveries from insurers. At December 31, 1996, the Company estimated a range of environmental liability for the MGP sites of $9,517,000 to $38,702,000. At December 31, 1995 the estimated range was $11,300,000 to $48,300,000. In September 1994, the Company initiated a suit against some of its insurers seeking defense and/or indemnification from the insurers against claims involving former MGP sites. The insurers have answered the Company's complaint, the parties have exchanged documents and have entered the discovery phase. Localized minor amounts of petroleum hydrocarbon impacted soils have been identified in the process of removing and abandoning equipment at a former compressor station site. The removal and abandonment project was undertaken in accordance with a plan approved by state and federal environmental agencies. A plan to remediate the impacted soil is scheduled to be developed and implemented in 1997. With respect to the Brodhead Creek Superfund Site, the USEPA has concluded removal of groundwater contamination is technically impracticable and that certain wells should be periodically monitored and pumped unless and until new technology becomes available. The costs incurred by the Company for work related to the impacted soils and Brodhead Creek will be counted against the Environmental Cost Cap included in the 1996 COA. The Company has received authorization from the PUC to capitalize environmental and clean-up expenditures and well plugging costs for accounting and ratemaking purposes and to amortize such expenditures over five (5) years. The Company expects the PUC will continue to authorize the recovery of such expenditures associated with MGP sites previously or currently owned by its utility subsidiaries and the costs of plugging wells through the rates the Company charges for its services. Accruals sufficient to provide for the minimum range of costs associated with non-utility sites have been charged to expense. At December 31, 1996 the amount accrued was $613,000 compared to $442,000 at December 31, 1995. Additional investigation and remediation may be required at the sites in the future; however, the scope of these activities cannot be determined and therefore any related cost has not been accrued. GAS UTILITY INDUSTRY RESTRUCTURING The restructuring of the natural gas industry to date has largely effected those aspects of the business regulated at the national or interstate level by the FERC. The Natural Gas Policy Act was passed in 1978 and started the gradual decontrol of natural gas prices at the wellhead. Subsequent orders issued by the FERC resulted in open access to pipeline transportation, resolution of take-or-pay liabilities and finally the unbundling of merchant gas sales service from other interstate pipeline services such as storage and transportation. All of these FERC initiatives have had significant effects on the operations of local distribution companies (LDC), such as the Company's utility subsidiaries. Most of the Company's large industrial and commercial customers now purchase their natural gas from a supplier other than the Company and utilize the Company's pipelines to deliver the gas to their facilities. The rate for this delivery or transportation service has been unbundled from the rate the Company charges for the cost of the gas. In situations where the customer is in a position to exercise its ability to build a connection to an interstate pipeline and bypass use of the Company's facilities, the Company has negotiated competitive rates. Legislation has recently been introduced in Pennsylvania that, among other things, provides gas supply choice to all gas customers, not just those that use large volumes of the commodity, after April 1, 1999. Under the proposed legislation LDCs will be required to file a restructuring proposal with the PUC by December 31, 1997. Certain aspects of the proposed legislation may change as the result of hearings to be held by the legislature, but it is expected that some measure of customer choice will be provided to all users of natural gas in Pennsylvania. Legislation providing customer choice to users of electricity was enacted in Pennsylvania in December 1996. As proposed, the restructuring plan is to include unbundled rates for gas distribution (transportation) and supply a proposal to physically, operationally and legally separate the gas supply merchant function from the distribution function and a proposed supplier of last resort mechanism. Under current regulations the Company does not earn a profit from the gas supply merchant function. The return on investment or profit is part of the rate the Company charges for delivering the gas and providing other services. The proposed legislation would continue to have the transportation and distribution of natural gas regulated by the PUC. _________________________________ Independent Auditors' Report _________________________________ THE BOARD OF DIRECTORS, PENN FUEL GAS, INC.: We have audited the accompanying consolidated balance sheets of Penn Fuel Gas, Inc. and subsidiaries as of December 31, 1996 and 1995 and the related consolidated statements of income, retained earnings, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Penn Fuel Gas, Inc. and subsidiaries as of December 31, 1994 and 1995, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, in 1995 the Company changed its method of recognizing revenues from sales of natural gas to residential and small commercial customers. As discussed in Note 5 to the consolidated financial statements, in 1995 the Company changed its method of accounting for postretirement benefits other than pensions to adopt the provisions of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. KPMG Peat Marwick LLP April 4, 1997 CONSOLIDATED BALANCE SHEETS (in thousands) Dec. 31, Dec. 31, 1996 1995 -------------------------------------------------------------- Assets Property, plant, and equipment: Gas utility plant: Natural gas production and gathering $ 2,401 $ 2,464 Storage 5,008 5,000 Transmission 33,221 32,310 Distribution 117,082 108,823 General and other 10,615 9,156 -------------------------------------------------------------- 168,327 157,753 Liquefied petroleum gas property 10,454 10,146 -------------------------------------------------------------- 178,781 167,899 Less accumulated depreciation, depletion, and amortization 42,830 40,638 -------------------------------------------------------------- 135,951 127,261 Gas stored underground -- noncurrent 5,341 5,341 -------------------------------------------------------------- 141,292 132,602 -------------------------------------------------------------- Current assets: Cash and cash equivalents 2,513 5,357 Receivables, less allowance for doubtful accounts of $988 in 1996 and $920 in 1995 13,802 12,131 Inventories: Gas 6,179 3,924 Merchandise, material, and supplies 3,706 2,828 Unrecovered gas and transition costs 370 -- Prepayments and other 1,379 1,627 Deferred income taxes 1,322 1,570 -------------------------------------------------------------- 29,271 27,437 -------------------------------------------------------------- Deferred debits: Environmental costs 15,115 15,891 Well plugging and abandonment costs 4,038 4,191 Other 6,749 4,156 -------------------------------------------------------------- 25,902 24,238 -------------------------------------------------------------- $196,465 $184,277 -------------------------------------------------------------- See accompanying notes to consolidated financial statements. CONSOLIDATED BALANCE SHEETS (in thousands) Dec. 31, Dec. 31, 1996 1995 -------------------------------------------------------------- Capitalization and Liabilities Capitalization: Stockholders' equity: Common, $1 par value; authorized 2,000,000 shares, issued and outstanding 717,583 shares in 1996 and 1995 $ 718 $ 718 Preferred, no par value; authorized 500,000 shares, issued none -- -- Additional paid-in capital 714 714 Retained earnings 65,313 60,646 -------------------------------------------------------------- 66,745 62,078 Redeemable preferred stock: $1.40 cumulative preferred stock; authorized 2,000,000 shares, issued and outstanding 717,583 shares in 1996 and 1995 10,764 10,764 Long-term debt, less amounts payable within one year 51,694 55,644 -------------------------------------------------------------- 129,203 128,486 -------------------------------------------------------------- Current liabilities: Notes payable 7,500 500 Long-term debt payable within one year 2,939 3,068 Accounts payable 11,346 8,167 Overrecovered gas and transition costs -- 3,080 Accrued environmental costs 1,811 1,815 Other current and accrued liabilities 4,554 3,852 -------------------------------------------------------------- 28,150 20,482 -------------------------------------------------------------- Deferred credits: Unamortized investment tax credits 1,990 2,067 Unamortized excess of equity value of subsidiary at acquisition over cost 537 642 Deferred income taxes 17,530 12,883 Accrued environmental costs 14,163 14,768 Accrued well plugging and abandonment costs 3,792 3,941 Other 1,100 1,008 -------------------------------------------------------------- 39,112 35,309 -------------------------------------------------------------- $196,465 $184,277 -------------------------------------------------------------- See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENT OF INCOME (in thousands, expect per share Dec. 31, Dec. 31, information) 1996 1995 -------------------------------------------------------------- Operating revenue: Utility revenue $ 99,793 $ 93,087 Liquefied petroleum gas revenue 12,294 11,009 Merchandise sales 1,420 1,551 -------------------------------------------------------------- 113,507 105,647 -------------------------------------------------------------- Operating revenue deductions: Cost of gas, utility 45,378 43,078 Cost of liquefied petroleum gas 5,323 4,278 Cost of sales, merchandise 1,192 1,319 Operating, administrative, and general expenses 30,274 29,235 Maintenance 3,238 3,131 Depreciation and amortization 6,246 5,541 Taxes, other than income 6,788 6,514 Income taxes 3,741 3,223 -------------------------------------------------------------- 102,180 96,319 -------------------------------------------------------------- Operating income 11,327 9,328 -------------------------------------------------------------- Other expense (income): Interest 4,362 4,731 Other (429) (1,102) -------------------------------------------------------------- 3,933 3,629 -------------------------------------------------------------- Income before cumulative effect of a change in accounting principle 7,394 5,699 Cumulative effect on prior years (to December 31, 1994) of change to record unbilled revenue, net of tax -- 378 -------------------------------------------------------------- Net income 7,394 6,077 Dividend requirement on redeeemable preferred stock (1,005) (1,005) -------------------------------------------------------------- Net income applicable to common stock $ 6,389 $ 5,072 -------------------------------------------------------------- Income before cumulative effect of a change in accounting principl $ 8.90 $ 6.54 Cumulative effect on prior years (to December 31, 1994) of change to record unbilled revenue, net of tax -- 0.53 -------------------------------------------------------------- Net income applicable to common stock $ 8.90 $ 7.07 -------------------------------------------------------------- See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENT OF RETAIN INCOME (in thousands, expect per share Dec. 31, Dec. 31, information) 1996 1995 -------------------------------------------------------------- Balance at beginning of year $ 60,646 $ 57,009 Net income 7,394 6,077 Dividends Redeemable preferred stock ($1.40 in 1996 and 1995) (1,005) (1,005) Common stock ($2.40 in 1996 and $2.00 in 1995) (1,722) (1,435) -------------------------------------------------------------- Balance at end of year $ 65,313 $ 60,646 -------------------------------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands) Dec. 31, Dec. 31, 1996 1995 -------------------------------------------------------------- Cash flows from operating activities: Net income $ 7,394 $ 6,077 -------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,246 5,541 Amortization of extraordinary property loss 38 231 Deferred taxes and investment tax credits 3,874 1,701 Gain on sale of liquefied petroleum gas property (193) (945) Changes in assets and liabilities: Increase in accounts receivable (1,671) (671) (Increase) decrease in gas inventory (2,255) 3,722 Decrease in overrecovered gas and transition costs, net (3,450) (1,501) Increase in other inventories (878) (353) Increase (decrease) in accounts payable and accrued liabilities 3,881 (1,342) Decrease in other assets/ liabilities, net (1,175) (89) -------------------------------------------------------------- Total adjustments 4,417 6,294 -------------------------------------------------------------- Net cash provided by operating activities 11,811 12,371 -------------------------------------------------------------- Cash flows from investing activities: Capital expenditures (12,561) (13,403) Proceeds on the sale of liquefied petroleum gas assets 226 1,379 Other (2,514) (2,380) -------------------------------------------------------------- Net cash used in investing activities (14,849) (14,404) -------------------------------------------------------------- Cash flows from financing activities: Principal payments on long-term debt (4,079) (2,458) Net increase in notes payable 7,000 500 Dividends paid: Preferred (1,005) (1,005) Common (1,722) (1,435) -------------------------------------------------------------- Net cash provided by (used in) financing activities 194 (4,398) -------------------------------------------------------------- Net decrease in cash and cash equivalents (2,844) (6,431) Cash and cash equivalents at beginning of year 5,357 11,788 -------------------------------------------------------------- Cash and cash equivalents at end of year $ 2,513 $ 5,357 -------------------------------------------------------------- Supplementary disclosures of cash flow information Cash paid for the year for: Interest $ 4,913 $ 5,326 Income taxes 1,556 3,178 -------------------------------------------------------------- See accompanying notes to consolidated financial statements. Notes to Consolidated Financial Statements (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNT POLICIES DESCRIPTION OF BUSINESS Penn Fuel Gas, Inc. (the Company) is an exempt public utility holding company whose utility subsidiaries provide natural gas distribution, transmission and storage service from facilities in Pennsylvania. In addition, the Company provides gas distribution service to a small number of customers in Maryland. The Company also sells liquefied petroleum (LP) gas and merchandise in Pennsylvania and Maryland. In August 1995, the Company sold its LP operations in Delaware. (See Liquefied Petroleum Gas Property). PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries, each of which is wholly owned. All material intercompany accounts have been eliminated. The Company's utility subsidiaries maintain their accounting records in conformity with the uniform system of accounts prescribed by the Federal Energy Regulatory Commission (FERC), Pennsylvania Public Utility Commission (PUC) and the Maryland Public Service Commission. Significant accounting practices are summarized below. PROPERTY, PLANT, AND EQUIPMENT Utility Plant. Utility plant is carried at cost. Depreciation is computed using the straight-line method. Based on average utility plant, the composite straight- line rates for 1996 and 1995 were 2.8% and 3.0%, respectively. For utility property, expenditures for replacements and renewals considered to be units of property are charged to utility plant accounts at cost. Expenditures for maintenance, repairs, renewals and replacements determined to be less than units of property are charged to maintenance. At the time utility properties are retired, replaced, or otherwise disposed of, accumulated depreciation, depletion, and amortization is charged with the cost of the properties plus the costs incurred in retiring, replacing or disposing of the property. As discussed in Note 7, the Company has accrued the estimated costs of removal related to 366 producing and nonproducing gas wells. Gas stored underground - noncurrent represents the cost of the estimated volume of gas required to maintain pressures in the underground storage fields at levels sufficient to meet the service requirements of the Company's customers on a peak day. Liquefied Petroleum Gas Property. Liquefied petroleum gas property is carried at cost. Depreciation is computed using the straight-line method. Based on average LP plant, the composite straight-line rate for 1996 and 1995 was 3.2%. Expenditures for maintenance, repairs, renewals, and replacements determined to be less than units of property are charged to maintenance. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in income for the period. On August 28, 1995, Gas-Oil Products, Inc. of Delaware (GOP), a wholly owned subsidiary of the Company, which accounted for all of the Company's business in Delaware, sold certain of its assets including tanks, inventory, motor vehicles and accounts receivable. On a consolidated basis, GOP's operations accounted for approximately 9% of the Company's LP volume and approximately 2% of the Company's merchandise sales. The selling price of the assets was received in cash and resulted in a gain before income tax of $945,000, which is reported as other income. In 1996 the real estate previously used in the operation was sold and resulted in a gain before income tax of $193,000, which is reported as other income. OPERATING UTILITY REVENUES Residential and small commercial customer's meters are read on a cycle basis throughout each month. Revenues from sales and transportation services are recorded based on meters read. Generally, large commercial and industrial and resale customers' meters are read on the last day of each month. Revenues from storage service are also recorded monthly. CHANGE IN ACCOUNTING PRINCIPLE Effective January 1, 1995, one utility subsidiary changed its method of recognizing revenue from sales of natural gas to residential and small commercial customers. Previously, revenues from these customers were recognized when he accounts were billed. Revenues related to gas delivered after billing and before the end of a month were recognized in the following month. In 1995, the subsidiary began accruing estimated revenues from gas service provided but not billed consistent with the industry practice which more closely matches revenues with the period in which service is provided and related expenses are incurred. The cumulative effect of the change at December 31, 1994 was to increase net income $378,000, net of income taxes. The change had the effect of increasing 1995 net income (excluding the beginning of the year cumulative effect of $378,000) by $156,000. INVENTORIES Inventories of materials, supplies, and appliances are recorded partly on average cost and partly at the lower of cost, determined by the first-in, first-out method, or market. Gas inventories of one subsidiary are recorded on the last-in, first-out (LIFO) method. The gas inventories of all other utility subsidiaries are valued at average cost. Gas stored underground - noncurrent represents the cost of the estimated volume of gas required to maintain pressures in the underground storage fields at levels sufficient to meet the service requirements of the Company's customers on a peak day. DEFERRED DEBITS Environmental costs are regulatory assets established in conjunction with recognition in the financial statements of environmental liabilities. Where such liabilities are not recovered from other responsible parties through cost recovery litigation or insurance claims, the Company expects to continue to recover environmental costs associated with utility sites through PUC approved rates charged for its services. Well plugging and abandonment costs are regulatory assets established in conjunction with recognition in the financial statements of the cost to plug and abandon wells in accordance with current regulations. Such costs have historically been recovered through the ratemaking process. Other deferred debits are amortized on the straight- line method over an appropriate number of years determined in regulatory proceedings. UNRECOVERED/OVERRECOVERED GAS COSTS Unrecovered/overrecovered gas costs represent net changes in gas costs which will either be collected from or paid to customers by fuel cost adjustments in the future. Amounts to be collected or paid over a subsequent period are classified as current in the financial statements. DEFERRED INCOME TAXES The Company provides deferred income taxes on timing differences between book and tax income based on policies and decision established in regulatory proceedings. The principal timing differences are depreciation, deferred gas costs and environmental costs. In 1996 the Company received approval from the Internal Revenue Service to change its tax accounting method for cost of removal. Deferred taxes have been recognized in 1996 for certain timing differences related to the change in method. The tax effects of timing differences resulted in deferred tax assets of $4,039,000 and deferred tax liabilities of $20,247,000 at December 31, 1996. Deferred tax assets and deferred tax liabilities were $4,330,000 and $15,643,000, respectively, at December 31, 1995. INVESTMENT TAX CREDITS Deferred investment tax credits are amortized to income on the straight-line method over the estimated useful lives of the related property. CASH EQUIVALENTS For the purpose of reporting cash flows, highly liquid investments purchased with a maturity of three months or less are considered to be cash equivalents. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. EARNINGS PER COMMON SHARE Earnings per common share were calculated based on net income less preferred stock dividend requirements divided by the weighted average number of common shares outstanding during the period. EXCESS OF EQUITY VALUE OVER COST OF ACQUISITION The excess of the equity value over the cost of acquisition, arising from the acquisition of North Penn Gas Company in 1977, is being amortized on the straight- line method over twenty-five (25) years. (2) DEBT At December 31, 1996, the company and its subsidiaries have committed bank lines of credit that is aggregate total $12,000,000, and uncommitted bank lines of credit that in aggregate total $24,000,000. At December 31, 1995 the amount of the lines was $8,000,000 and $24,000,000, respectively. The credit lines, which are unsecured, are reviewed annually. The Company expects to negotiate bank lines of credit in 1997 at levels appropriate to meet its requirements. During 1996 and 1995 the maximum amount borrowed under the lines of credit at any month end was $7,500,000 and $500,000, respectively. Average monthly borrowings ranged from zero to $6,874,000 in 1996 and from zero to $500,000 in 1995. The weighted average interest rate on borrowings under the lines of credit at December 31, 1996 and 1995 was 6.89% and 6.70% respectively. Long-term debt at December 31, 1996 and 1995, less amounts payable in one year, consisted of the following (in thousands): Annual Due Installments Date 1996 1995 -------------------------------------------------------------- Notes payable: 9.20% $1,500 2001 $ 3,000 $ 4,500 9.59% 750 2005 5,250 6,750 (commencing 1996) 9.64% 375 2010 6,375 7,125 (commencing 1996) 8.70% 833 2023 10,000 10,000 (commencing 2011) 7.51% 1,818 2014 20,000 20,000 (commencing 2004) 6.70% 1,400 2003 7,000 7,000 (commencing 1999) -------------------------------------------------------------- 51,625 55,375 Capital leases 69 269 -------------------------------------------------------------- $51,694 $55,644 -------------------------------------------------------------- The terms of the long-term debt agreements contain, among other things, restrictions relating to the creation of debt, liens, investments, disposition of assets, mergers and consolidations, purchase of shares, acceleration of debt payments, maintenance of equity to debt ratio is, and the payment of dividends. In 1996 the Company elected to exercise its option to double the annual installment payments on the 9.59% and 9.64% notes. Under the most restrictive provisions, the amount of consolidated retained earnings available for preferred and common stock dividends at December 31, 1996 was approximately $9,455,000. Maturities of long-term notes and capital leases for the next five years are as follows: 1997 -- $2,939,000; 1998 -- $2,694,000; 1999 -- $4,025,000; 2000 -- $2,525,000, and 2001 -- $2,525,000. (3) REDEEMABLE PREFERRED STOCK In November 1991 the Company authorized the creation of 2,000,000 shares of $1.40 cumulative preferred stock (Preferred Stock). The Company issued one share of Preferred Stock for each share of common stock outstanding on December 16, 1991. The Preferred Stock was recorded at its estimated value of $15 per share at the date of distribution. The Preferred Stock is subject to mandatory redemption at $15 per share over a ten-year period beginning January 1, 2018. Additionally, commencing January 1, 1997, all or part of the outstanding preferred stock is redeemable at the option of the Company provided that 66-2/3% of preferred shareholders approve such redemption. (4) INCOME TAXES Income tax expense for 1996 and 1995 consisted of the following (in thousands): 1996 1995 ----------------------------------------------------- Current: Federal $ 523 $ 1,232 State 201 289 ----------------------------------------------------- 724 1,521 Deferred 3,093 1,778 Amortization of deferred (76) (76) investment tax credits ----------------------------------------------------- $ 3,741 $ 3,223 ----------------------------------------------------- In 1996 the Company received approval from the Internal Revenue Service to change its tax accounting method for cost of removal. The change in method which is effective for the tax year beginning January 1, 1994 created a combination of timing differences and current tax benefits. Deferred taxes have been recorded recognizing the timing differences. The primary difference between the Company's income tax expense at the federal statutory rate of 34% and the effective tax rate is state income taxes, and the reduction in current tax expense resulting from the 1996 approved change in tax accounting method. (5) RETIREMENT PLANS Effective January 1, 1996, two noncontributory defined benefit plans sponsored by the Company were merged to form one plan. The Company funds accrued pension costs subject to limitations included in the Internal Revenue Code and the Employee Retirement Income Security Act of 1974. Net pension (income) cost for the pension plan(s) for 1996 and 1995 includes the following components (in thousands): 1996 1995 -------------------------------------------------------- Service cost $ 809 $ 618 Interest cost 1,679 1,575 Return on assets (includes (3,734) (4,748) insurance contract settlement) Net amortization and deferral 1,229 2,814 -------------------------------------------------------- Net pension (income) cost $ (17) $ 259 -------------------------------------------------------- The assumptions used by the pension plan(s) in determining the actuarial present value of the plan's benefit obligations are as follows: 1996 1995 ------------------------------------------------- Discount rate 7.75% 7.0% Amortization of deferred 5% 5% investment tax credits ------------------------------------------------- The funded status of the pension plan(s) at December 31, 1996 and 1995 is as follows (in thousands): 1996 1995 ------------------------------------------------------------ Vested benefit obligation $ 15,622 $ 19,087 ------------------------------------------------------------ Accumulated benefit obligation 16,619 20,410 Additional benefits related to future compensation levels 3,947 3,864 ------------------------------------------------------------ Projected benefit obligation 20,566 24,274 Plan assets at fair value (24,984) (25,009) ------------------------------------------------------------ (4,418) (735) Unrecognized transition amount 1,263 Unrecognized net gain 958 466 Unrecognized prior service cost 4,385 (668) ------------------------------------------------------------ (615) Accrued pension cost $ 310 $ 326 ------------------------------------------------------------ The Company also sponsors an unfunded nonqualified Supplemental Executive Retirement Plan (SERP) which provides additional retirement benefits to certain employees. Effective February 1, 1996, the Company established an unfunded nonqualified retirement program for the benefit of its Board of Directors. The actuarially determined benefit obligation for the two nonqualified plans was $433,000 at December 31, 1996 and $282,000 at December 31, 1995. Net expense related to these plans was $229,000 in 1996 and $60,000 in 1995. Benefit payments under both plans are made directly by the Company to plan participants or their beneficiaries. In 1996 the Company discontinued an investment contract with an insurance company that was used to manage approximately $7,000,000 of pension assets. At the time the contract was discontinued, there were approximately $2,700,000 of outstanding guaranteed annuities under the contract. The insurance company issued certificates to retirees to guarantee their pension benefits under the program; the balance of the pension assets were transferred to an investment manager for reinvestment. Settlement of the investment contract resulted in a reduction of $343,000 to 1996 pension cost. In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for retired employees of one subsidiary. These benefits are provided through an insurance company, and substantially all of the subsidiary's employees will become eligible for them if they reach their retirement age while working for the subsidiary. Up to and including December 31, 1994, the subsidiary recognized the cost of providing these benefits for retirees on the "pay as you go" basis. In the first quarter of 1995, the Company adopted the provisions of Statement of Accounting Standards No. 106 (FAS 106). Employers' Accounting for Postretirement Benefits Other than Pensions (PBOPs), issued by the Financial Accounting Standards Board in December 1990. FAS 106 requires the expected cost of PBOPs to be recognized on an accrual basis as employees perform services to earn the benefits. Also, during the first quarter of 1995, the company filed a rate increase request with the PUC, which among other things, sought authorization for the recognition in rates of the cost of PBOPs on an accrual basis instead of "pay as you go" basis. On September 27, 1995, the PUC adopted an order authorizing an increase in the Company's rates and the recovery of the cost of PBOPs in accordance with FAS 106. The Company recorded a liability of $435,000 and an associated regulatory asset representing the estimated FAS 106 costs incurred from January 1, 1995 to September 27, 1995 and began a five-year amortization of these costs in October 1995. The Pennsylvania Office of Consumer Advocate appealed the PUCs decision. On February 7, 1997 the Commonwealth Court ordered that the appeal be reargued before the entire court. In the opinion of management, the decision of the court will not have a material adverse effect on the Company. The Company has established trust funds for the deposit of FAS 106 costs being recovered through its rates. Net periodic PBOP expense in 1996 and 1995 consists of the following components (in thousands): 1996 1995 ---------------------------------------------------- Service cost $ 93 $ 80 Interest cost 555 530 Return on assets (66) -- Net amortization and deferral 431 310 ---------------------------------------------------- Net periodic postretirement $ 1,013 $ 920 benefit expense ---------------------------------------------------- The funded status of the plan at December 31, 1996 and 1995 is as follows (in thousands): 1996 1995 --------------------------------------------------------- Accumulated postretirement benefit obligation (APBO) as of December 31, 1996 and 1995: Fully eligible active employees $ 1,803 $ 1,853 Other active employees 1,743 1,791 Retirees 4,292 4,409 ---------------------------------------------------------- 7,838 8,053 Plan assets at fair value (1,157) (260) ---------------------------------------------------------- Accumulated obligation in excess of plan assets 6,681 7,793 Unrecognized net transition obligation (5,640) (5,950) Unrecognized net loss (778) (1,523) ---------------------------------------------------------- Accrued postretirement benefit cost $ 263 $ 320 ---------------------------------------------------------- The discount rate used in determining the benefit obligation was 7.75% for 1996 and 7.0% for 1995. Annual rates of increase in the per capita cost of covered health care benefits of 10.6% and 11.8% were assumed for 1996 based on the age of plan participants. The Company assumed rates for 1995 were 11.2% and 12.5%. The rates were assumed to decrease gradually to 5.5% over ten years in both 1996 and 1995 and remain level thereafter. The health care cost trend rate assumption has a significant effect on amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point would increase the APBO as of December 31, 1996 by $386,000 and the net periodic postretirement benefit expense for the year then ended by $30,000. As of December 31,1995, the APBO would increase $396,000 and the net periodic postretirement benefit expense would increase $29,000 if a one percentage point increase in the health care cost trend rates was assumed. (6) REGULATORY MATTERS Order 636 issued by FERC in 1992 substantially changed the regulations governing the operations and services provided by interstate pipeline companies. The Order requires the interstate pipelines to separately charge for services such as storage and transportation, which were historically bundled as part of the traditional merchant gas sales service they offered. The regulated services available from interstate pipelines no longer include the aggregation of gas supplies from producers. Instead, the Company is responsible for securing its gas supply requirements through negotiated, unregulated transactions. The interstate pipelines interconnected with the Company's system implemented Order 636 in 1993. All of the Company's pipeline suppliers have implemented plans approved by the FERC to recover from their customers, including the Company, 100% of transition costs prudently incurred in complying with Order 636. The amount and duration of transition costs is different for each supplier. The Company has received authorization from the PUC to recover all transition costs billed by the pipelines. A $5,712,000 refund to its customers was included in the Company's annual purchased gas cost filing submitted to the PUC on August 31, 1995. Included in the refund was approximately $2,600,000 deferred in 1994 plus interest. The PUC granted the Company authorization to refund the amount as a lump-sum bill credit during December 1995. The balance of $2,969,000 was included as a refund in rates charged to customers during the period November 1, 1995 through November 30, 1996. Revised rates for the recovery of the Company's purchased gas costs were approved by the PUC effective December 1, 1996. the Company and the parties who participated in purchased gas cost proceedings agreed that $895,000 of cost for pipeline capacity that the Company would not need to meet its firm sales requirements during the next three winters (stranded costs) could be claimed through rates established under a different docket. The Company's filing in support of the recovery of these stranded costs has been suspended by the PUC until July 1, 1997 in order to consider the formal complaints filed by various parties. The Company is recording the pipeline capacity costs as a liability and an offsetting regulatory asset representing the expected recovery of these costs from its customers. On January 27, 1995, the Company filed a rate increase request with the PUC seeking an increase in annual revenues of $5,022,000. The filing covered approximately half of the Company's utility customers. On September 27, 1995, the PUC adopted an order authorizing an increase in annual operating revenues of $2,247,000 effective on one day's notice for service rendered after September 27, 1995. The annual increase includes an allowance for the recovery of the cost of postretirement benefits other than pensions (PBOPs) calculated in accordance with FAS 106, including recovery and amortization over five years of such costs deferred from January 1, 1995 to September 27, 1995. The Pennsylvania Office of Consumer Advocate appealed the PUC's decision allowing recovery of the deferred costs. The amount at issue is $435,000. On February 7, 1997, the Commonwealth Court ordered the appeal to be reargued before the entire court. In the opinion of management the decision of the court will not have a material adverse effect on the Company. On February 27, 1996, the Company's two wholly owned public utility subsidiaries filed a request with the PUC for an increase in annual revenues of $10,955,000 and authorization to consolidate the tariffs of the two subsidiaries into one tariff and one set of rates. In October 1996, final approval of a settlement resolving the issues was received from the PUC. Under the settlement, the Companies were permitted to consolidate their tariffs and increase their rates to produce additional annual operating revenues of $6,725,000. Gas supply cost, including contracts with pipelines for delivery service (capacity cost), storage service and the cost of natural gas purchased for sale and delivery to customers is the Company's largest cost. The Company's tariffs provide for the recovery of these costs subject to regulatory review and approval. Rates to recover gas supply costs are based on projections of the volume of gas the Company will purchase; the cost of these purchases and the amount of gas its sales customers will use Deviations between such projections and actual experience cause over or under recovery of the costs from customers which are adjusted in the Company's filings with the PUC and either refunded or collected. At December 31, 1996 the Company's rates for the recovery of gas costs plus its rates authorized to recover pipeline transition costs resulted in undercollection from customers of $370,000. At December 31, 1995 the Company overcollected gas and transition costs in the amount of $3,080,000 which has been paid back to the customers with interest. (7) COMMITMENTS AND CONTINGENCIES The Company and its subsidiaries are present or past owners of approximately twenty-six (26) properties on which manufactured gas plants (MGP) were located. In October 1993, the Company and the Pennsylvania Department of Environmental Protection (PADEP) signed a Consent Order and Agreement (COA) for the environmental assessment of twenty (20) of the Company's twenty-one (21) MGP sites located in Pennsylvania, which at the time were under the Company's control. (The one such Pennsylvania MGP site not covered by the COA was the Brodhead Creek Superfund Site which is the subject of separate agreements with the United States Environmental Protection Agency (USEPA).) On March 27, 1996, the Company, North Penn Gas Company (North Penn), a wholly owned subsidiary of the Company, and PADEP signed a new COA (1996 COA). This agreement, except for certain provisions which have been incorporated by reference, supersedes the 1993 COA. The 1996 COA provides that from 1996 through the year 2011 the Company will perform a minimum amount of work per year to investigate, and where necessary, clean up twenty (20) MGP sites and that North Penn will plug all of its non-producing wells. The 1996 COA has a term of fifteen (15) years, but may be terminated by either party after five (5) years. Progress on the investigation, clean-up and well plugging activities covered by the 1996 COA will be measured through a point system, which is based on addressing the highest risks earlier in the process. In any year in which the Company's and North Penn's environmental costs defined by the 1996 COA exceed $1,750,000 (Environmental Cost Cap), the Company will not be required to achieve the minimum required points except that North Penn must meet the well plugging schedule set forth in the agreement regardless of whether the minimum required points or the Environmental Cost Cap are reached. The point system gives the Company and North Penn some flexibility in determining the activities to be undertaken in a given year, however, the 1996 COA does not relieve or limit the Company's or North Penn's obligation to comply with applicable statues or regulations. The Company and North Penn satisfied the 1996 COA's minimum point requirement during 1996 and PADEP has approved the Company's 1997 annual plan. North Penn's estimate of the cost to plug the wells covered by the 1996 COA is $4,038,000. After recognizing North Penn's estimated well plugging cost, the Company allocated the balance of the Environmental Cost Cap to MGP site activities for the purposes of estimating the related total commitment under the 1996 COA. The estimated present value of the portion of the Environmental Cost Cap allocated to MGP site activities plus oversight cost reimbursements owed to PADEP during the term of the agreement is $15,728,000 at December 31, 1996 and $16,333,000 at December 31, 1995. The estimated present value was determined based on interest rates for United States Treasury obligations with maturities that coincide with the term of the 1996 COA. The Company has adopted the present value of its estimated total Environmental Cost Cap under the 1996 COA as the low end of the rate of costs that may be incurred in connection with MGP site activities. A liability of $15,728,000 and an associated regulatory asset of $15,115,000 have been recorded at December 31, 1996. A liability of $16,333,000 and an associated regulatory asset of $15,891,000 were recorded at December 31, 1995. The Company's actual costs will depend on a number of factors including actual site conditions determined through the site assessment process, changing technology, government statutes and regulations, success in pursuing claims against and finalizing cost sharing arrangements with other potentially responsible parties and recoveries from insurers. At December 31, 1996, the Company estimated a range of environmental liability for the MGP sites of $9,517,000 to $38,702,000. At December 31, 1995 the estimated range was $11,300,000 to $48,300,000. In September 1994, the Company initiated a suit against some of its insurers seeking defense and/or indemnification from the insurers against claims involving former MGP sites. The insurers have answered the Company's complaint, the parties have exchanged documents and have entered the discovery phase. Localized minor amounts of petroleum hydrocarbon impacted soils have been identified in the process of removing and abandoning equipment at a former compressor station site. The removal and abandonment project was undertaken in accordance with a plan approved by state and federal environmental agencies. A plan to remediate the impacted soil is scheduled to be developed and implemented in 1997. With respect to the Brodhead Creek Superfund Site, the USEPA has concluded removal of groundwater contamination is technically impracticable and that certain wells should be periodically monitored and pumped unless and until new technology becomes available. The costs incurred by the Company for work related to the impacted soils and Brodhead Creek will be counted against the Environmental Cost Cap included in the 1996 COA. The Company has received authorization from the PUC to capitalize environmental and clean-up expenditures and well plugging costs for accounting and ratemaking purposes and to amortize such expenditures over five (5) years. The Company expects the PUC will continue to authorize the recovery of such expenditures associated with MGP sites previously or currently owned by its utility subsidiaries and the costs of plugging wells through the rates the Company charges for its services. Accruals sufficient to provide for the minimum range of costs associated with non-utility sites have been charged to expense. At December 31, 1996 the amount accrued was $613,000 compared to $442,000 at December 31, 1995. Additional investigation and remediation may be required at the sites in the future, however, the scope of these activities cannot be determined and therefore any related cost has not been accrued. (8) COMMON STOCK The Company has a Stock Option Agreement under which 14,350 shares were granted in 1992. The options are exercisable on a pro rata basis during a seven-year period commencing in 1995. There are 4,019 options outstanding at December 31, 1996 exercisable at a price of $52.27 per share. (9) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of current assets and liabilities which are considered financial instruments approximates their fair value as of the dates presented. The carrying amounts and estimated fair values of the Company's long- term financial liabilities as of December 31, 1996 are as follows (in thousands): Carrying Estimated amount fair value -------------------------------------------------- Long-term debt $ 51,625 $ 54,105 Preferred Stock 10,764 13,634 -------------------------------------------------- The fair value of long-term debt and preferred stock has been estimated based on market rates for similar instruments with approximately the same maturities. Management believes that the prepayment provisions of the Company's long-term debt do not make it economically feasible to refinance the debt at this time. SUMMARY OF FINANCIAL DATA
(in thousands, except per share data) Year ended December 31 1996 1995 1994 1993 1992 ----------------------------------------------------------------------------------------------- Operating revenues $ 113,507 $ 105,647 $ 123,410 $ 115,812 $ 105,603 Cost of sales 51,893 48,675 67,188 63,432 58,978 Other operating expenses 50,287 47,644 46,035 42,940 39,824 ----------------------------------------------------------------------------------------------- Operating income 11,327 9,328 10,187 9,440 6,801 Interest expense 4,362 4,731 4,347 4,320 3,864 Other (income) expense (429) (1,102) 135 (185) (28) ----------------------------------------------------------------------------------------------- Income before cumulative effect of a change in accounting principle 7,394 5,699 5,705 5,305 2,965 Cumulative effect on prior years (to December 31, 1994) of change to record unbilled revenue, net of tax -- 378 -- -- -- ----------------------------------------------------------------------------------------------- Net income $ 7,394 $ 6,077 $ 5,705 $ 5,305 $ 2,965 ----------------------------------------------------------------------------------------------- Earnings per common share (based on weighted average number of shares outstanding) $ 8.90 $ 7.07 $ 6.55 $ 5.99 $ 2.73 ----------------------------------------------------------------------------------------------- Cash dividends per preferred share $ 1.40 $ 1.40 $ 1.40 $ 1.40 $ 1.40 ----------------------------------------------------------------------------------------------- Cash dividends per common share $ 2.40 $ 2.00 $-- $-- $-- ----------------------------------------------------------------------------------------------- Total assets $ 196,465 $ 184,277 $ 174,367 $ 159,236 $ 147,608 ----------------------------------------------------------------------------------------------- Property, plant, and equipment, net $ 141,292 $ 132,602 $ 122,897 $ 115,237 $ 108,369 ----------------------------------------------------------------------------------------------- Capitalization: Stockholders' equity $ 66,745 $ 62,078 $ 58,441 $ 53,741 $ 49,441 Redeemable preferred stock 10,764 10,764 10,764 10,764 10,764 Long-term debt 51,694 55,644 58,904 34,995 56,359 ----------------------------------------------------------------------------------------------- Revolving line of credit, notes payable and long-term debt 129,203 128,486 128,109 99,500 116,564 payable within one year 10,439 3,568 2,266 24,395 2,055 ----------------------------------------------------------------------------------------------- $ 139,642 $ 132,054 $ 130,375 $ 123,895 $ 118,619 -----------------------------------------------------------------------------------------------
OPERATING STATISTICS
Year ended December 31 1996 1995 1994 1993 1992 ------------------------------------------------------------------------------------ Operating revenues (in thousands) Utility: Sales: Residential $ 47,914 $ 40,025 $ 47,377 $ 42,358 $ 35,025 Commercial 25,418 25,990 29,183 25,936 20,70 6 Industrial 10,681 11,339 20,124 21,039 21,437 Resale 49 222 682 1,120 1,659 ------------------------------------------------------------------------------------ 84,062 77,576 97,366 90,453 78,827 Storage 6,157 5,570 5,101 5,167 6,164 Transportation 8,897 8,458 6,899 6,883 6,454 Other 677 1,483 843 583 558 ------------------------------------------------------------------------------------ 99,793 93,087 110,209 103,086 92,003 Liquefied petroleum 12,294 11,009 11,648 11,359 11,909 ------------------------------------------------------------------------------------ 112,087 104,096 121,857 114,445 103,912 Merchandise 1,420 1,551 1,553 1,367 1,691 ------------------------------------------------------------------------------------ Total $113,507 $105,647 $123,410 $115,812 $105,603 ------------------------------------------------------------------------------------ Throughput -- DTH: (in thousands) Utility: Sales: Residential 7,316 6,513 6,790 6,597 6,470 Commercial 4,500 4,737 4,865 4,643 4,318 Industrial 2,282 2,303 4,017 4,423 5,090 Resale 11 64 161 307 403 ------------------------------------------------------------------------------------ 14,109 13,617 15,833 15,970 16,281 Transportation 12,666 13,071 9,613 9,177 9,589 ------------------------------------------------------------------------------------ 26,775 26,688 25,446 25,147 25,870 Liquefied petroleum 841 830 865 857 893 ------------------------------------------------------------------------------------ Total 27,616 27,518 26,311 26,004 26,763 ------------------------------------------------------------------------------------ Customers: Utility: Sales: Residential 61,504 60,688 59,130 58,068 57,199 Commercial 8,954 8,865 8,655 8,694 8,361 Industrial 302 323 342 356 369 Resale 2 2 3 3 3 ------------------------------------------------------------------------------------ 70,762 69,878 68,130 67,121 65,932 Transportation 124 118 92 62 43 ------------------------------------------------------------------------------------ 70,886 69,996 68,222 67,183 65,975 Liquefied petroleum 28,021 28,260 29,935 30,338 31,197 ------------------------------------------------------------------------------------ Total 98,907 98,256 98,157 97,521 97,172 ------------------------------------------------------------------------------------ Total degree days 5,494 5,223 5,411 5,352 5,204 ------------------------------------------------------------------------------------ Percent of degree days to thirty-year average 102.7% 97.7% 101.2% 100.1% 97.3% ------------------------------------------------------------------------------------
[PHOTOGRAPHS OF BOARD OF DIRECTORS OMITTED] ------------------ Board of Directors ------------------ Carol W. Gates (2) Oxford Advisory Board, Fulton Bank Terry H. Hunt (1) President and CEO, Penn Fuel Gas, Inc. and subsidiaries Director, UTI Energy Corp. Marilyn Ware Lewis (1)(3) Chairman, American Water Works Company, Inc. Director, CIGNA Corporation W. Kirk Liddell (2) President and CEO, Irex Corporation Director, High Industries, Inc. Director, CoreStates Central/Northern Regional Board Loren D. Mellendorf (2)(3) Retired Executive Vice President, American Water Works Company, Inc. John H. Ware, IV (2) Director, Subsidiaries of American Water Works Company, Inc. Paul W. Ware (1)(2)(3) Chairman, Penn Fuel Gas, Inc. and subsidiaries Director, American Water Works Company, Inc. Director, The York Water Company Richard P. Wild (1)(3) Partner, Dechert Price & Rhoads Committees: (1) Executive Committee (2) Audit Committee (3) Compensation Committee --------------------- Corporate Information --------------------- PENN FUEL GAS, INC. OFFICERS Terry H. Hunt President and Chief Executive Officer George C. Rhodes, Sr. Senior Vice President, Utility Operations and Engineering Ronald J. Frederick Vice President, Human Resources and Administration Edward L. McCusker Vice President and Treasurer Charles C. Rogala Vice President, Utility Operations George W. Ruth Vice President, Gas Supply Eleanor R. Ross Secretary John P. Nitsche Assistant Secretary SUBSIDIARIES PFG Gas, Inc. North Penn Gas Company STOCK TRANSFER Penn Fuel Gas, Inc. 55 South Third Street, Oxford, PA 19363 Attention: Eleanor R. Ross ANNUAL MEETING The annual meeting of shareholders will be held at The Eden Resort Inn, 222 Eden Road, Lancaster, Pennsylvania on Tuesday, May 27, 1997 at 9:00 a.m. Notice of the meeting and proxy are enclosed for holders of common stock. This report, including financial statements contained herein, is submitted for the general information of shareholders of the Company and not in connection with any sale, offer for sale, or solicitation of any offer to purchase any securities. ------------------- Penn Fuel Gas, Inc. ------------------- 55 South Third Street Oxford, Pa 19363 (610) 932-2000 EX-99 7 EXHIBIT H-1 EXHIBIT H-1 [MORGAN STANLEY LETTERHEAD] June, 25, 1997 Board of Directors PP&L Resources, Inc. Two North Ninth Street Allentown, Pennsylvania 18101 Members of the Board: We understand that Penn Fuel Gas, Inc. ("PFG" or the "Company"), PP&L Resources, Inc. ("Resources") and Keystone Merger Corp. a wholly owned subsidiary of Resources ("Keystone"), propose to enter into an Agreement and Plan of Merger, substantially in the form of the draft dated June 20, 1997 (the "Merger") of Keystone with and into PFG. Pursuant to the Merger, the Company will become a wholly owned subsidiary of Resources and each outstanding share of common stock, par value $1.00 per share (the "PFG Common Stock"), of the Company other than shares held in treasury or held by any subsidiaries of PFG, will be converted into the right to receive 7,665 (the "Common Stock Exchange Ratio") shares of common stock, par value $0.01 per share ("Resources Common Stock"), of Resources subject to adjustment in certain circumstances pursuant to a certain formula set forth in the Merger Agreement. The terms and conditions of the Merger are more fully set forth in the Merger Agreement. You have asked for our opinion as to whether the Common Stock Exchange Ratio pursuant to the Merger Agreement is fair from a financial point of view to Resources. For purposes of the opinion set forth herein, we have: (i) reviewed certain publicly available financial statements and other information of Resources; (ii) reviewed certain internal financial statements and other financial and operating data concerning the Company prepared by the management of the Company, including information relating to certain strategic and operational benefits anticipated from the Merger; (iii) analyzed certain financial projections prepared by the management of the Company; (iv) discussed the past and current operations and financial condition and the prospects of the Company with senior executives of the Company and Resources; (v) reviewed certain internal financial statements concerning Resources prepared by the management of Resources; (vi) discussed the past and current operations and financial condition and the prospects of Resources with senior executives of Resources, and analyzed the pro forma impact of the Merger on Resources' earnings per share, consolidated capitalization and financial ratios; (vii) reviewed and discussed with senior executives of Resources their assessment of the cost savings and revenue enhancements to be realized in the Merger; (viii) reviewed the reported prices and trading activity of Resources Common Stock; (ix) compared the financial performance of the Company with that of certain comparable publicly-traded companies and their securities; (x) reviewed the financial terms, to the extent publicly available, of certain comparable acquisition transactions; (xi) participated in discussions and negotiations among representatives of the Company and Resources and their financial and legal advisors; (xii) reviewed the Merger Agreement and certain related documents; (xiii) reviewed certain environmental analyses provided by Resources; and (xiv) performed such other analyses and considered such other factors as we have deemed appropriate. We have assumed and relied upon, without independent verification, the accuracy and completeness of the information reviewed by us for the purposes of this opinion. With respect to the financial projections, including estimates of the strategic, financial and operational benefits anticipated from the Merger, we have assumed that they have been reasonably prepared on bases reflecting the best currently available estimates and judgments of the future financial performance of the Company and Resources. We have not made any independent valuation or appraisal of the assets or liabilities of the Company or Resources; however, we have reviewed the environmental analyses provided by Resources and have relied without independent verification upon such analyses for purposes of this opinion. We have assumed that the Merger will be accounted for as a "pooling-of- interests" business combination in accordance with U.S. generally accepted accounting principles and will qualify as a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code of 1986. Our opinion is necessarily based on economic, market and other conditions as in effect on, and the information made available to us as of, the date hereof. In connection with this opinion, we have relied on the Company's and Resources' assessment of costs savings and revenue enhancements to be realized by the Merger. We have acted as financial advisor to the Board of Directors of Resources in connection with this transaction and will receive a fee for our services. In the past, Morgan Stanley & Co. Incorporated and its affiliates have provided financial advisory and financing services for Resources and have received fees for the rendering of these services. It is understood that this letter is for the information of the Board of Directors of Resources only and may not be used for any other purpose without our prior written consent. Based upon and subject to the foregoing, we are of the opinion on the date hereof that the Common Stock Exchange Ratio pursuant to the Merger Agreement is fair from a financial point of view to Resources. Very truly yours, MORGAN STANLEY & CO. INCORPORATED By: /s/ Daniel B. More ___________________ Daniel B. More Managing Director EX-99 8 EXHIBIT H-2 EXHIBIT H-2 [First Union Capital Markets Corp. letterhead] CONFIDENTIAL June 26, 1997 Board of Directors Penn Fuel Gas, Inc. 55 South Third Street Oxford, Pennsylvania 19363 Members of the Board: You have asked us to advise you with respect to the fairness to the stockholders of Penn Fuel Gas, Inc. ("Penn Fuel") from a financial point of view of the exchange ratio to be offered to such stockholders pursuant to the terms of the Agreement of Merger, dated as of June 26, 1997 (the "Merger Agreement"), among Penn Fuel, PP&L Resources, Inc. ("PP&L"), and a wholly owned subsidiary of PP&L ("Merger Sub"). The Merger Agreement provides for the merger (the "Merger") of Penn Fuel with and into Merger Sub pursuant to which (i) Penn Fuel will become a wholly owned subsidiary of PP&L, (ii) each outstanding share of common stock, par value $1 per share, of Penn Fuel will be converted into 7.665 shares of common stock of PP&L, subject to adjustment pursuant to the Merger Agreement, (iii) Penn Fuel's preferred stock will be redeemed for cash or PP&L common shares representing a market value of $10.76 million, and (iv) each outstanding option to purchase Penn Fuel common stock granted under Penn Fuel's 1992 Stock Option Agreement will be cashed out simultaneously with the Merger such that no options to acquire PP&L stock would exist following the Merger. In arriving at our opinion, we have reviewed certain publicly available business and financial information relating to Penn Fuel and PP&L, as well as the Merger Agreement. We have also reviewed certain other information, including financial forecasts, provided to us by Penn Fuel, and have met with Penn Fuel's and PP&L's managements to discuss the business and prospects of Penn Fuel and PP&L. We have also considered certain financial data of Penn Fuel, and we have compared that data with similar data for publicly held companies in businesses similar to those of Penn Fuel and we have considered the financial terms of certain other business combinations and other transactions which have recently been effected. We also considered such other information, financial studies, analyses and investigations and financial, economic and market criteria which we deemed relevant. We have also relied upon the views of Penn Fuel's management concerning the business, operational and strategic benefits and implications of the Merger. We have assumed, with your consent, that the Merger will be accounted for as a pooling of interests under generally accepted accounting principles. In connection with our review, we have not assumed any responsibility for independent verification of any of the foregoing information and have relied on its being complete and accurate in all material respects. With respect to the financial forecasts, we have assumed that they have been reasonably prepared on bases reflecting the best currently available estimates and judgments of Penn Fuel's management as to the future financial performance of Penn Fuel. In addition, we have not made an independent evaluation or appraisal of the assets or liabilities (contingent or otherwise) of Penn Fuel or PP&L, nor have we been furnished with any such evaluations or appraisals. Our opinion is necessarily based upon financial, economic, market and other conditions as they exist and can be evaluated on the date hereof. We are not expressing any opinion as to what the value of the stock of PP&L actually will be when issued to Penn Fuel's stockholders pursuant to the Merger or the prices at which such stock will trade subsequent to Merger. In connection with our engagement, we approached third parties to solicit indications of interest in a possible acquisition of Penn Fuel. We have acted as financial advisor to Penn Fuel in connection with the Merger and will receive a fee for our services, a significant portion of which is contingent upon the consummation of the Merger. In the ordinary course of business, we or our affiliates may actively trade the debt and equity securities of PP&L for our or any such affiliate's own account or for the account of customers, and accordingly, may hold a long or short position in such securities. In addition, we and our affiliates in the past may have provided investment and/or commercial banking products and services for Penn Fuel, its affiliates and other related persons. It is understood that this letter is for the information of the Board of Directors of Penn Fuel in connection with its consideration of the Merger, does not constitute a recommendation to any stockholder as to how such stockholders should vote on the proposed Merger and is not to be quoted or referred to, in whole or in part, in any registration statement, prospectus or proxy statement, or in any other document used in connection with the offering or sale of securities, nor shall this letter be used for any other purposes, without First Union Capital Markets Corp.'s prior written consent. Based upon and subject to the foregoing, it is our opinion that, as of the date hereof, the exchange ratio to be offered to the stockholders of Penn Fuel in the Merger is fair from a financial point of view to such stockholders. Very truly yours, FIRST UNION CAPITAL MARKETS CORP. EX-99 9 EXHIBIT I-1 EXHIBIT I-1 SECURITIES AND EXCHANGE COMMISSION ------------------------------------------------- (Release No. 35-__________) FILING UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 PP&L Resources, Inc. (the "Company"), Two North Ninth Street, Allentown, PA 18101, a Pennsylvania corporation which is a holding company exempt from the registration requirements of the Act under section 3(a)(1) of the Act, has filed an application-declaration on Form U-1 under sections 9(a)(2), 10 and 3(a)(1) of the Act. Pursuant to the terms of an Agreement and Plan of Merger dated as of June 26, 1997 (the "Merger Agreement"), by and among the Company, Keystone Merger Corp., a Pennsylvania corporation ("Keystone") and a wholly-owned subsidiary of the Company, and Penn Fuel Gas, Inc. ("Penn Fuel"), the Company proposes to acquire all of the issued and outstanding common stock of Penn Fuel, a holding company exempt from the registration requirements of the Act under section 3(a)(1) of the Act (the "Transaction"). Under the terms of the Merger Agreement, Keystone will be merged into Penn Fuel, with Penn Fuel surviving as a wholly-owned subsidiary of the Company. As a result of the Transaction, the Company would be a public-utility holding company as defined in section 2(a)(7) of the Act with three public utility subsidiaries PP&L, Inc. (formerly Pennsylvania Power & Light Company) ("PP&L"), which is currently a wholly- owned subsidiary of the Company, and PFG Gas, Inc. ("PFG Gas") and North Penn Gas Company ("North Penn"), which are currently wholly-owned subsidiaries of Penn Fuel. The Company has also requested an order of exemption under section 3(a)(1) from all provisions of the Act except section 9(a)(2). The Company is a holding company which provides, through its subsidiaries, electric utility services and other energy-related products and services in central eastern Pennsylvania. PP&L, the Company's principal subsidiary, is an operating electric utility incorporated under the laws of the Commonwealth of Pennsylvania. As of June 30, 1997, PP&L served approximately 1.2 million residential, commercial and industrial customers in a 10,000 square mile territory in 29 counties of central eastern Pennsylvania, with a population of approximately 2.6 million persons. PP&L also sells power to other electric utilities and owns direct and indirect interests in a number of generating stations. In addition, the Company engages in other businesses which are not jurisdictional under the Act, through a number of other subsidiaries, including investing in electric generation, transmission and distribution facilities both overseas and domestically, providing energy-related products and services inside and outside of PP&L's service territory, and operating oil and gas pipeline facilities which supply fuel to PP&L's Martins Creek generating station. For the year ended December 31, 1996, the Company's operating revenues on a consolidated basis were approximately $2.910 billion, of which $64 million were attributable to non-utility activities. Consolidated assets of the Company and its subsidiaries at December 31, 1996 were approximately $9.824 billion, of which approximately $6.487 billion consisted of net electric plant and equipment. Penn Fuel is a holding company which provides natural gas service in Pennsylvania and Maryland through its public utility subsidiaries and supplies liquid propane gas to customers in Pennsylvania and Maryland. Penn Fuel is a closely-held corporation, incorporated under the laws of the Commonwealth of Pennsylvania, whose common stock is not actively traded. PFG Gas and North Penn, Penn Fuel's principal subsidiaries, are Pennsylvania corporations which provide natural gas distribution and storage service to residential, commercial and industrial customers in 31 counties in Pennsylvania. PFG Gas provides gas sales and transportation service in southern and eastern Pennsylvania and a small portion of Maryland. North Penn provides gas sales and transportation services to customers located in north and northwestern Pennsylvania. North Penn also owns storage capacity in two underground natural gas storage facilities located in Pennsylvania: the Wharton Storage Field and the Tioga-Meeker Storage Complex. For the year ended December 31, 1996, Penn Fuel's operating revenues on a consolidated basis were approximately $114 million, of which approximately $100 million were attributable to its gas utility operations, and $14 million from propane operations and merchandise sales. Consolidated assets of Penn Fuel and its subsidiaries as of December 31, 1996 were approximately $196 million, of which approximately $141 million consisted of property, plant and equipment, $29 million were current assets and $26 million were deferred regulatory assets. The Application states that the Transaction will combine two companies with complementary operations and expertise, and provide important strategic, financial and other benefits to the merging companies, shareholders and customers. The Merger Agreement provides for the business combination of the Company and Penn Fuel to be effected by the merger of Keystone with and into Penn Fuel, the separate corporate existence of Keystone will cease, and Penn Fuel will continue as the surviving corporation in the merger, operating as a wholly-owned subsidiary of the Company. Each share of Penn Fuel Common Stock outstanding prior to the merger will be converted into the right to receive between 6.968 and 8.516 shares of Company Common Stock, depending upon the market price of the Company Common Stock at the time of the closing of the merger. Penn Fuel common shareholders will become Company common shareholders and the Company will become the sole holder of all of the outstanding Common Stock of Penn Fuel. Penn Fuel is taking all necessary action to redeem shares of the Penn Fuel $1.40 Preferred Stock in accordance with the terms of the preferred stock. Preferred shareholders will have the option of receiving the cash redemption price or converting their preferred shares into the right to receive between 0.682 and 0.833 shares of the Company Common Stock, depending upon the market price of the Company Common Stock at the time of the closing of the Transaction. Thus, Penn Fuel preferred shareholders may become common shareholders of the Company and there will no longer be any shares of Penn Fuel preferred stock outstanding. The Transaction is conditioned, among other things, upon approval by the Pennsylvania Public Utility Commission, based on its analysis of whether granting approval is necessary or proper for the service, accommodation, convenience or safety of the public. The Maryland Public Service Commission was notified of the Transaction and has determined not to institute proceedings on the matter at this time. In addition, the Transaction was subject to the 30-day waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (as amended) (the "HSR Act"). On October 7, 1997, the notice required pursuant to the HSR Act was filed by the Company and Penn Fuel, respectively. On October 24, 1997, the United States Department of Justice granted early termination of the waiting period under the HSR Act with respect to the Transaction. The Company states that following consummation of the Transaction, it and each of its subsidiaries will be entitled to an exemption from all provisions of the Act except section 9(a)(2) because it and each of its public utility subsidiaries from which it derives a material part of its income will be predominantly intrastate in character and will carry on their utility businesses substantially within the Commonwealth of Pennsylvania. For the Commission, by the Division of Investment Management, pursuant to delegated authority. -----END PRIVACY-ENHANCED MESSAGE-----